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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.
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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.
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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.
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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.
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As always, we appreciate your interest.
Brent Wood, our CFO, is also participating on the call.
We hope everyone is enjoying their fall.
They continue performing at a high level and reaping the rewards of a very positive environment.
Our third quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
Some of the results the team produced include, funds from operations coming in above guidance up 14% compared to third quarter last year and ahead of our forecast.
This marks 34 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
Our quarterly occupancy averaged 97.1%, up 50 basis points from third quarter 2020 and at quarter end, we're ahead of projections at 98.8% lease and 97.6% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends.
Quarterly releasing spreads were at record levels at 37.4% GAAP and 23.9% cash and year-to-date, those results are 31% GAAP and 18.5% cash.
Finally, cash same-store NOI rose 5.2% for the quarter and 5.6% year-to-date.
In summary, I'm proud of our team's results, putting up one of the best quarters in our history.
Today, we're responding to the strength in the market and demand for industrial product by both users and investors by focusing on value creation via development and value-add investments.
I'm grateful we ended the quarter at 98.8% leased, our highest quarter on record and to demonstrate the market strength, our last four quarters marked the highest four quarterly rates in our company's history.
Looking at Houston, we're 96.7% leased.
It now represents 12% of rents, down 140 basis points from a year ago and is projected to continue shrinking.
As we've stated before, our development starts are pulled by market demand.
Based on the market strength we're seeing today, we're raising our forecasted starts to $340 million for 2021.
This represents an annual record level of starts for our company.
To position us for this market demand, we've acquired several new sites with more in our pipeline along with value-add and direct investments.
More details to follow as we close on each of these opportunities.
And Brent will now review a variety of financial topics, including our 2021 guidance.
Our third quarter results reflect the terrific execution of our team, strong overall performance of our portfolio and the continued success of our time-tested strategy.
FFO per share for the third quarter exceeded our guidance range at $1.55 per share and compared to third quarter 2020 of $1.36 represented an increase of 14%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth.
From a capital perspective, during the third quarter, we issued $49 million of equity at an average price over $176 per share.
In July, we repaid a maturing $40 million senior unsecured term loan.
And in September, we closed on the refinance of $100 million unsecured term loan that reduced the effective fixed interest rate from 2.75% to 2.1%, with five years of term remaining.
In our ongoing efforts to bolster our ESG efforts, we incorporated a sustainability-linked metric into the amended terms.
That activity combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility.
Our debt to total market capitalization was below 17%, debt-to-EBITDA ratio at 4.7 times and our interest and fixed charge coverage ratio increased to over 8.5 times.
Our rent collections have been equally strong.
Bad debt for the first three quarters of the year is a net positive $346,000 because of tenants whose balance was previously reserved but brought current, exceeding new tenant reserves.
This trend continues to exemplify the stability, credit strength and diversity of our tenant base.
Looking forward, FFO guidance for the fourth quarter of 2021 is estimated to be in the range of $1.54 to $1.58 per share and $6.01 to $6.05 for the year, a $0.15 per share increase over our prior guidance.
The 2021 FFO per share midpoint represents a 12.1% increase over 2020.
Among the notable assumption changes that comprise our revised 2021 guidance include: increasing the cash same-property midpoint by 8% to 5.6%, decreasing reserves for uncollectible rent by $900,000, increasing projected development starts by 24% to $340 million and increasing equity and debt issuance by combined $95 million.
In summary, we were very pleased with our third quarter results.
We will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to carry our momentum through the year.
Now Marshall will make some final comments.
In closing, I'm excited about where we stand this far into 2021.
We're ahead of our initial forecast and adhering that momentum into 2022.
Our company, our team and our strategy are working well, as evidenced by the quarterly results.
And it's the future that makes me most excited for EastGroup.
Our strategy has worked well the past few years.
We're further seeing an acceleration and a number of positive trends for our properties and within our markets.
Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets.
These, along with the mix of our team, our operating strategy and our markets has us optimistic about the future.
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q3 ffo per share $1.36.
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Copies of all three are available on the Investors page of our website.
With us for Q&A, we have Matt Sharpe on Business Development and Distribution; Mark Desrochers on P&C, Tyson Sanders on Supplemental, and Mike Weckenbrock on Life and Retirement, with Ryan Greenier available on investments.
Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.
Reconciliations of these measures to the most comparable GAAP measures are available in our news release.
Last night, we reported second quarter core earnings of $1.02, our highest second quarter result ever.
We benefited from particularly strong investment income in our alternatives portfolio and lower than guided catastrophe losses.
As previously announced, this led us to raise our full-year core earnings per share guidance to a range of $3.50 to $3.70 with an expected return on equity above 10%.
We saw strong earnings growth in each segment in the second quarter and solid sales momentum in the retirement line.
Annuity contract deposits increased by double digits over the prior year.
Bret will go over the quarterly results in more detail later in the call.
I want to focus on our progress toward our long-term objectives of a sustainable double-digit ROE and significant expansion in the education market.
Over the past year and a half, through unprecedented disruption in all aspects of our day-to-day life, Horace Mann has continued to be successful.
I attribute this success to two factors.
First, our unwavering dedication to the deserving education market.
We know our customers, we know them well and we respond to the issues they face.
Second, our multiline model, we have the premium and earnings risk diversification that enables us to remain focused on our long-term objectives throughout occurrences of weather volatility, market volatility and mortality and morbidity trend changes.
While the COVID-19 pandemic added an extra year to the transformational stage of our growth journey, it also gave us time to analyze and improve the ways we can fulfill our value proposition for the education market.
Examples of the outcomes of this focus include an accelerated integration of NTA agents, initiating key improvements and infrastructure, and expansion of our student loan solutions program nationwide.
It also set the stage for the entry into the employer paid benefits market with the planned acquisition of Madison National Life Insurance Company.
This acquisition brings together two educator-centric companies with complementary strength in product distribution and infrastructure.
Horace Mann's most established channel for serving educators has always been individual products sold through our agency force of local, trusted advisors.
In recent years, we invested in upgrading our section 125 benefits administration program, which enable school districts to offer voluntary worksite plans, benefits including our individual supplemental products are provided or introduced through the school district, but paid for by individual educators.
In some cases, educators can fund these purchases with pre-tax dollars.
Madison national represents a new third way for us to serve educators.
In line with emerging workplace trends, school districts are increasingly adding and enhancing employee benefits to attract and retain educators for hard-to-fill positions.
Madison National's employer paid and sponsor group products will enable us to provide educators with solutions like short and long-term disability, while helping school districts improve recruiting and retention efforts.
Districts generally work with independent benefit brokers to purchase Madison National's group products and educator staff are automatically enrolled.
With this addition, Horace Mann will now have complementary distribution capabilities in each of the ways the country's $6.5 million public K-12 educators receive insurance solutions, dramatically increasing our addressable market.
In terms of scope, Horace Mann has at least one educator household located in 75% of the roughly 12,000 K-12 school districts in our market footprint.
When we bought NTA, we added approximately 120,000 educator households.
With the acquisition of Madison National, we gain a solid base in this growth segment as they serve 1200 districts that provide employer paid and sponsored products to about 350,000 educators.
There's some overlap between Horace Mann's presence and those of NTA and Madison National, but each of the transactions has clearly added to our market share and with the Madison National transaction, our total addressable market expands to include a portion of the $160 billion that school districts spend annually on employer paid benefits, a market sector that has grown more than 30% over the past five years.
As we look at ways in which Maddison National aligns with our business strategy from a product perspective, Madison National bring 60 years of experience designing and underwriting a portfolio of group products.
These products can offer educators peace of mind that their families will be able to respond to unexpected events without depleting their savings.
From a distribution perspective, independent brokers are key in the complex public sector benefit space, where districts, particularly large ones rely on their assistance to design plans and offerings that are typically offered to every employee in the district.
Working with independent brokers is completely complementary to our established distribution through local trusted advisors.
We have already signed a long-term distribution agreement with National Insurance Services, an employee benefit brokerage subsidiary of Assured Partners that has been a key distribution partner for Madison National for nearly 40 years.
It will take effect concurrently with the acquisition, giving us immediate access to the employer paid and sponsored portion of the market.
After the transaction closes, we will be complementing Madison National's current group offerings, which includes supplemental products with enhanced offerings.
Our product development team has been leveraging and NTA's 50 plus years of success in supplemental market to accelerate filings for group products customized for educators such as cancer and hospitalization.
These will allow us to work with Madison National and NIS to provide a comprehensive group product suite.
In terms of infrastructure, Madison National brings an exceptional experienced team focused on delivering great educator customer experiences supported by modern and scalable infrastructure.
They're ready to add scale and we're the right partner to help them do so.
In 2022, we expect Madison national to add 50 basis points of ROE with upside potential in future years.
We remain focused on three additional drivers of higher ROE across the entire business.
First, driving higher net investment income by increasing the allocation to alternative investments.
While our alternative portfolio returns can be volatile, recent performance clearly illustrates the value this asset class brings.
We continue to realize savings from actions such as the full integration of the supplemental segment in 2020, as well as benefits from continued infrastructure improvements.
Third, market share expansion through cross-sell and new sales through each of our distribution channels.
We bring the ability to combine the new virtual marketing approaches we tested and refined over the past year and a half with our traditional in-person activities.
We look to build on the sales momentum we established in the first half of the year and are seeing a lot of optimism in the agency force around scheduling meetings and events in their schools this fall.
The 2021, 2022 school year will certainly be more normal than the previous one.
However, there is concern about new COVID-19 variants.
We believe most schools will avoid a return to a hybrid or remote environment, notably, nearly 90% of educators are vaccinated against COVID-19, a far higher rate than the general population.
Further, educators have overwhelmingly made the case that the best educational environment for students is in-person.
At Horace Mann, this past year and a half has provided us an ever growing list of reasons and reminders of why we do what we do.
It is an honor to serve the educators who have gone above and beyond to reach every student through the COVID-19 pandemic.
Their dedication and selflessness to our country's children continues to inspire us to do more and this year we will.
And with that, I'll ask Brett to take you through the results.
Second quarter core earnings per share was $1.02, up 52% over last year and our third consecutive record quarter.
Six-month core earnings per share was $2.12, more than halfway to the increased full year earnings per share guidance of $3.50 to $3.70.
As we said last quarter, our outlook has always presumed a gradual recovery from the effects of the COVID-19 pandemic on results and that's largely what we've seen so far this year.
In that context, we're encouraged by the signs of momentum we are seeing with the vaccine rollout and continued strong performance across the business.
As a result, on July 1, we brought guidance to a level that aligned with the strong second quarter net investment income returns in the lower than historical average level of second quarter catastrophe losses.
As I talk through the segments, I will address the changes we've made to align full year segment outlooks with the updated guidance.
I'll finish up with a recap of how we continue to think about allocating capital to maximize value for our shareholders.
When we raised earnings per share guidance, we also raised our expectation for 2021 core return on equity to greater than 10% for the year.
Core return on equity for the second quarter was 11.7% and it was 12.1% for the 12 months up from 9% for the prior 12 months.
Although the pandemic and other unusual factors continue to contribute to the improvement, our strategic initiatives are equally as important and we remain on track to our long-term target of a sustainable double-digit ROE.
And as we look ahead, the Madison National transaction will be a strategic use of capital to accelerate our shareholder value creation.
In addition to the strong fit of Madison National, this is another business with predictable and stable underwriting profitability, as well as strong capital generation that serves to further diversify our business profile.
In 2020, Madison National had net premiums of approximately $108 million and statutory income of approximately $14 million.
Madison National's premium have grown in the mid-single digits over the past five years with the trailing five-year loss ratio below 50%.
The transaction is expected to be accretive by mid-single digits to Horace Mann's earnings from the level we would anticipate for 2022, taking into account a normal cat load.
We'll see that benefit even though amortization of intangibles related to purchase accounting means that GAAP earnings will be somewhat lower than statutory income.
The transaction also will deliver about 50 points of ROE improvement in the first 12 months after closing.
We expect that contribution to grow over time as we leverage the new opportunities that Madison National and it's independent distribution bring to Horace Mann.
Turning to segment results for the quarter.
In Property Casualty, core earnings for the quarter were up about $8 million or 70.8% due to the strong contribution from net investment income, which was driven by the returns in the alternatives portfolio.
Due to a higher underlying loss ratio, underwriting income was down by about $6 million despite significantly lower catastrophe losses and an improved expense ratio that reflected our continued focus on expense optimization.
Premiums for the quarter were $156 million with new business volume remaining below historical levels as we work through the impact of the pandemic on sales.
Auto average premiums were down slightly in the quarter, while property average premiums are starting to rise.
In line with our July 1 announcement, cat losses for the quarter were $17.5 million, contributing 11.3 points to the combined ratio, significantly below last year and below what we anticipated when the year started.
The 17 events designated as cat in the second quarter were generally less severe and not as widespread as the 20 declared cat events in last year's second quarter.
Our revised full-year 2021 guidance reflects our assumption that second half cat losses will be between $20 million and $25 million, which is unchanged from what we guided to at the beginning of the year and is in line with the 10-year average for second half cat losses.
Turning to the underlying loss ratios, our experience in the second quarter and the first half aligns with overall industry trends.
Driving is returning to more normal patterns while inflationary trends in labor and materials are driving costs higher across all businesses.
Let's look first at auto where the loss ratio has been one of the most pandemic-impacted metrics for the entire P&C industry.
Even as miles driven ramps back up, through the first six months of 2021, our underwriting discipline is key to why we are reporting an underlying auto loss ratio below the 70.6% we reported for full year 2019, however, because of the inflationary component of the increase in loss costs over 2020.
We are initiating appropriate rate filings in selected geographies to help keep us at our targeted loss ratio.
We're confident and our agents will remain competitive on the business they quote even as these filings begin to take effect.
For Property, not only is inflation a concern, but similar to others, we are seeing increased frequency of fire and non-weather water losses in our case with several larger claims from those causes.
To address, we're now planning to file for property rate increases in the mid-single digits in many geographies in the second half of the year, a bit above our original rate plan for this year.
We're also making sure the insured values of covered properties remain in line with data on the rising value of homes across the country.
Finally, we released $4.2 million dollars in prior period reserves during the second quarter with approximately $3 million from 2019 in prior auto liability.
With our six-month combined ratio at 92.7%, we are still on track to achieve a full-year combined ratio in line with our longer-term target of 95% to 96%.
Our updated guidance for 2021 core earnings of $66 million to $70 million reflects the strong contribution of net investment income in the first half.
Turning to Supplemental, the segment contributed $31.6 million in premiums and $12 million dollars to core earnings.
Supplemental continues to experience favorable trends in reserves and is still seeing the benefit of changes in policyholder behavior due to the pandemic.
Net investment income on the Supplemental portfolio reflects the solid progress we are making in improving the Supplemental investment yield.
Supplemental sales were $1.2 million in the second quarter, up from both this year's first quarter and the year ago period.
As we've said, the individual Supplemental products that we currently offer have traditionally been sold through a consultative enrollment model that has been among the most impacted by the worksite access limitations of the past year and a half.
As we prepare for a more normal back-to-school season, Horace Mann agents continue to sell our individual Supplemental products with steady sales metrics in more open geographies.
Premium persistency remains above 90%, a testament to the value educators place on these coverages with about 282,000 policies in force.
Our revised outlook for Supplemental's 2021 core earnings of $41 to $43 million reflects a higher contribution from net investment income.
We are also seeing the return to historical policyholder claims behavior occur more slowly than we had anticipated in this business.
We now expect a full year 2021 pre-tax profit margin better than our longer-term target of mid 20%.
In the Life segment.
June was the highest month for Life sales since the pandemic began.
Annualized sales for the second quarter were ahead of first quarter with retention steady.
We also saw an increase in single premium Life sales.
These sales tend to be lumpy, but they are a reflection of improving access as these are more consultative sales, typically requiring multiple contacts with the customer.
Core earnings more than doubled from last year to $5 million as mortality costs returned to within actuarial expectations, total benefits and expenses returned to targeted levels and net investment income rose 26.9% Nevertheless, because of the higher mortality costs in the first quarter, we've modestly lowered our outlook for full year 2021 Life segment core earnings to the range of $14 million to $16 million.
For the Retirement segment, second quarter core earnings ex-DAC unlocking were up 88.3% reflecting the strong net interest margin.
DAC unlocking was favorable by about $200,000 compared with $3.7 million in last year's second quarter.
The net interest spread improved 79 basis points over last year's second quarter to 265 bps in part due to strong returns on the alternatives portfolio.
This is above our threshold to achieve a double-digit ROE in this business.
Our solutions for augmenting retirement savings remain a core need for educators.
Annuity contract deposits were ahead of last year's second quarter by 15.6% with the June beating out March, the previous record as the highest month for deposit for several years.
Our educator customers continue to see annuities as an important way to achieve their financial objectives and these products are complemented by our suite of fee-based products.
Based on the strong results through the first half, we increased our full-year 2021 outlook for Retirement core earnings ex-DAC unlocking to the range of $43 to $45 million.
Turning to investments, total net investment income on the managed portfolio was up almost 50% to $84.1 million with total net investment income up 35.8%.
The increase in NII, on the managed portfolio, was largely because our alternatives portfolio generated outsized returns in the second quarter.
As we've said, driving higher investment income through increasing our allocations to the alternative investments portfolio will be a strategic driver of a sustained double-digit return on equity.
Year-to-date, private equity returns have been quite strong given the relative strength of the equity markets and the active IPO window.
As a result, second quarter alternative results were significantly above expectations.
In addition to the private equity returns, our other alternative strategies, such as private credit, infrastructure and commercial mortgage loan funds posted solid performance in the quarter.
We expect to reach our targeted 15% allocation to alternative investments within the next two years and expect this diversified portfolio to generate high single-digit annual returns on average over time.
The fixed income portfolio had a yield of 4.3% in the second quarter compared with 4.39% a year ago.
Second quarter purchase activity was largely opportunistic and focused on BBB corporate and high yield securities with attractive relative yields.
The core new money rate was 3.35% in the second quarter and based on current market conditions, we continue to anticipate a core new money rate of about 3% for the year.
Our updated guidance reflects the higher assumption for total net investment income of $385 million to $405 million including approximately $100 million of accreted investment income on the deposit asset on reinsurance.
This expectation for investment income is captured in the segment by segment outlook I've summarized and in our core earnings per share guidance range of $3.50 to $3.70.
In closing, we are very pleased with our business progress through the first half of 2021 and excited about the potential of this year's back to school, as well as the progress we anticipate in 2022 and beyond.
As we stated last quarter, our top priority for the use of excess capital remains growing our business at returns that meet or exceed our ROE targets.
The acquisition of Madison National is an ideal use of capital to accelerate our path for sustained double-digit ROE.
Further, after the transaction, Horace Mann should generate more than $50 million in excess capital annually, assuming normalized property and casualty results.
We're committed to prudently using that capital to create additional value for shareholders.
Beyond growth initiatives, our capital generation provides scope for repurchase, as well as maintaining our track record of annual increases in our cash dividend, which is currently generating yield slightly above 3%.
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compname reports second-quarter 2021 net income of $1.11 per share and record core earnings* of $1.02 per share.
reaffirming updated 2021 core earnings per share guidance of $3.50 to $3.70, with roe above 10%.
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Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer.
During today's call, we will review our second quarter 2021 financial results and discuss our financial guidance for the third quarter of 2021 and full-year 2021.
The guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating.
Those assumptions are based on the facts we know today.
Many of these assumptions relate to matters that are beyond our control and changing rapidly, including, but not limited to, the time frames for and severity of social distancing and other mitigation requirements; the continued impact of COVID-19 on customers' purchasing decisions; and the length of our sales cycle, particularly for customers in certain industries.
We'd also like to point out that the company presents non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
All financial figures we will discuss today are non-GAAP except for revenues; remaining performance obligations, or RPO; and current RPO, or CRPO.
A replay of today's call will also be posted on the website.
Our team delivered an outstanding quarter, significantly exceeding the high end of our guidance across all metrics.
Subscription revenues were up 31%.
Subscription billings were up 30%.
Operating margin was 25%.
And the number of deals greater than $1 million was 51, up 28% year over year.
Free cash flow for the first half of the year was up 34% year over year.
An incredible performance by our team, an exceptional first half and we have unstoppable momentum.
And we reflected this in our strong full-year guidance raise across the board.
Gina will review the details with you in a few moments.
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The enterprise digital transformation market is expected to grow nearly three times faster than GDP in 2021.
Business leaders worldwide are facing do-or-die moments.
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The pandemic has accelerated the digital imperative.
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The world's biggest challenges are ServiceNow's biggest opportunities: from vaccine management, to ESG, to the new world of hybrid work.
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We've created a new market, one that respects the billions and billions of dollars of investment that customers have put into their systems of record.
We make those investments work for today's digital business demands.
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ServiceNow is the control tower for digital transformation for every business, in every industry, serving every persona.
The power of the Now Platform makes this possible with one data model, one architecture and one platform to workflow a better world.
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I'd like to share an overview of our success across ServiceNow's portfolio.
Let's begin with our IT workflows.
We are the standard for optimizing all IT services and operations.
Our core IT workflows remained very strong.
ITSM was in 16 of our top 20 deals, with 14 deals over $1 million.
ITOM was in 15 of our top 20 deals, with six deals over $1 million.
Our AI-powered Service Operations is resonating big time with customers.
We saw great wins with leading companies, including Travelers and Walgreens Boots Alliance and more.
They're working with ServiceNow to support their digital transformation of their enterprises.
And we're honored that Maritime and Port Authority of Singapore is working with ServiceNow to accelerate its digital transformation efforts as it looks to make Singapore a leading global port and international maritime center.
MPA will leverage the Now Platform to drive automation and to improve productivity and employee experience.
With Employee Workflows, we make work better by driving outstanding employee experiences that enhance productivity for employees anytime, anywhere while also developing company loyalty, which is particularly important in this environment.
The Now Platform provides employees the system of action for key events, including onboarding, parental leave, moving and many more moments that matter for people.
Employee Workflows were in 13 of our top 20 deals, with six deals over $1 million.
Asahi, for example, is focused on expanding growth while reinforcing ESG initiatives that support sustainable value creation.
They chose the Now Platform to improve the employee experience by providing a single point of contact for employees to improve productivity.
They wanted service catalogs so they could standardize HR processes, and they wanted integrations to connect all their siloed workflows.
With Customer Workflows, we're creating a new service paradigm by delivering connected experiences that redefine customer operations for greater speed, agility, transparency and convenience, all while working with existing systems.
Customer Workflows were in 10 of our top 20 deals, with four deals over $1 million.
We now have over 2,000 customers running customer service management.
Deutsche Telekom is leveraging ServiceNow's telecommunication solution to streamline order management to become the leading B2B telco provider.
The Now Platform will be at the heart of the order management process, enabling a 360-degree view of orders, inventory and infrastructure, creating a seamless, connected experience for DT's employees and customers.
With Creator Workflows, we're accelerating software development across the entire enterprise by giving everyone the low-code tools to quickly create applications and beautiful experiences.
IDC predicts that more than 500 million apps will be developed by 2023.
This is equivalent to the total number of apps that were developed in the past 40 years.
For example, Airbus built an innovative tracking application in less than three months using ServiceNow's low-code app engine.
Now Airbus employees can scan barcodes of any piece of factory equipment to see the relevant information they need in real time.
Manufacturing transportation incidents have dropped 20%.
In Q2, Creator Workflows were in 18 of our top 20 deals.
Nokia picked ServiceNow's Creator Workflows to develop custom apps in significantly less time at a fraction of the cost of alternative platforms.
These examples show how the combined capabilities of the workflows on the Now Platform are better together.
They deliver even more value than the sum of their parts.
Our introduction of the Now Buying Program has helped customers realize those synergies more quickly by simplifying the buying process, providing greater usage flexibility, all while improving business impact.
Continuing to build a strong client and alliance ecosystem, we established an enterprise agreement through the Now Buying Program with Deloitte who will take advantage of our full product suite to facilitate great experiences for their employees and clients while enhancing efficiencies and compliance management for the business.
Also in our partner ecosystem, we recently announced our integration with Microsoft Windows 365.
This will enable users to easily access cloud PCs directly through Microsoft Teams regardless of the employees' location in the hybrid work environment.
In closing, I am incredibly proud of our team's passion for solving the world's greatest challenges.
Our engineering team is second to none.
Our go-to-market organization is the best in the business, and our purpose to make work better for people is resonating.
It's been an honor to help turn vaccines into vaccinations for millions and millions of people.
It's a privilege to help the world reopen and safely return to the workplace.
We are engaging leaders on how we can solve society's biggest problems, improve the lives of people and help deliver better services to citizens everywhere.
We are better than we were yesterday, not as good as we will be tomorrow.
This is a special company with unbridled energy and unprecedented opportunity.
We are well on our way to becoming the defining enterprise software company in the 21st century.
Gina, over to you.
Q2 was a tremendous quarter with strong leads across our top line and profitability guidance metrics.
The team demonstrated exceptional execution, and we saw strong demand across all regions and workflows.
Q2 subscription revenues were $1.33 billion, $35 million above the high end of our guidance range and growing 31% year over year, inclusive of a 450-basis-point tailwind from FX.
Remaining performance obligations, or RPO, ended the quarter at approximately $9.5 billion, representing 35% year-over-year growth.
Current RPO was approximately $4.7 billion, representing 34% year-over-year growth and a four-point beat versus our guidance.
Currency was a 300 basis point tailwind year over year.
Q2 subscription billings were $1.328 billion, representing 30% year-over-year growth and a $73 million beat versus the high end of our guidance.
FX and duration were a 500-basis-points tailwind year over year.
We saw growth across all our industry categories.
Financial services and manufacturing were particularly strong across the globe driven by investments in business continuity.
Industries impacted by COVID, including retail and hospitality, also showed signs of recovery with strong net new ACV growth in the quarter.
The Now Platform remains a mission-critical part of our customers' operations, reflected by our strong 97% renewal rate.
The stickiness of our customer base has served as a solid foundation for us to build upon with our land-and-expand growth strategy.
This is evident with the continued growth in our average customer spend this quarter.
As of the end of Q2, we had 1,201 customers paying us over $1 million in ACV, up 25% year over year.
This included 62 customers paying us over $10 million in ACV.
Overall, we closed 51 deals greater than $1 million net new ACV in the quarter.
We're also seeing robust net new ACV growth from new customers, with the average deal size growing over 50% year over year.
Going to market with a solution sales approach to deliver the full capabilities of the portfolio instead of selling point products continues to drive more multi-product deals.
In Q2, 18 of our top 20 deals included three or more products.
Operating margin was 25%, three points above our guidance, driven by the strong revenue beat, cost savings and some marketing spend that was pushed into the second half of the year.
Our free cash flow margin was 19%.
Together, these results show the power of our business model and our ability to drive a balance of growth and profitability.
To navigate the post-COVID economy and the new era of work, businesses are investing in digital transformation to unlock new levels of innovation, agility and productivity.
As you heard from Bill, the macro trends driving digital transformation are a significant opportunity for ServiceNow.
Our Knowledge 2021 event in May included two amazing weeks of keynotes, panels and discussions that brought together experts and thought leaders of every industry across 141 countries to focus on these topics.
This year, we released new solutions, including our manufacturing and healthcare industry products, and showcased the power and endless possibilities achievable through ServiceNow workflows.
The response from customers has been fantastic.
The pipeline generated per attending account was up 45% year over year.
Together, the macro tailwinds and interest generated from Knowledge has accelerated pipeline growth for the second half of 2021.
Furthermore, our coverage ratio today continues to remain ahead of a year ago.
As a result, we are raising guidance for the full year.
We are raising our subscription revenue outlook by $73 million at the midpoint to a range of $5.53 billion to $5.54 billion, representing 29% year-over-year growth, including 250 basis points of FX tailwind.
We are raising our subscription billings outlook by $123 million at the midpoint to a range of $6.315 billion to $6.325 billion, representing 27% year-over-year growth.
Excluding the early customer payments in 2020, our normalized subscription billings growth outlook for the year would be 31% at the midpoint.
Growth includes the net tailwinds in FX and duration of 200 basis points.
We continue to expect 2021 subscription gross margin at 85%, and we are raising our full-year 2021 operating margin from 23.5% to 24.5%.
This reflects the increase in our top line growth, more efficient marketing spend and savings from some continued lower T&E expenses related to COVID.
We are raising our full-year 2021 free cash flow margin by one point from 30% to 31%.
I'd note that from a seasonality perspective, we're expecting 40% of our total free cash flow in Q4.
And lastly, we expect diluted weighted average outstanding shares of 202 million.
For Q3, we expect subscription revenues between $1.4 billion and $1.405 billion, representing 28% to 29% year-over-year growth, including the 150-basis-point FX tailwind.
We expect CRPO growth of 30% year over year, including 150-basis-point FX tailwind.
We expect subscription billings between $1.32 billion and $1.325 billion, representing 22% to 23% year-over-year growth.
Growth includes a net tailwind from FX and duration of 50 basis points.
As a reminder, looking at billings from a four-quarter rolling basis will help normalize the quarterly seasonality and changes in customer invoicing terms.
On that basis, our Q3 subscription billings guidance would represent 31% year-over-year growth.
We expect an operating margin of 23%.
There's 202 million diluted weighted outstanding shares for the quarter.
In conclusion, digital transformation is accelerating across the globe, and ServiceNow is at the epicenter of that opportunity.
ServiceNow is the digital fabric that stitches together existing systems of record, collapsing silos to connect fragmented processes.
We are the platform company for digital business, and we are well on our way to becoming a $15 billion revenue company.
And with that, I'll open it up for Q&A.
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servicenow - subscription revenues of $1,293 million in q1 2021, representing 30% year-over-year growth, 26% adjusted for constant currency.
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As usual, we'll start today's call with the Chief Financial Officer, who will review Vishay's third quarter 2021 financial results.
Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail.
We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide.
I will focus on some highlights and key metrics.
Vishay reported revenues for Q3 of $814 million.
EPS was $0.67 for the quarter.
Adjusted earnings per share was $0.63 for the quarter.
The only reconciling items between GAAP earnings per share and adjusted earnings per share are tax related.
There were no reconciling items impacting gross or operating margins.
Revenues in the quarter were $814 million, down by 0.7% from previous quarter and up by 27.1% compared to prior year.
Gross margin was 27.7%.
Operating margin was 15.2%.
There were no reconciling items to arrive at adjusted operating margin.
EPS was $0.67, adjusted earnings per share was $0.63.
EBITDA was $162 million or 19.9%.
There were no reconciling items to arrive at adjusted EBITDA.
Reconciling versus prior quarter, operating income quarter three 2021 compared to operating income for prior quarter based on $5 million lower sales or flat sales, excluding exchange rate impacts, operating income decreased by $2 million to $124 million in Q3 2021 from $125 million in Q2 2021.
The main elements were: Average selling prices had a positive impact of $10 million, representing a 1.3% ASP increase; volume decreased with a negative impact of $4 million, equivalent to a 1.3% decrease in volume.
Variable costs increased with a negative impact of $12 million, primarily due to increases in metal prices as well as materials and services and not completely offset by cost reductions.
Fixed costs decreased with a positive impact of $4 million, in line with our guidance.
Reconciling versus prior year, operating income quarter three 2021 compared to adjusted operating income in quarter three 2020, based on $174 million higher sales, or $172 million excluding exchange rate impacts, adjusted operating income increased by $62 million to $124 million in Q3 2021, from $61 million in Q3 2020.
The main elements were: Average selling prices had a positive impact of $18 million, representing a 2.2% ASP increase; volume increased with a positive impact of $70 million, representing a 23.2% increase.
Variable costs increased with a negative impact of $8 million.
Volume-related manufacturing efficiencies and cost reduction efforts did not completely offset higher metal prices, annual wage increases and higher tariffs.
Fixed cost increased with a negative impact of $17 million, primarily due to annual wage increases and higher incentive compensation costs, only partially offset by our restructuring programs.
Inventory impacts had a positive impact of $9 million.
Exchange rates had a negative effect of $9 million.
Selling, general and administrative expenses for the quarter were $102 million, in line with our guidance, excluding exchange rate impacts.
For quarter four 2021, our expectations are approximately $104 million of SG&A expenses at current exchange rates.
The debt shown on the face of our balance sheet at quarter end is comprised of the convertible notes due 2025 net of debt issuance costs.
There were no amounts outstanding on our revolving credit facility at the end of the quarter.
However, we did use the revolver from time to time during Q3 to meet short-term financing needs and expect to continue to do so in the future.
No principal payments are due until 2025, and the revolving credit facility expires in June 2024.
We had total liquidity of $1.7 billion at quarter end.
Cash and short-term investments comprised $916 million, and there are no amounts outstanding on our $750 million credit facility.
Total shares outstanding at quarter end were 145 million.
The expected share count for earnings per share purposes for the fourth quarter 2021 is approximately 145.6 million.
Our convertible debt repurchase activity over the past three years, together with the adoption of the new convertible debt standard significantly reduces the variability of our earnings per share to share count.
Our U.S. GAAP tax rate year-to-date was approximately 18%, which mathematically yields a rate of 17% for quarter three.
In quarter three, we recorded a tax benefit of $5.7 million due to the reversal of deferred tax valuation allowances in certain jurisdictions.
We also recorded benefits of $8.3 million year-to-date due to changes in tax regulations.
Our normalized effective tax rate, which excludes the unusual tax items, was approximately 22% for the quarter, and 23% for the year-to-date period.
We expect our normalized effective tax rate for full year 2021 to be between 22% and 24%.
Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions.
A shift in income could result in significantly different results.
Also a significant change in U.S. tax laws or regulations could result in significantly different results.
Cash from operations for the quarter was $136 million.
Capital expenditures for the quarter were $57 million.
Free cash for the quarter was $79 million.
For the trailing 12 months, cash from operations was $436 million, capital expenditures were $171 million, split approximately for expansion, $113 million; for cost reduction, $9 million; for maintenance of business, $49 million.
Free cash generation for the trailing 12-month period was $267 million.
The trailing 12-month period includes $15 million cash taxes paid for the 2021 installment of the U.S. tax reform transition tax.
Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 26 years and greater than $200 million for the past 19 years.
Backlog at the end of quarter three was at $2.244 billion or 8.3 months of sales.
Inventories increased quarter-over-quarter by $30 million excluding exchange rate impacts.
Days of inventory outstanding were 81 days.
Days of sales outstanding for the quarter were 43 days.
Days of payables outstanding for the quarter were 35 days, resulting in a cash conversion cycle of 89 days.
Also in the third quarter, we operated under quite excellent economic conditions characterized by extremely high backlogs.
We continue to expand critical manufacturing capacities in order to prepare ourselves for further growth.
During the quarter, we did experience some localized shortages of labor impacting the manufacturing output.
There were strong financial third quarter results.
We had a gross margin of 27.7% of sales and operating margin of 15.2% of sales.
Earnings per share were $0.67 and adjusted earnings per share, $0.63.
Vishay in the third quarter generated $79 million of free cash, and we do expect another good year of cash generation.
As I said, the economic environment for electronic components remains exceptionally good with backlogs at a historical high.
Except for automotive, all markets continue to be in excellent shape and sales are basically limited by the manufacturing capacities.
The automotive sector is expected to accelerate again over the next quarters with current supply problems getting resolved step by step.
The supply chain continues to be rather depleted in general.
We see extremely long lead times and shortages of supply.
Price increases are being implemented in general also to offset increased inflationary costs for metals and for transportation.
Concerning the various regions, not so many differences.
All regions remained exceptionally strong.
POS in all regions remains close or above all-time highs, and distribution in all regions remains hungry for products every year, no change.
Global distribution continues to get overwhelmed with orders.
POS in the third quarter continued on a record level of the second quarter, running 34% over prior year.
POS increased versus Q2 by 5% in the Americas and by 3% in Europe.
Asia was slightly down by 2%.
Americas and Europe are at an all-time high.
Inventory turns of global distribution in quarter three turns was at 4.2 turns, started to normalize from quite extreme 4.4 turns in the second quarter.
In the Americas, 2.2 turns after 2.1 turns in the second quarter and 1.5 turns in prior year.
In Asia, 6.1 turns after 7.4 turns in Q2 and 4.3 turns in prior year.
And in Europe, 4.5 turns in the quarter after 4.6 turns in the second quarter and 3.2 turns in prior year.
Coming to the various industry segments we serve.
Sales to the automotive market remains dampened by customers' inability to secure ICs.
The situation is expected to improve step by step.
And as the demand for cars remains on a very high level, you can see that there's money in the bank for 2022.
Industrial markets continued strong in all regions, factory automation, alternative energy, power transmission are driving the growth.
After record levels in 2020, personal computing shows signs of normalization, but server markets continue growing.
Proliferation of 5G technology continues to drive sales in fixed telecom.
Military spending remains stable.
Commercial aerospace starts to recover slowly.
Medical markets are steady, with focus being more and more shifted back to normal hospital procedures.
White goods, air conditioning and gaming remains strong and profitable.
Coming to Vishay's business development in Q3.
Due to local labor shortages, third quarter sales, excluding exchange rate impacts came in below the midpoint of our guidance.
We achieved sales of $814 million versus $819 million in prior quarter and versus $640 million in prior year.
Excluding exchange rate effects, sales in Q3 were flat versus prior quarter and up by $172 million or by 27% versus prior year.
Book-to-bill in the quarter has remained on an extraordinarily high level of 1.26 after 1.38 in prior quarter.
1.29 book-to-bill for distribution after 1.41 in quarter two; 1.23 for OEMs after 1.34 in the second quarter; 1.27 for semis after 1.41 in Q2; 1.26 for passives after 1.35; 1.30 for the Americas after 1.33 in Q2; 1.14 for Asia after 1.29; 1.41 for Europe after 1.54, I think we can speak of a broad continuation of an excellent economical environment.
Our backlog in the third quarter has climbed to another record high of 8.3 months after 7.5 in the second quarter, 8.9 months in semis after 8.4 months in Q2 and 7.6 months in passives after 6.7 months in Q2.
Price increases become visible in our broad form.
We have seen 1.3% prices up versus prior quarter and 2.2% versus prior year.
For the semiconductors, it was 2.2% up versus prior quarter and 3.8% up versus prior year.
For the passives, 0.3% up versus prior quarter and 0.5% up versus prior year.
Some highlights of operations.
Despite the continued good level of plant efficiencies, our contributive margin in the third quarter has suffered from inflationary impacts, in particular as it relates to metals and to transportation.
SG&A costs in Q3 came in at $102 million according to expectations when excluding exchange rate impacts.
And manufacturing fixed costs in the quarter came in at $137 million, below our expectations when excluding exchange rate impacts.
Total employment at the end of the third quarter was 22,730, 1% up from prior quarter.
Excluding exchange rate impacts, inventories in the quarter increased.
By $30 million, $13 million in raw materials and $17 million in WIP and finished goods.
Inventory turns in the third quarter remained at a very high level of 4.5 after 4.8 in Q2.
Capital spending in the quarter was $57 million versus $22 million in prior year, $41 million for expansion, $2 million for cost reduction and $14 million for the maintenance of business.
We continue to expect for the year 2021 capex of approximately $250 million for the most part, of course, for expansion projects.
We, in the third quarter generated cash from operations of $436 million on a trailing 12-month basis.
And also, on a 12-month basis, we generated $267 million free cash.
Despite increased capex, we also for the current year, expect a solid generation of free cash, quite in line with our provision.
Coming to our main product lines, starting with resistors.
With resistors, we enjoy a very strong position in the auto industrial, mill and medical market segments.
We offer virtually all resistor technologies and are globally known as a reliable high-quality supplier of the broadest product range.
Vishay's traditional and historically growing business has returned to record levels.
Sales in the quarter were $181 million, down by $12 million or 6% from previous quarter, but up by $35 million or 24% versus prior year, all excluding exchange rate impacts.
In the third quarter, in particular, some shortages of labor and limited sales.
The book-to-bill ratio in the quarter continued strong, 1.26 after 1.39 in the second quarter.
The backlog increased further to 7.8 months from 6.6 months in the prior quarter.
Gross margin in the quarter decreased to 27% of sales, down from a peak of 30% in Q2.
Main reasons were lower volume and higher metal and logistics costs.
Inventory turns in the quarter remained on a very high level of 4.7 after 5.1 in the second quarter.
Selling prices continued to increase, plus 0.5% versus prior quarter and plus 0.7% versus prior year.
We are in process to raise critical manufacturing capacities mainly for resistor chips and for power wirewounds.
And of course, we focus on hiring in the critical places.
We expect a very successful year for resistors.
The business consists of power inductors and magnetics.
Since years, our fast-growing business with inductors represents one of the greatest success stories of our company.
Exploiting the growing need for inductors in general, which had developed a platform of robust and efficient power inductors and leads the market technically.
With magnetics, we are very well positioned in specialty businesses, demonstrating steady growth there.
Sales of inductors in the third quarter were $85 million, flat versus prior quarter and up by $5 million or by 7% versus prior year, excluding exchange rate effects.
The book-to-bill ratio in the third quarter was 1.11 after 1.21 in prior quarter.
The backlog for inductors grew further to 5.4 months from 5.1 in the second quarter.
Gross margin continued to run at an excellent level of 32% of sales, slightly down from a peak of 34% in prior quarter.
Inventory turns were at 4.6, practically flat versus prior quarter.
There is a substantially reduced price decline at inductors, a slight price increase of 0.2% versus prior quarter and minus 1% versus prior year.
We are accelerating the next steps of capacity expansion for power inductors in order to get ahead of the demand curve.
Our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches.
We enjoy increasing opportunities in the fields of power transmission and of ECAs, namely in Asia and China.
Sales in the third quarter were $116 million, 3% below prior quarter but 25% above prior year, which excludes exchange rate impacts.
Shortages of labor, also in the case of capacitors, limited manufacturing output and sales.
Book-to-bill in the third quarter for capacitors remained at very strong 1.7 on the level of the prior quarter.
Backlog increased to an absolute record of 8.9 months, up from 7.7 months in the second quarter.
Gross margin in the third quarter reduced to 21% of sales from 24% in the second quarter.
Lower volume meant further increased cost for metals, in particular, worsen the results.
Inventory turns in the quarter remained on a healthy level of 3.5 after 3.9 in prior quarter.
We are steadily increasing selling prices, 0.1%-plus versus prior quarter and 1.3%-plus versus prior year.
We expect a solid year for capacitors with growing opportunities in the future.
We remain confident for capacitors for the midterm in the light of increasing designed wins that we see.
Coming to Opto products.
Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers.
Also in Opto, we see a strong acceleration of demand.
Sales in the quarter were $71 million, 6% below prior quarter, but 9% above prior year, which excludes exchange rate impacts.
We experienced quite substantial losses of manufacturing output due to COVID-related restrictions in Malaysia.
This situation should be resolved, for its resolved after all by all the workforce now has been vaccinated, will not repeat itself therefore.
Book-to-bill in the third quarter continued strong at 1.36 after extreme 1.69 in the second quarter.
Backlog continued to grow to another record high of 10.9 months after 9.3 months in prior quarter.
Gross margin in the third quarter improved further to 34% of sales after 32% in prior quarter.
I think we can say Opto continues to perform exceptionally well.
We have seen now more normal inventory turns of 5.0 in the quarter after 5.8 in the second quarter.
The selling prices are going up, plus 1.9% versus prior quarter and plus 5% versus prior year.
We modernized and expand our Heilbronn wafer fab and the production should start in the course of Q4, partially Q1 next year.
Opto products continue to be a very relevant factor for Vishay's growth.
Diodes for Vishay represents a broad commodity business where we are largest supplier worldwide.
Vishay offers virtually all technologies as well as the most complete product portfolio.
The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years.
Sales in the quarter were $185 million, up by $12 million or by 7% versus prior quarter, and up by $61 million or 49% versus prior year without exchange rate effects.
We see a continued strong book-to-bill ratio of 1.31 in the quarter after 1.45 in Q2.
Backlog climbed to an extreme high of 8.9 months from 8.5 months in prior quarter.
With growing volume, gross margin continued to improve to 25% of sales as compared to 24% in Q2.
Inventory turns were at 4.5 after 4.7 in prior quarter.
Selling prices keep increasing by 2.9% versus prior quarter and by 5.1% versus prior year.
We have started to expand our fab in Taipei introducing the 8-inch technology there.
The business with diode starts to exceed pre-pandemic levels.
Vishay is one of the market leaders in MOSFET transistors.
With MOSFETs, we enjoy a strong and growing market position, in particular, in automotive, which in view of an increasing use of MOSFETs will provide a very successful future for this product line.
The demand has reached quite extreme levels and increases further.
Sales in the quarter were $176 million, 5% above prior quarter and 31% above prior year, excluding exchange rate impacts.
Book-to-bill ratio in Q3 was 1.19 after 1.26 in the second quarter.
Backlog has grown further to an extreme level of 8.1 months as compared to 7.9 in the second quarter.
Higher volume, better selling prices and good efficiencies allowed gross margin to increase further to 31% of sales, up from 28% in the second quarter.
Inventory turns in the quarter were at 5.1, virtually flat versus prior quarter.
We are implementing price increases plus 1.5% versus prior quarter and plus 2.2% versus prior year.
MOSFETs remain absolute key for Vishay's growth going forward.
We intend to keep a proper balance between in-house manufacturing of wafers and purchases from foundries.
And this in mind, we decided to build a 12-inch wafer fab in Itzehoe in Germany, adjacent to our existing eight-inch fab, which will increase our in-house wafer capacity by 70%, 7-0 percent, within three to four years.
Let me summarize and let me emphasize the following: Clearly we, since a few years, enjoy very favorable economic conditions, and the end of the positive phase of the current cycle is not in sight.
But, I think much more important beyond all short-term speculations, the longer-term outlook for electronics and also for components is remarkably bright.
We expect noticeably higher growth rates for our products going forward than we have seen them in the past.
Vishay definitely is in a good position to benefit from this favorable trend.
We enjoy a very broad and strong market position.
We are a broad liner, and we are financially solid and therefore, in the position to take the right steps.
Results also for the fourth quarter look promising.
We guide to a sales range between $805 million and $845 million at a gross margin of 27.7%.
Over to you, Peter.
Vic, please take the first question.
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compname reports q4 earnings per share of $0.28.
q4 adjusted earnings per share $0.27.
q4 earnings per share $0.28.
q4 revenue fell 10.2 percent to $69.1 million.
sees q1 2020 revenue $63 million to $70 million.
vishay precision - operating results for q4 2019 versus q3 2019 were primarily impacted by inventory reductions & negative impact of foreign exchange rates.
vishay precision group- projected revenue range excludes any potential impact of coronavirus on business, which co is continuing to monitor closely.
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They will provide their perspective on Xylem's third-quarter results and their outlook.
I'll ask you please keep the one question and a follow up and then return to the queue.
A replay of today's call will be available until midnight on November 30.
Additionally, the call will be available for playback via the investors section of our website under the heading investor events.
All references will be on an organic or adjusted basis unless otherwise indicated.
These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC including in our Form 10-Q to report results for the period ending September 30, 2020.
We have provided you with a summary of our key performance metrics including both GAAP and non-GAAP metrics.
For purposes of today's call, all references will be on an organic and adjusted basis, unless otherwise indicated.
I hope all of you and those close to you are keeping safe and well.
The team's operational execution was strong right around the world.
You'll recall that after the low point of April, we saw sequential improvements in May and June, and we continue to build on that positive trajectory through the summer.
Our team took advantage of the market regaining pace and exceeded our revenue and margin guidance for the quarter, while generating very strong cash flow.
This performance reflects the team's focus on serving our customers and managing what we can control, whatever the dynamics are of the macroenvironment.
Through the quarter, we saw solid foundations of recovery in a number of places, and we are well positioned to further capitalize on that momentum.
The pandemic's impact hasn't been uniform, of course.
Conditions varied significantly both by geography and by end market.
For example, China revenue returned a healthy growth of 17%.
Western Europe, overall, was back to relative stability at 2% growth.
The U.S. saw only slight recovery, still dealing with pandemic response and coming in at down 11%, although improving sequentially.
In our end markets, we've seen ongoing resilience in the wastewater side of utilities, and our wastewater solutions returned to solid growth in the quarter.
On the clean water side, we're delivering strong commercial momentum including winning large, long-term transformational metrology deals, leveraging our differentiated platform, particularly in advanced metering infrastructure.
In addition to big wins with England and in Winston-Salem which we mentioned last quarter, the team recently won another marquee project in Columbus, Ohio, worth $94 million.
This customer is a combined utility, meaning we will provide both water and electricity meters plus advanced software and services.
It's worth noting how compelling our value proposition is for combined utilities, addressing both water and energy applications with one portfolio and leveraging our unique Flexnet communication capability across both platforms to achieve economies of scale.
The Columbus, Winston-Salem and England deals have together added about $250 million to Xylem's backlog.
Our metrology and communications offerings are clearly differentiated in their own rights, but we also have the advantage of delivering unique value by combining infrastructure platforms with complementary digital solutions.
Each value proposition enhances the other.
As anticipated, COVID impacts are causing delays in some metrology projects where time lines have shifted to the right.
And in parts of the U.S., replacement meter installations have been pushed out in the short term.
Pipeline assessment services, a business that requires putting people on-site, has been affected by COVID-driven restrictions on travel and field work.
At the same time, the pace of interest in digital solutions for remote monitoring and automated operations has accelerated.
The pandemic has not only spot-led essential services, it has also eliminated utilities need for much greater operational and financial resilience which is now at the top of every utility operators' agenda.
Digital transformation has gone from being attractive to becoming an imperative, and that's reflected in strong quoting activity in our digital solutions business which has also increased by 50% its number of revenue-generating clients.
The revenues are still a small part of our top line, but the acceleration of interest further strengthens our view on digital adoption in this sector.
And as the number and size of those projects grow, we are seeing a broadening scope of opportunities across software, services and infrastructure products.
While we don't expect this to be a straight-line recovery, Xylem is well positioned irrespective of how the pandemic plays out.
We anticipate quarter sequential improvements.
Our financial health and liquidity are both strong.
We're successfully running in cost, executing the actions we announced earlier this year.
And we're shifting investment to adapt quickly to customers' evolving needs and new ways of working.
Our supply chain has been exceptionally resilient, with the team keeping customers supplied even through the pandemic's peaks.
So we are operating with discipline, strengthening our competitive position and helping our customers serve their communities with uninterrupted essential services despite whatever macro uncertainty may present.
But since Mark was in the Chair through the end of the reporting period, he'll carry the commentary on our third-quarter performance.
So Mark, over to you.
Revenue declined 7% which was better-than-anticipated as we entered the third quarter.
We had strong performance in our wastewater utility businesses and the residential end market, both of which grew mid-single digits in the quarter.
The return to growth in these markets was offset by the expected declines in our metrology project deployments and industrial and commercial businesses which continue to be impacted by project delays and site restrictions.
Geographically, as various countries have reopened and recovered, so has our business.
In China, for example, we saw a very strong performance with double-digit year-over-year growth.
Despite the China business returning to pre-pandemic growth rates, emerging markets overall declined 7%.
India was down only modestly, while the Middle East and Latin America declined double digits as they continue to be impacted by shutdowns throughout the quarter.
Across North America, recovery remains mixed.
While revenues improved quarter sequentially, they were down year over year.
While our wastewater business remained resilient, we continue to see timing effects on metrology deployments and softness in industrial markets.
Western Europe grew 2% in the quarter as countries reopened and activity resumed, with revenue growing in each of our end markets with the exception of industrial.
We also saw operating margins expand quarter sequentially to 13% which drove earnings per share of $0.62, both better than expected.
I'll cover the margin impacts by segment shortly.
Overall, our teams maintained very sharp focus and executed well operationally by driving strong productivity and cost reductions.
Water Infrastructure orders declined 5%.
Order trends in our wastewater utility businesses continued to be solid.
Treatment orders were up 20%.
Wastewater transport orders down 9% for the quarter would have been up mid-single digits but for lapping the large deal we won last year in India.
Orders in the industrial end market were soft due to double-digit declines in our dewatering business.
Long-term backlog continues to build as we're up over 30% for backlog shippable in 2021 and beyond.
Segment revenues declined 2% in the quarter compared to the prior year.
This was better-than-anticipated and reflects the resilience of utility spending to run and maintain their wastewater operations.
Our wastewater transport business grew 4% in the quarter.
And we saw continued strength in our treatment business which grew 3% in the quarter.
The growth in treatment reflects what has been, to date, the relatively uninterrupted deployment of wastewater capex projects.
The dewatering business experienced continued softness.
Revenues declined 14%, most of which was in the North American construction and industrial markets which have seen -- which have been significantly impacted by site closures and access restrictions.
Operating margin in the quarter was 18.5%, down modestly year over year from higher inflation, lower volumes and unfavorable mix.
However, the margin performance exceeded our expectations as the team's strong execution on cost reductions and productivity initiatives delivered 630 basis points in margin expansion.
Orders in the applied water segment declined 1% in the quarter, and revenues declined 4% as softness in the industrial and commercial markets continued, particularly in the United States and the Middle East.
The commercial end market declined 5% in the quarter.
As a reminder, this business is roughly two-thirds weighted toward repair and replacement work which held up relatively well in the quarter despite shutdowns in some regions.
Industrial was affected by similar regional dynamics including site access restrictions and declined 7%.
A bright spot in the quarter was residential which grew 4%.
We saw a particularly strong growth across Western Europe and from China.
Overall, emerging markets declined 8% in the quarter.
China had a very strong performance, growing 23% as the team executed well, delivering on pent-up demand.
This was more than offset by the declines in the Middle East and Latin American regions due to the ongoing lockdowns.
Revenue in the United States declined 6% but improved quarter sequentially, with some softness across end markets driven by continued virus impacts.
Operating margin in the segment was 15.9%.
Volume declines and inflation impacts reduced margins in the quarter but were largely offset by 530 basis points of cost reduction and productivity benefits.
Measurement and control solutions orders declined 19% in the quarter and revenue declined 15%.
We saw project timing significantly impact our metrology business and COVID-19 restrictions push out our project revenues in our pipeline assessment services business.
In metrology, we've seen relative stability in our opex replacement business from water metrology products.
As a reminder, our opex exposure accounts for about 70% of our revenues.
We've seen much more variability in the 30% of our metrology business that's tied to large project deployments or capex, particularly in our gas segment, where project revenues were down 60% in the quarter.
Here, we've been significantly impacted by project timing, particularly from lapping a large gas metrology project deployment which was largely completed at the end of last year and delays in another large gas project this year due to home access restrictions.
Despite these challenges, our underlying North American water metrology book and bill business has remained relatively stable and commercial momentum in winning new projects remains robust.
This is highlighted by the large contract wins we had in the first half of the year and continued into the third quarter with the Columbus, Ohio and Winston-Salem, North Carolina wins.
Patrick already covered Columbus, but I'll quickly highlight a couple of important points on the Winston-Salem win.
This is a $60 million contract to provide water metrology products under our network as a service offering, leveraging our Flexnet communications network.
Importantly, our teams differentiated the value of our offering by introducing several components from our digital solutions platform, enabling our customer to also seamlessly address critical needs around non-revenue water and the wastewater network.
Our pipeline assessment services business has also been subject to significant near-term delays in project revenues driven by COVID-19 travel restrictions and site closures.
As a reminder, there are two businesses within AIA, digital solutions and pipeline assessment services.
It's in the latter business where we've experienced deferrals of pipe inspection work.
And we expect those pushouts to continue into early 2021.
As a result, we booked an accounting charge to reflect the impacts of those delays.
We continue to strongly believe that the medium and long-term value proposition of this business is compelling, particularly as utilities move to address budget challenges by using pipeline assessment services to reduce future spend on pipe replacement.
We expect the project timing for deploying new metrology projects and the COVID-19-related delays in pipeline assessment services to continue to impact us through the fourth quarter.
This is reflected in our fourth quarter guidance which Sandy will cover later, as shippable backlog for the fourth quarter is down roughly 25%.
That said, it's significant that we've not had any project cancellations.
Rather, we're seeing an acceleration of growth in our project pipelines, and we continue to win large new contracts.
As a result, MCS shippable backlog in 2021 and beyond is up over 30% which is a pretty good indication of the power we're seeing with our digital platform.
So while these projects aren't currently reflected in the orders metric, they are the latest in a series of important wins that give us confidence in the medium and long-term growth profile of this segment.
EBITDA margin in the segment was 14.8%.
The year-over-year margin decline was driven by lower revenues of high-margin North American metrology and pipeline assessment services due to project timing and COVID-19.
This impact was partially offset by 630 basis points of cost reduction in the quarter.
We ended the quarter with approximately $1.6 billion of cash and short-term investments and $2.4 billion of liquidity driven by our very successful green bond issuance last quarter, combined with our strong cash flow performance throughout the year.
In the face of substantial challenges presented by the pandemic, I'm very proud of the work of our teams in managing all aspects of our working capital performance.
At quarter end, working capital was 20.3% of sales, representing an improvement of 30 basis points versus this time last year.
The team's focus on working capital, disciplined capex spending and cost control through the quarter have continued to pay off, enabling us to generate free cash flow of $234 million, a conversion rate of over 200% in the quarter which did see some benefit from favorable timing on payments primarily related to taxes and interest.
Having worked with Sandy previously, I wasn't at all surprised by how quickly she's come up to speed on our businesses and our markets and the pace with which she's developed relationships, all virtually, and taken on the leadership of the global finance team over the past month.
I couldn't be more confident about the future of Xylem or in Sandy's capability to help Patrick and the team accomplish our mission and take the company's performance to the next level.
So with that, I'll hand it back to Patrick for the last time.
Before turning to our outlook, I just want to take a moment to reiterate two overall trends we're seeing as we look forward.
The first is the influence of regional differences around the world.
in the third quarter.
So long as the impact of COVID-19 continues to influence demand, we believe those geographic effects will be considerable to at least the end of the year.
Xylem's global diversification puts us in a strong position as we serve the international markets that are furthest along in the recovery curve.
The second overall trend to highlight is a shift of attention from reactive operational imperatives to medium and longer-term resilience.
The pressured utility space at the beginning of the pandemic are well known.
You simply can't stop providing an essential service, even if you're struggling to put crews in the field, and more end users than usual are having trouble paying their bills.
Our customers have come through the most intense part of the crisis serving their communities heroically.
It's also been a wake-up call for the sector.
Utilities leaders and operators have become acutely aware of the pressing need to invest in greater operational and financial resilience.
Part of that investment will go to conventional infrastructure.
That will have to be combined with new approaches if utilities are to address their overarching challenges, making the cost of infrastructure more affordable, extending asset life and dramatically increasing labor efficiencies while maintaining safety.
So we've seen interest continue to ramp-up in digital transformation, remote monitoring, automated operations and smart infrastructure, more broadly.
Of course, the implications of digitizing utility network goes deeper than the software platforms in our digital solutions business.
Beyond software and end points, transformation also requires the digitally enabled pumps and drives that make up the backbone of a smarter network which is why we are implementing an integrated digital strategy across our entire portfolio.
We're very excited about the opportunity of working with our customers to build the digital water and energy networks that will carry their communities into the future.
Turning from those trends to outlook.
In general, we have a much clearer view on Q4 than we had on Q3.
We were seeing stabilization in a number of markets.
We have even greater supply chain confidence, and we're executing well on cost, all of which leads us to expect quarter sequential improvement in margins.
So by end market, I'll start with our outlook for utilities.
The wastewater side has been exceptionally resilient.
We expect opex to continue holding up well given the need to service mission-critical applications.
And capital projects with secured funding continue to move forward.
On the clean water side, as I mentioned, we have strong commercial momentum with multiyear projects like Anglin, Winston-Salem and Columbus, setting us up for healthy growth in 2021 and beyond.
In the short term, we expect performance to trail wastewater due to more pronounced COVID impacts, but we're not seeing structural changes in demand, and the growth profile of this segment is expected to remain highly attractive.
We simply anticipate some continuing COVID impacts on deployment timing.
And standard meter replacements are likely to remain soft until physical distancing eases.
Looking at industrial and commercial end markets, the accessibility of industrial sites varies widely by region.
Where COVID response has lagged, there have been site access restrictions, and work has been deferred.
So we're still anticipating softness to the fourth quarter, especially in North America construction and industrial markets, affecting our dewatering business.
And in commercial, it's a mixed picture that varies by end customer.
Demand in hospitals, data centers and apartment buildings, for example, is very different than for offices and hotels.
But less building use overall and soft North America construction suggest continued softness in the near term.
Now, I have the great pleasure of turning over to Sandy for the first time so she can provide some more specifics on our Q4 guidance.
I just want to kick off by expressing how excited I am to have joined the Xylem team.
I joined Xylem because of the unique combination of strong commercial opportunities for growth and the compelling mission of the company.
Xylem is also complementary to my previous experiences which has included bringing together cutting-edge technologies with industrial products.
I spent the last month getting up to speed with the team alongside Mark, and I look forward to all we have ahead of us, rounding out 2020 and beyond.
With that, let's get into a few more details on our fourth-quarter guidance.
On the top line, we expect organic revenues in the range of down 6% to down 8%.
This is a modest improvement in sequential performance versus the third quarter.
As we break it down by segment, we anticipate being down low-single digits in Water Infrastructure, down mid-single digits in applied water and down mid-teens in Measurement and control solutions reflecting the project deployment delays we have continued to see through October.
Operating margin in the quarter is expected to be in the range of 13 to 13 and a half percent.
Also, a modest quarter sequential improvement.
I also want to highlight a few full-year items.
We expect to end 2020 with free cash flow conversion of greater than 100% for the full year.
Restructuring and realignment costs are now expected to be between $75 million and $85 million, slightly lower than our previous guidance, while structural annual cost savings remain unchanged at approximately $70 million.
We are lowering our estimated tax rate this year to 18 and a half percent to reflect our updated mix of earnings.
Having worked with Mark before, I know he and I bring similar perspectives and share a common approach to operational excellence and driving investment in innovation to support sustainable growth.
Mark has built a great team, and I'm confident we have the organizational capability to focus to deliver.
It's great to have you on the team.
And we will execute from a position of competitive strength, even in the more challenging environments.
Our discipline on cost and cash will continue to pay off, both in the coming quarter and through 2021.
Looking ahead, that quality of operational execution will enable us to continue driving sustainable margin expansion.
Our robust financial health which gives our customers confidence that they can rely on us in uncertain times, is built on the foundations of a strong balance sheet and cash generation.
Our leading market positions are paired with a differentiated product portfolio and a durable business model at the heart of essential services.
And our strategy places Xylem in the lead as the water sector's digital adoption curve accelerates, providing a multiyear runway of attractive growth.
We will deploy capital to continue strengthening our portfolio, investing in the solutions and services that anticipate our customers' needs.
Both the economic and the social returns of those investments will be attractive over the medium and long terms.
And our commitment to create value for all our stakeholders will continue to underpin the sustainability and resilience of our company, our customers and our communities.
So let me take this opportunity to say once again, as I've said before, that all of Xylem stakeholders have benefit profoundly from Mark's leadership and tenure at Xylem, but none more than me, as I have benefited tremendously from his counsel.
So operator, pleased to listen to Q&A.
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q3 adjusted earnings per share $0.62.
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Actual results may differ significantly because of risks and uncertainties that are difficult to predict.
We will also describe our business using certain non-GAAP financial measures.
UGI delivered strong third quarter results and performed well while managing the ongoing impact of the COVID-19 pandemic.
Our third quarter GAAP earnings per share was $0.71, while adjusted earnings per share was $0.13, $0.05 over a $0.08 performance in the comparable prior year period, reflecting strong execution across our diversified business and increased margins at UGI International.
On a year-to-date basis, our GAAP earnings per share of $4.48 and adjusted earnings per share of $3.30 represent record earnings through the first three quarters of the fiscal year.
We are really pleased with this performance, which demonstrates the earnings strength of our diversified business.
During the Q2 earnings call, we shared the revised earnings per share guidance of $2.90 to $3 for this fiscal year.
Given the strong year-to-date performance, we expect to be at the top end of our guidance range.
Next, I'll comment briefly on several key accomplishments during the quarter before turning it over to Ted, who will provide you with an overview of UGI's financial performance.
During the quarter, our teams continued to execute on our major business initiatives as we deliver reliable earnings growth, progress incremental opportunities related to renewables and make investments to rebalance our portfolio.
We are well positioned to meet our objectives and are pleased with the pipeline of opportunities ahead.
Turning to the key highlights for the quarter.
UGI Utilities is on track for another record year of capital expenditure, where we will invest in infrastructure replacement and reinforcement.
These investments, which are primarily focused on replacement of cast iron and bare steel, are expected to drive continued reliable earnings growth as our PA utility has seen a rate base CAGR of 11.4% over the past five years.
The Utilities team also continues to focus on adding new customers across our system with more than 2,200 new residential heating and commercial customers added in Q3 and roughly 10,000 added on a year-to-date basis.
Our Midstream & Marketing business continues to leverage our supply assets to take advantage of opportunities that arise, and we continue to expect that we will invest substantial capital over the next several years.
Our recent investments in the UGI Appalachia system, including our interest in the Pine Run system continue to perform well, and we were pleased with the strong production volumes during the quarter.
As we continue to see growth in demand and rising prices, we remain confident that our midstream assets position us well for future opportunities.
Our LPG businesses had a strong quarter of execution as we continue to deliver on the business transformation initiatives we previously outlined.
We will drive efficiencies within our operations, improve the customer experience and remain focused on operational and commercial excellence.
We are on track to deliver the previously targeted benefits for both AmeriGas and UGI International.
And expect that this strategy, coupled with continuous improvement, will generate customer and shareholder value.
Our teams are progressing on exciting and attractive range of investment opportunities in renewable solutions as we execute against the renewable strategy that we previously shared with you.
Yesterday, we announced that UGI Energy Services has entered into definitive agreements to develop innovative food waste digestive projects to produce renewable natural gas in Ohio and Kentucky through the Hamilton RNG joint venture.
In conjunction with that project, pipeline quality RNG will be injected into a local natural gas pipeline that serves a regional distribution system.
In addition, we are able to leverage GHI, which will be the exclusive offtaker and marketer of RNG for Hamilton RNG, similar to the arrangement with Cayuga RNG.
In addition, during our last investor update, we discussed the intent to create a joint venture for the production and use of renewable dimethyl ether.
We have started the regulatory filing process with the European authorities, and we will provide an update on our future calls as we progress on this venture.
As you can see, we are making strong progress on a number of initiatives across our businesses.
We will remain focused on executing against our strategy of delivering reliable earnings growth, exploring renewables opportunities and rebalancing our portfolio.
We are confident that this will allow us to continue to deliver long-term earnings per share growth of 6% to 10% and 4% dividend growth.
I'll return later on the call to discuss other business updates.
As Roger mentioned, we're pleased with the strong third quarter results.
We delivered adjusted diluted earnings per share of $0.13, an increase of $0.05 over the prior year fiscal quarter.
Our reportable segments had EBIT of $98 million compared to $81 million in the prior year.
This table lays out our GAAP and adjusted diluted earnings per share for fiscal year 2021 compared to fiscal year 2020.
As you can see, our adjusted diluted earnings exclude a number of items such as: the impact of mark-to-market changes in commodity hedging instruments, a gain of $1.09 this year versus $0.55 in the third quarter of fiscal 2020.
Last year, we recorded an $0.18 impairment of our ownership interest in the Conemaugh Station.
This interest was divested as of September 30, 2020.
Also last year, we had a $0.02 loss on foreign currency derivative instruments.
We adjusted out $0.07 of expenses associated with our LPG business transformation initiatives compared to $0.02 in the prior year.
Lastly, we had a $0.44 impairment related to our PennEast assets.
In June, the U.S. Supreme Court ruled in favor of PennEast, which is categorically good news for the industry and consumers.
Natural gas will continue to play an important role in meeting our energy needs.
However, even with this positive news, it is unclear when other remaining issues, such as a decision by FERC on the request to phase the project will be resolved allowing the project to be brought into service.
This has led us to impair our investment.
While there is uncertainty regarding the timing of PennEast, we have ample opportunity to deploy capital in other areas that meet our return objectives as we have discussed in the past.
Looking at our year-over-year quarterly performance, this chart provides some additional color to the $0.05 improvement in earnings we achieved versus the prior year period.
This performance was largely due to higher volumes at our international LPG business on weather that was almost 55% colder than prior year.
There was also an increase due to the new gas base rate that went into effect at Utilities at the beginning of this calendar year as well as continued discipline in margin and opex management throughout our businesses.
Our domestic businesses saw warmer weather than prior year, which impacted demand at AmeriGas and the Utilities.
At the corporate level, we saw a $0.15 decrease versus the prior year period, largely due to CARES Act tax benefits that were realized last year.
When we shared our revised FY 2021 guidance range of $2.90 to $3, we noted that this included $0.10 of anticipated COVID headwind in tax benefits of roughly $0.12 from CARES and other strategic tax planning actions.
Our experience during the quarter continues to align with the amounts we previously projected.
And as Roger shared, we expect to deliver at the top end of our guidance range.
Delivering at the top end of our guidance range and given our year-to-date non-GAAP results of $3.30, we expect that Q4 will see a sizable reduction that is primarily driven by tax items when compared to the prior year period.
In FY 2020, the entire GILTI tax benefit was realized in Q4, while that benefit is reflected in the quarterly results of FY 2021.
In addition, our leverage of the CARES Act is reduced with our strong performance this year.
Looking at the individual businesses.
AmeriGas reported EBIT of $11 million compared to $19 million in the prior year.
There was a slight increase in total retail volume driven by an 18% increase in national account volumes in comparison to the prior year period.
This volume increase fully offset a 19% decrease in cylinder exchange volume that we saw as sales normalized after a significant uptick in Q3 of FY 2020.
When compared to 2019 third quarter, there was a 5% increase in cylinder exchange volume this quarter.
Overall, the business saw a decline of $14 million in total margin that was largely attributable to customer mix.
We saw lower volumes in the higher-margin residential and cylinder exchange customer segments that was partially offset by the higher volumes from lower-margin commercial and motor fuel customer segments.
Other income increased by $7 million, largely due to higher finance charges, which were suspended in response to the COVID pandemic in the prior year period and onetime gains on asset sales in the current period.
UGI International generated EBIT of $41 million compared to $21 million in fiscal 2020.
Retail volumes increased by 21%, largely due to the significantly colder than prior year weather that I described earlier.
And recovery on certain volumes that were impacted by the COVID-19 pandemic last year.
This increase in bulk and cylinder volumes drove the higher total margin and offset the slightly lower unit margins given the 81% increase in average wholesale propane prices over prior year.
We saw roughly an $18 million or 86% improvement in the year-over-year constant currency performance in EBIT.
Separately, our hedging strategy which is intended to offset the multiyear impact of foreign currency exchanges is working as intended, and reducing the volatility associated with U.S. dollar shifts over time.
Moving to the natural gas businesses.
Midstream & Marketing reported EBIT of $21 million, which was fairly consistent with fiscal 2020.
The business experienced improved margins from capacity management, gas gathering and renewable energy marketing activities in comparison to the prior year period.
Our recent investment in Pine Run continues to deliver in line with our expectations and is the primary driver for the increase in this quarter's EBIT versus prior year.
UGI Utilities delivered a strong performance for the quarter and reported EBIT of $25 million, $4 million higher than the prior fiscal year.
This increase was largely attributable to continued growth in our customer base and implementation of increased gas base rates on January 1.
Depreciation expense increased due to continued distribution system and IT capital expenditure activity.
Turning to our liquidity.
Cash flows remained strong with a 9% increase in the year-to-date cash provided by operating activities over the corresponding prior year period.
As of the end of the quarter, UGI had available liquidity of $2.4 billion, approximately $800 million more than the prior year period.
Our balance sheet remains strong.
We continue to be comfortable with the financing capacity across all of our business units and are well within our debt covenants.
We have now completed the financing needed to close the Mountaineer acquisition, and that includes a mix of debt and equity units consisting in part of convertible preferred stock, which is consistent with the financing mix that we shared in the past.
And with that, I'll hand the call back over to Roger.
Before we move to Q&A, I'll share with you some other key business updates since our last call.
First, the Mountaineer acquisition continues to progress smoothly.
In July, we completed a key milestone in the regulatory process by filing an agreement for settlement as well as providing testimony in a hearing before the commission.
Our next step will be to file a proposed order by August 10, seeking the commission's approval.
While the precise timing of the commission's approval is uncertain, we have completed several key steps in the regulatory approval process, and now expect to close well before the end of the calendar year and even potentially within this fiscal year.
We continue to expect the transaction will be accretive to earnings in the first full year of operation and believe Mountaineer will provide meaningful growth opportunities moving forward.
During the quarter, our UGI Utilities Electric division reached a settlement agreement on its rate case and filed a joint petition for approval of that agreement with the Pennsylvania PUC on July 19.
Under the terms of the settlement agreement, the Electric division would be permitted to increase base rates by $6.15 million, and we anticipate new rates going into effect in November 2021.
Separately, the second phase of the gas base rate increase of $10 million went into effect on July 1.
In July, UGI Utilities completed construction of a new state-of-the-art centralized safety training facility.
Safety is our top priority and a core value at UGI.
We are pleased to place this new facility in service as it reinforces our commitment to safety across the organization.
Lastly, our AmeriGas team continues to increase the footprint of our home delivery service, Cynch.
During the quarter, we launched Cynch in three additional markets, bringing the total to 23 cities across the U.S. As we look forward to the remaining quarter in this fiscal year and fiscal year 2022, we are pleased with the strong year-to-date performance and the investment opportunities available to us as we execute on our strategy.
We have demonstrated our resiliency and our ability to operate effectively despite a challenging and volatile macro environment.
I remain confident that we're well positioned both strategically and financially to continue executing and delivering reliable long-term earnings per share growth of 6% to 10% and return capital to shareholders through a robust dividend that we expect to grow at 4% over the long term.
To do this, we will remain committed to our core businesses, driving continuous improvements and efficiencies in our operations and lean into investment opportunities in our natural gas business and in renewable energy solutions.
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q3 adjusted earnings per share $0.13.
q3 gaap earnings per share $0.71.
sees fy earnings per share $2.90 to $3.00.
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In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our third quarter 2021 results and our updated financial outlook for 2021.
Joe Ventura, our Chief Legal Officer will also be joining Bruce and Susan for the Q&A session.
Before we begin our discussion, I need to advise call participants of our cautionary statement.
Actual results could differ materially.
Call participants should note that today's discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP.
Finally, any references to earnings per share or earnings per share made during this conference call refer to diluted earnings per common share.
Today, we reported adjusted earnings per share of $4.83 for the third quarter of 2021, slightly above consensus estimates.
Our year-to-date results reflect the strength of our core operations as we continue to see strong underlying fundamentals across all lines of business and have remained focused on ensuring our members receive the right care at the right time despite the continued disruption caused by the pandemic.
While our underlying fundamentals are strong, 2021 financial results have been impacted by the ongoing pandemic, which has resulted in an adjustment to our full year adjusted earnings per share guidance.
As Susan will share in more detail, this reduction of approximately $1 in adjusted earnings per share is a direct result of COVID and corresponds to our current expectation of the total Medicare Advantage utilization inclusive of COVID costs will run 1% below baseline in the fourth quarter, which is a 150 basis points less than our previous assumption of 2.5% below baseline.
This update reflects a more conservative posture going into the final months of the year and notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to this guidance update we had not recognized a COVID headwind in our '21 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results in an expected adjusted earnings per share growth at the lower end of our long-term range.
And importantly, it is not reflective of any concerns with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part contributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher rated contracts for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
Excuse me participants, this is the operator.
Your conference will begin momentarily.
Please stay on hold until the conference begin.
Sorry for the technical glitch share.
Let me just -- just maybe just go back to our guidance update here and reinsure that investors understand the guidance and in addition how it reflects in the -- as we look at the future here.
First, the guidance reflects a much more conservative posture going into the final months of the year.
And notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to the guidance update we had not recognized the COVID headwind in our 2021 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results an expected adjusted earnings per share growth at the lower end of our long-term range and is importantly does not reflect any concern with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part attributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher contract for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
And while CMS did make adjustments to the 2022 Star Ratings due to the possible impact of the COVID-19 pandemic, these adjustments had minimal impact on our ratings.
This further demonstrates our enterprisewide focus on quality, clinical outcomes and best-in-class customer service, which has been recognized from notable organizations such as Forrester, J.D. Power, and USAA.
Importantly, the Star's bonus allows us to maintain a strong value proposition for our members and provided value for supplemental benefits that address social determinants of health and other barriers not addressed by fee-for-service Medicare.
Looking ahead to 2022, we are pleased to be able to provide stable or enhanced benefits for the majority of our Medicare Advantage members.
Operating plans that support members whole health needs while continuing to deliver the human care our members have come to expect from us.
Our strong clinical and quality programs drive improved clinical outcomes and cost savings that allow our Medicare Advantage plans to continue to expand member benefits on those covered by fee-for-service Medicare.
Our plans include highly valuable extra benefits including dental, vision, hearing and over-the-counter medication allowance, transportation support, business program memberships and home delivered meals following an inpatient hospital set.
Over the last few years, we've made great progress in addressing social determinants of health and health equity by expanding our Medicare Advantage benefits.
Examples of those impactful areas include respite care distributing 1.5 million meals during COVID, sending fans to seniors with COPD during a heat wave and providing support for financial need impacting a senior's health and well-being.
Given the increased demand for health equity across America, we have aggressively expanded our efforts to address it.
We continue to advance our consumer segmentation efforts developing plans that are tailored to the unique needs of specific member populations.
This has allowed us to provide benefits that enhance and complement an individual's existing coverage through programs like Medicaid or entities such as Veterans Affairs.
This approach leads to disproportionate growth.
As you've seen in our D-SNP plans designed for dual eligible members where we have grown our membership approximately 40% in both 2022 and 2021.
We've expanded our D-SNP offerings for 2022 to cover nearly 65% of the dual eligible population nationally.
To reduce food and security, 97% of our members enrolled in our D-SNP plans, and we'll have a healthy foods cart, which provides a monthly allowance to purchase approved food and beverages at various national chains.
New for 2022, many of our D-SNP members will have reduced Part D drug co-pays as a result of the D-SNP prescription drug savings benefit, which will help address the financial barriers some members face when assessing needed prescriptions leading to better medication adherence, an important driver of member's health -- overall health outcomes.
As previously shared, we took a more conservative approach to our 2022 bids recognizing the continued uncertainty associated with COVID-19 and potential impacts to premium and claims assumption allowing us to prioritize long-term benefit stability for our members.
While it is early in the selling season we believe we struck the right balance and are competitively positioned for our continued growth in Medicare Advantage.
Our brand promise to deliver human care resonates with seniors given our comprehensive set of offerings and focus on providing a patient-centric experience based on their specific needs.
Susan will provide more detail and 2022 commentary in our remarks, including high level earnings per share and membership guidance.
I now would like to highlight the continued progress of our strategy through the build out of our healthcare service platform starting with Primary Care business and then moving to our Growing Home Solutions offerings.
We have the largest senior-focused, value based primary care organization in the country, which by year end will include approximately 200 clinics serving 300,000 patients across 24 markets in nine states.
We are accelerating organic and inorganic growth nationally and plan to open a total of 30 de novo senior focused centers in 2022, up from 24 in 2021.
This will include launching in two new major metropolitan areas, Dallas and Phoenix next year.
This faster pace expansion comes as we continue to gain conviction in our de novo center model with panel growth in centers launched in 2021 exceeding plan and clinical performance in our more mature markets continuing to improve.
At our more mature centers hospitalizations and ER visits are down 12% year-to-date versus 2019 pre-COVID Stars performance tracking to 4.5 Stars and NPS score of 90.
We will also continue to expand through inorganic growth completing seven acquisitions through the third quarter of this year bringing 21 newly, wholly owned centers to our portfolio.
We plan to continue this pace of acquisitions, focused on the markets where we have established presence to provide more access and high quality care to our patients.
Turning to the home, we completed the acquisition of Kindred at Home in the third quarter and now the largest home health and hospice organization in the nation.
As previously shared we will be migrating Kindred at Home to Humana's payor-agnostic healthcare service brand CenterWell.
Our efforts to transform home health to a value-based model come at a pivotal time for the industry.
As seniors increasingly choose Medicare Advantage, there is a meaningful opportunity for home health organizations to engage differently with patients and Medicare Advantage payers to more holistically address patient needs and improved health outcomes reduce the total cost of care for health plans and share appropriately in this value creation.
We've made substantial progress toward our goal of scaling and maturing a risk-bearing value-based model that manages the provision of home health, durable medical equipment and home infusion services.
With the acquisition of onehome earlier in 2021, a delegated post-acute management services organization for the home, we have the capabilities to be a value-based convener providing risk-based contracting and referral management and continue to develop technology enabling us to coordinate with other adjacent services.
These services include gap in care, closure, primary or emergent care in the home as well as coordination of meals, transportation and other services to positively support social determinants of health.
We currently care for approximately 270,000 Humana members under value-based home care models in South Florida and Southeast Texas where we have seen improved outcomes including emergency room usage being 100 basis points better than Humana's national average.
We now are focused on expanding to select markets in North Carolina and Virginia, which we've chose based on multiple criteria including market density, opportunity to significantly reduce home care expense and a robust Kindred at Home footprint.
We expect to begin the rollout in the second quarter of 2022 with the goal of covering nearly 50% of Humana Medicare Advantage members under this value-based home health model within the next five years.
We are excited about the continued progress of our strategy in the home, but consistent with our home health peers we recognize that the national nursing labor shortage poses a significant risk to the industry and we are taking proactive steps to address it as part of our well-developed integration process with Kindred at Home.
In some markets the nursing shortages resulting in inadequate capacity to meet demand, negatively impacting our ability to grow the top line.
We believe that Humana's CenterWell brand supported by our patient-centric culture will bolster recruiting and retention efforts for nurses.
We've seen increased nurse satisfaction and engagement in pilot markets where we have deployed value-based concepts, with voluntary nursing turnover improving nearly 10% among home health nurses in 2021.
In addition to unlock sufficient capacity to meet our growth goals, we are implementing broader operational improvements and benefit enhancements, while also making targeted investments in capacity constrained areas to enhance nurse recruiting and retention.
With respect to hospice, our intent remains to ultimately divest the majority interest in this portion of the asset.
As our experience has demonstrated, we can deliver desired experiences and outcomes for patients transitioning from restorative care to hospice through partnership models.
Since we closed the transaction in August we have continued to explore alternatives for the long-term ownership structure for the business and have initiated steps to reorganize the hospice business for stand-alone operations, while also ensuring business continuity and monitoring underlying trends.
We do not have a further update on the specific transaction structure or expected transaction timing, but we will provide additional updates as appropriate moving forward.
Given the continued expansion of an interest in our healthcare service platform we are committed to providing additional disclosure to give further transparency into the performance of these businesses beginning with our first quarter 2022 reporting.
Before closing, I want to touch on the current regulatory and legislative landscape.
As you know, last week, the White House and congressional leaders released their plan known as, Build Back Better, which includes several proposed changes to the Medicare program including establishing a hearing benefit starting in calendar year 2024, which will be included in the Medicare Advantage benchmark.
Given that today more than 40% of Medicare beneficiaries, over 27 million seniors and those with disabilities are enrolled in Medicare Advantage, we were encouraged to see that the package did not include any payment reductions to the program.
As this legislation continues to advance and likely be modified and as we look ahead to the annual CMS call letter and rate notice period, we will continue to work with policymakers and the Biden Administration to further improve Medicare Advantage building on the program's innovation and significant progress in areas like value-based care, social determinants of health, affordability and financial protection for beneficiaries, as well as reducing the total cost of care.
These attributes, along with a deep consumer popularity of Medicare Advantage are what have enabled it to have a strong bipartisan support with hundreds of members of Congress on record supporting the program.
With Medicare Advantage serving as a leading example of a successful private-public partnership, I am optimistic we can continue to lead on important healthcare issues facing both individuals and society, including addressing health and equities, improving health outcomes and expanding value-based care.
Today we reported adjusted earnings per share of $4.83 for the third quarter and updated full year 2021 adjusted earnings per share guidance to approximately $20.50 to reflect a net unmitigated COVID headwind resulting from our current view of utilization levels for the balance of the year.
I will now walk you through this detail starting with a reminder of our previous commentary.
As of our second quarter call, full year guidance assumed non-COVID Medicare Advantage utilization was around 2.5% below baseline in the second half of the year, with a further assumption of minimal COVID testing and treatment costs for the same period.
In September 2021 as a result of the surge in COVID cases due to the Delta variant, we updated our commentary on full year guidance to indicate we expected non-COVID Medicare Advantage utilization to be 5.5% below baseline in the back half of the year, while being partially offset by 3% of COVID costs, therefore, again assuming total utilization would be 2.5% below baseline in the back half of 2021.
What we've seen develop for the third quarter is that total utilization is running 1% below baseline versus the previously anticipated 2.5%.
COVID costs have been higher than initially anticipated as the Delta Variant resulted in hospitalization levels on par with what we experienced in January of 2021 and were overwhelmingly driven by the 20% of our Medicare Advantage members believed to be unvaccinated.
These higher-than-expected COVID costs were fully offset by non-COVID utilization in the quarter.
As COVID hospitalizations increased or decreased we continue to see an approximate 1-to-1 offset in non-COVID hospitalization levels.
We also continue to see significantly reduced non-inpatient utilization when surges occur, offsetting the higher average cost of COVID admission.
However, for the third quarter, in total we saw 1% incremental reduction in utilization beyond the level needed to offset COVID costs versus the 2.5% contemplated in our previous guide.
As a result, we have adjusted our full year guide to now reflect the fourth quarter running similarly with total Medicare Advantage utilization running 1% below baseline inclusive of estimated COVID costs, consistent with what we experienced in the third quarter.
We realized higher than expected positive current period claims development in Medicare Advantage in the third quarter as well as other operating outperformance largely mitigating the lower than anticipated depressed Medicare Advantage utilization allowing us to report results that were slightly favorable to The Street estimates.
Our revised guidance does not assume that the higher levels of favorable current period development seen in the third quarter will continue.
Taken together, our updated full year 2021 adjusted earnings per share guidance takes a more conservative posture going into the final months of 2021, and it's important to note as we've consistently shared throughout the year the midpoint of our original guidance range of $21.50 remains the correct baseline for 2022 given our approach to pricing.
I will now briefly touch on operating results across our segments before sharing early thoughts on 2022 performance.
Our Medicare Advantage growth remains on track and consistent with previous expectations.
We have refined our full year individual Medicare Advantage membership guidance to up approximately 450,000 members consistent with the midpoint of our previous guidance of up 425,000 to 475,000 members.
This outlook represents above market growth with an increase of 11.4% year-over-year.
Our Medicaid results continue to exceed initial expectations due to higher than anticipated membership increases, largely attributable to the extension of the public health emergency.
We now expect to add 125,000 to 150,000 Medicaid members in 2021, up from our previous expectation of up 100,000 to 125,000 members.
Utilization trends continue to be favorable to initial expectations and the Medicaid team is working diligently toward a successful implementation in Ohio with Go Live anticipated in July.
In our Group and Specialty segment, fully insured medical results were impacted by higher than expected COVID costs in the quarter, while our Specialty business results continued to exceed expectations as utilization, particularly for dental services remained lower than previously anticipated.
Recall that our guidance as of second quarter did not contemplate significant COVID costs in the back half of the year and the Commercial business is not seeing the same level of utilization offset experienced in Medicare Advantage.
From a membership perspective, we have increased our expected Group medical membership losses from 100,00 to 125,000 reflecting the expectation of additional losses in the fourth quarter as a result of rating actions taken to account for the expected impact of COVID in 2022.
Finally, within our healthcare service of operations, the Pharmacy and Provider businesses continue to perform slightly better than expected with Pharmacy benefiting from increased mail order penetration as a result of customer experience improvements and marketing campaigns and the Provider business seeing continued operating improvement at our more mature centers, which are now aligned under the same leadership in our de novo centers.
As Bruce mentioned in his remarks, we are actively integrating the Kindred at Home operations and results post integration have largely been in line with expectations.
Similar to Home Health and Hospice peers, the business is being impacted by COVID and labor shortages.
For the third quarter, home health admissions grew low single digits year-over-year, while hospice experienced a low single-digit decline year-over-year.
We will continue to closely monitor trends as we made targeted investments to sustainably improve the recruitment and retention of nurses.
Now, let me take a few moments to share an early outlook for 2022 starting with membership.
As you're aware, the overall PDP market continues to decline as more and more beneficiaries including dual eligibles choose Medicare Advantage.
In addition, as we've discussed previously, PDP plans have become a commodity with the low price leader capturing disproportionate growth.
Consistent with 2021 the Walmart Value Plan will offer competitive benefits but will not be the low premium leader in 2022.
As a result, we expect a net decline in PDP membership of a few hundred thousand members in 2022.
We continue to focus on creating enterprise value for our PDP plans by driving increased mail order penetration and conversions to Medicare Advantage.
With respect to Group Medicare Advantage, we expect membership to be generally flat for 2022 as we do not anticipate any large accounts will be gained or lost as we continue to maintain pricing discipline in a highly competitive market.
Moving to individual Medicare Advantage; as previously shared, we took a more conservative approach to our 2020 bids, reflecting the continued uncertainty associated with the pandemic.
We expect to grow our individual Medicare Advantage membership in a range of 325,000 to 375,000 members in 2022 or approximately 8% year-over-year reflective of our prudent approach we took to pricing for 2022 and the competitive nature of the market.
It is early in our AEP selling season and the outlook we are providing today could change depending on how sales and voluntary disenrollment ultimately commence.
And consistent with prior years we have very little member disenrollment data at this point in the AEP cycle.
I will now turn to our expected 2022 financial performance.
As previously mentioned, I want to reiterate that the $21.50 midpoint of our original 2021 guide continues to be the appropriate jumping-off point for 2022 adjusted earnings per share growth given our approach to pricing.
In addition, we feel comfortable that the risk adjusted assumptions and our 2022 pricing are appropriate as providers have been actively engaging with our members to ensure their conditions are fully documented and that care plans are established to address gaps in care.
Provider interactions and documentation of clinical diagnoses that we anticipate will impact 2022 revenue are approximately 92% complete to-date, in line with both our expectations for 2021 as well as the estimated completion rate for the same time period in 2019.
We also assumed medical costs will return to baseline levels reflecting a pre-COVID historical trending.
From an earnings perspective, we believe the conservative approach we took to 2020 pricing struck the appropriate balance between membership and earnings growth.
Given the ongoing uncertainty surrounding the COVID-19 pandemic we expect to enter the year with an appropriately conservative view of our initial 2022 financial outlook.
Accordingly, we anticipate that our initial earnings per share guidance will target the low end of our long-term growth range of 11% to 15%.
We expect that COVID will be net neutral to the Medicare business in 2022 as we do not anticipate a risk adjustment headwind and expect COVID utilization to be offset by a reduction in non-COVID utilization.
However, our initial guide will allow for an explicit COVID-related headwinds that we can tolerate, should it emerge similar to the approach some of our peers took in 2021.
We believe entering the year with this more conservative approach is prudent in the current environment and sets the company up for success in 2022.
We look forward to providing more specific guidance on our fourth quarter earnings call in early February.
In fairness to those waiting in the queue we ask that you limit yourself to one question.
Operator, please introduce the first caller.
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sees fy adjusted earnings per share about $20.50.
q3 adjusted earnings per share $4.83.
confirming $21.50 as baseline for 2022 adjusted earnings per share growth.
updates fy 2021 expected individual medicare advantage membership growth to 450,000 members.
during 3q21 covid costs were higher than previously expected.
updating its fy 2021 earnings per share guidance to take a more conservative posture going into final months of 2021.
anticipating total medicare advantage utilization, net of covid costs, will run approximately 1 percent below baseline in q4.
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I'm Patrick Burke, the company's head of investor relations.
Finally, earlier today, we experienced a power outage, but we've been assured by the local power company that there will be no further outages.
But we do have a backup plan to restart the call just in case we get interrupted.
It's great to be with you today to discuss our 2020 full year and Q4 results, as well as to provide some color on the business going forward.
Looking back on 2020, I have to start with a simple wow, what an interesting and eventful year.
We started with business as usual.
Survived an unforeseen global shutdown working our way through in a manner that is sure we came through in a position of strength.
Then as the world opened back up, we emerged to find Golf experiencing record demand and participation levels.
Finally, we finish the year announcing a transformational merger with Topgolf, signing Jon Rahm, and delivering on some key strategic initiatives.
And now looking forward all things considered we could not feel more fortunate or be happier about where our business is and our future prospects.
With that said, we're also mindful that many people have been significantly, negatively impacted by COVID-19, and our thoughts and prayers go out to them and their families.
Looking at Q4 in isolation.
The operating results in our golf equipment segment continued the strong momentum shown in Q3, while the apparel business returned to growth and showed great signs for the future.
On the Topgolf side, we continue to make progress on the merger front with our shareholder vote scheduled for March 3, and hopefully closing shortly thereafter.
All the while, setting us up for transformational change and growth.
Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and remains highly motivated.
Let's not turn to Page 6 and jump into our Q4 results.
We were pleased with our results in virtually all markets and business segments.
Our golf equipment segment continued to experience unprecedented demand globally as interest in the sport and participation have surged.
According to Golf Datatech, U.S. retail sales of golf equipment specifically hard goods were up 59% during Q4, the highest Q4 ever on record.
Results that followed the highest Q3 on record as well.
rounds were up 41% in Q4.
And despite the shutdowns earlier in the year delivered 14% growth for the full year.
We continue to believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport.
Golf retail outside of resort location remains very strong at present, while inventory at golf retail remains at all-time lows, it is likely these low inventory levels will continue at least through Q1.
Callaway's global hardwoods market shares remain strong during the quarter.
We estimate our U.S. market share across all channels grew slightly during both Q4 and for the full-year 2020.
Our share in Japan was also up slightly for the full-year allowing us to finish 2020 as the No.
1 hardwoods brand in that market.
This is the first time that a non -Japanese brand has ever finished No.
1 for the full year in total hardwoods.
Our full-year share in Europe was down slightly, but we still finished as the No.
1 hardwoods brand in this market as well.
On a global basis, I believe we remain the leading club company in terms of both market share and total revenues, and the No.
2 ball company in the U.S., third-party research showed our brand to be the No.
1 club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions.
We had a good year on tour in 2020 finishing the year with the No.
1 putter and the No.
1 driver on global tours.
However, we didn't have as many wins or total brand exposure as we would have liked, as a result, we strengthened our tour position significantly during 2020 with the signing of Jon Rahm to a full equipment headwear and apparel deal.
The addition of Jon, along with Xander and Phil, and our ongoing strong complement of players across global men's and women's tours leaves us well-positioned in this important area of our business.
We've also started 2021 nicely with two wins already on the PGA Tour and a lot of exposure at all events.
On the product front, we're thrilled with our new 2021 lineup allowing us to focus on -- our focuses on our most premium brands those being our Epic drivers and Apex Irons.
For 2021, both brands are being supercharged with new technology, including a new speed frame version of our proprietary jailbreak technology in the woods, and a new version of the Apex line called DCB, which should broaden the appeal of this already highly popular line of Irons.
Reaction to the lineup has been outstanding both on tour and in the marketplace.
Turning to our soft goods and apparel segment, this portion of our business along with the apparel industry generally was of course more impacted by the pandemic during Q4.
However, the speed magnitude of the recovery also continued to exceed our expectations.
Looking at individual businesses in this segment starting with the Callaway apparel business in Asia.
In Japan, we had a good quarter and finish the year as the No.
1 golf apparel brand in that market based on market share.
In Korea, we plan to take back the Callaway Golf apparel brand that has been licensed to a third party for several years and launch our own apparel business in Korea during the second half of 2021.
We are investing in staffing and I.T. systems for this.
The team there is energized by this opportunity as this is something that they have been considering for several years now.
Turning TravisMatthew, this brand and business continue to impress.
Their brand momentum is extremely strong both in direct to consumer channels and at wholesale.
Given their success, we are increasingly confident this can be a large and highly profitable brand presenting us with an even bigger opportunity than we originally anticipated.
To enable this, we have been investing in their systems and supply chain infrastructure.
This investment phase will continue through 2021 and then taper off.
We are also investing in direct-to-consumer efforts both through the addition of new stores selectively taking advantage of some great opportunities and of course e-commerce.
We could not be more excited about this business overall.
Jack Wolfskin also had a strong quarter delivering year-over-year revenue growth.
The price even more importantly we cleared some key strategic and operational hurdles during the quarter.
In Europe, our new CEO, Global Jack Wolfskin, Richard Collier joined the team in December.
Richard joined us from Helley Hansen where he held the title Global Product Officer and served in that capacity as well as de facto Chief Operating Officer.
We're excited to have Richard on the team.
The reaction to Richard and the new CFO, André who joined us a few months earlier from my move.
We enter 2021 with a very strong leadership team fully in place.
Equally importantly, prior to the full Europe retail shut down in mid-December, the sell-through of our fall winter lineup was excellent in both Europe and in China.
This speaks to the strength of the brand in these key markets, improved channel management, and the strength of the product lineup.
Noting that in China, Q4 was the first quarter to showcase the local product design by a new team that was recruited in 2019.
The success of this new China for China product was a key strategic initiative for us.
Across the globe, but especially in their key markets of China and Europe, we believe the combination of strong leadership and sell through momentum bodes well for this brand as markets open up and recover.
Taking a step back and looking at the larger apparel and soft goods segment, for the last nine months the hero has certainly been e-com.
This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day.
These investments enabled our apparel business e-com to deliver 64% year-over-year growth in Q4.
E-com is now a significant portion of the channel mix of this segment and we are confident our expanding capabilities and strength here will bolster this business growth prospects and profitability going forward.
Post-COVID, we continue to expect our apparel soft goods segment to grow faster than our golf equipment business, and with that growth to deliver operating leverage enhanced profitability.
And although the pandemic delayed our efforts, we still believe we'll be able to deliver 15 million synergies in the segment over the coming years.
Like our company overall, this segment with its concentration in golf and outdoor appears to be well-positioned for both the months and years ahead both during the pandemic and after.
Our comments here will be limited given we have not closed the transaction yet.
But during late Q4 due to COVID restrictions, three of the U.S. venues were forced to shut as well as three of the U.K. venues.
However, despite these headwinds, Topgolf's overall results exceeded expectations in Q4.
This was driven primarily by strong walking sales.
venue in Portland, Oregon are closed, and COVID restrictions appear to be gradually even.
Despite 2021 starting out with more COVID restrictions than we expected, strong walk-in traffic is allowing this business to continue to perform at a level consistent with achieving our total venue full-year same venue sales target of 80% to 85% of 2019 levels.
Turning to new venue development.
Topgolf has opened two new domestic venues already this year; Lake Mary, Florida; and Albuquerque, New Mexico, and is on track to hit their new venue plan of eight new owned venues for this year.
On the international front, our third franchise location opened earlier this year in Dubai.
The sales have been getting strong reviews despite ongoing COVID complications in this market, and we expect this to be a flagship site for us internationally.
Looking forward, given the uncertainties of the COVID situation globally, we're not currently providing 2021 guidance.
We can however provide the following color.
The golf equipment sector is likely to be slightly impacted by COVID in Q1 with the majority of European markets in portions of Asia, Tokyo for instance, in some sort of locked down or retail constraint, and with some supply constraints based on both capacity limitations and logistics.
We are also experiencing higher operating costs associated with COVID.
Our container shipping costs alone are estimated to be up approximately 13 million for the full year as these processes have surged, but we do not see this as a long-term issue, just a short-term anomaly associated with the pandemic.
The demand situation is strong enough that we expect a very strong year in golf equipment despite these issues.
A little constrained in Q1 based on capacity and logistics with increasing opportunity catch up with demand in Q2.
Our soft goods and apparel segment continues to be more impacted by COVID.
The Europe shutdown is especially impactful for a business there certainly for Q1.
However, the key points of operating strategic progress we mentioned earlier along with the attractive long-term prospects of both golf and outdoor lifestyle apparel make me increasingly confident for this business post the COVID closures and their short-term impact.
Topgolf is performing consistent with the plan, new venue openings are on track and we are increasingly confident for this business overall.
We hope to close in early March, if this happens, we'll have a lot more say on this business starting on our next call.
We continue to see this as a transformational opportunity.
On the operating expense side and comparison 2019, which is the only meaningful comparison you're going to see some further investments in 2021.
These include investments in our growth infrastructure such as the Korea apparel business, increased tour presence, and direct to consumer resources.
We have a track record for making this kind of internal investments, and we're confident these will deliver high returns for shareholders.
Lastly, we remain confident in the 2022 guidance we provide as part of the topped up merger process as well as the future potential of what is going to be a unique and powerful business.
Brian, over to you.
As Chip mentioned, 2020 was quite a year.
We were pleasantly surprised with how quickly our golf business and the golf industry began recovering from COVID-19 once the governmental restrictions began to abate during the second quarter.
We were also pleased with the recovery of both our TravisMatthew and Jack Wolfskin businesses, while the recovery in those businesses will not be as quick as the golf equipment business through the long supply chain lead times and seasonality.
The recovery of our apparel businesses is pacing ahead of our expectations and that of comparable businesses.
The stronger than expected recovery has contributed to our significantly improved liquidity position.
Our available liquidity, which includes cash on hand plus availability under our credit facilities increased to $632 million on December 31, 2020, compared to $303 million on December 31, 2019.
In addition to the core business recovery, we may also -- we also remain very excited about our prospective merger with Topgolf, which clearly will be transformational for Callaway.
The Topgolf shareholders have already approved the transaction, we are holding a special Callaway shareholder meeting on March 3, 2021, to approve the merger.
We would expect to close the merger shortly thereafter.
We evaluate -- evaluating our results for the fourth quarter and full year, you should keep in mind some specific factors that affect the year-over-year comparisons; First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred non-recurring transaction and transition-related expenses in 2019; Second, as a result of the OGIO TravisMatthew and Jack Wolfskin acquisitions, we incurred non-cash amortization in purchase accounting adjustments in 2020 and 2019, including the Jack Wolfskin inventory step up in the first quarter of 2019; Third, we also incurred other non-recurring charges including costs related to the transition to our North American distribution center in Texas.
Implementation costs related to the new Jack Wolfskin IP system, severance costs related to our COVID-19 cost reduction initiatives, and costs related to the proposed Topgolf merger; Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is non-recurring and did not affect 2019 results.
Thus, we incurred and will continue to incur non-cash amortization of the debt discount in the notes issued during the second quarter of 2020.
With those factors in mind, we'll now provide some specific financial results.
Turning now to Slide 11.
Today, we were reporting record consolidated fourth quarter 2020 net sales of $375 million, compared to $312 million for the same period in 2019, an increase of $63 million or 20.1%.
This increase was driven by a 40% increase in the golf equipment segment resulting from the high demand for golf products late into the year as well as the strength of the company's product offerings across all skill levels.
The company soft goods segment continued its faster than expected recovery with fourth-quarter 2020 sales increasing 1% versus the same period 2019.
Changes in foreign currency rates had a $9 million favorable impact on fourth-quarter 2020 net sales.
The gross margin was 37.1% in the fourth quarter of 2020, compared to 41.7% in the fourth quarter of 2021, a decrease of 460-basis-points.
On a non-GAAP basis, the gross margin was 37.2% in the fourth quarter, compared to 42.4% in the fourth quarter of 2019, a decrease of 520-basis-points.
The decrease is primarily attributable to the company's proactive inventory reduction initiatives in the soft goods segment, increased operational cost due to COVID-19, increased freight costs -- freight costs associated with higher rates, and a higher mix of air shipments in order to meet demand.
These decreases were partially offset by favorable changes in foreign currency exchange rates and a favorable mix created by an increase in the company's e-commerce sales.
Operating expenses were $171 million in the fourth quarter of 2020, which is an $18 million increase, compared to $153 million in the fourth quarter of 2019.
Non-GAAP operating expenses for the fourth quarter were $152 million, a $14 million increase compared to the fourth quarter of 2019.
This increase was driven by the company's decision to pay back to employees other than executive officers to reduce our salary levels for a portion of the year, variable expenses related to the higher revenues in the quarter, continued investments in our new businesses, and an unfavorable change in foreign currency exchange rates.
Other expenses were $15 million in the fourth quarter of 2020, compared to other expense of $9 million in the same period the prior year.
On a non-GAAP basis, other expenses with $13 million in the fourth quarter of 2020, compared to $9 million for the comparable period in 2019.
The $4 million increase in other expenses primarily related to a net decrease in foreign currency-related gains as well as interest expense related to our convertible notes.
Pre-tax loss was $48 million in the fourth quarter of 2020, compared to a pre-tax loss of $32 million for the same period in 2019.
Non-GAAP pre-tax loss was $35 million in the fourth quarter of 2020, compared to a non-GAAP pre-tax loss of $25 million in the same period of 2019.
Loss per share was $0.43, or 94.2 million shares in the fourth quarter of 2020, compared to a loss per share of $0.31 on 94.2 million shares in the fourth quarter of 2019.
Non-GAAP loss per share was $0.33 in the fourth quarter of 2020, compared to a loss per share of $0.26 for the fourth quarter of 2019.
Adjusted EBITDA was negative 12 million in the fourth quarter of 2020, compared to negative 6 million in the fourth quarter of 2019.
Turning now to Slide 12.
Net sales for full-year 2020 were $1.589 billion, compared to $1.701 billion in 2019, a decrease of $112 million or 6.6%.
All things considered, we were very pleased with the sales level given the global pandemic.
The decrease in net sales reflects a decrease in our soft good segment, which decreased 15.9%t and our golf equipment segment increased slightly year over year.
Changes in foreign currency rates positively impacted 2020 net sales by $11 million versus 2019.
The gross margin for full-year 2020 was 41.4%, compared to 45.1% in 2019, a decrease of 370-basis-points.
Gross margins in 2020 were negatively impacted by the North American warehouse consolidation, and in 2019 were negatively impacted by a non-recurring purchase price inventory step-up associated Jack Wolfskin acquisition.
on a non-GAAP basis, which is good and they were not referring item, gross margin was 41.8% in 2020, compared to 45.8% in 2019, a decrease of 400-basis-points.
The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with all facilities during the governor -- government mandated shutdown, the company's inventory reduction initiatives, and increased freight expense in the back half of the year.
The decrease in gross margin was partially offset by favorable changes in currency exchange rates and an increase in the company's e-commerce business.
Operating expense with $763 million in 2020, which is a $129 million increase compared to $634 million in 2019.
This increase is due to the $174 million of the non-cash impairment charge, related to the Jack Wolfskin goodwill and trading, excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for 2020 were $570 million, a $47 million decrease, compared to $670 million in 2019.
This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses, lower variable expenses due to the lower sales, and reduced spending in marketing tour golf events around the world was canceled.
The decrease was partially offset by continued investment in our new businesses and unfavorable impacts of foreign exchange rates.
Another expense was approximately $22 million in 2020, compared to other expense of $37 million in 2019.
On a non-GAAP basis, other expenses $15 million for 2020, compared to $33 million for 2019.
Those $18 million improvements are primarily related to a $19 million increase in foreign currency-related gains period over a period, including the $11 million gain related to the settlement of the cross-currency swap arrangement.
Pre-tax loss of $127 million in 2020, compared to pre-tax income of $96 million in 2019.
Excluding the impairment charge in the other non-GAAP items previously mentioned, non-GAAP pre-tax income was $79 million in 2020, compared to non-GAAP pre-tax income of $130 million in 2019.
Loss per share was $1.35, or 94.2 million shares in 2020, compared to fully diluted earnings per share of $0.82, or 96.3 million shares in 2019.
Excluding the impairment charge in the other non-GAAP item previously mentioned, non-GAAP full-year earnings per share were $0.67 in 2020, compared to fairly good earnings per share of $1.10 for 2019.
Adjusted EBITDA was $165 million in 2020, compared to $210 million in 2019.
Turning now to Slide 13.
I will now cover certain key balance sheet and cash flow items.
As of December 31, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $632 million, compared to $303 million at the end of the fourth quarter of 2019.
This additional liquidity reflects improved liquidity from working capital management, cost reductions, and proceeds from the convertible notes we issued during the second quarter.
We had total net debt of $406 million, including $442 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin.
Our consolidated net accounts receivable was $138 million, a decrease of 1.4% compared to $140 million at the end of the fourth quarter of 2019.
Days sales outstanding decreased to 45 days on December 31, 2020, compared to 53 days on December 31, 2019.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 22.8% to $353 million at the end of the fourth quarter of 2020.
This decrease was primarily due to the high demand we are experiencing in the golf equipment business as well as inventory reduction efforts in our soft goods businesses.
The teams continue to be highly focused on inventory on hand as well as inventory in the field, both of which remain relatively very low at this time.
Capital expenditures for 2020 were $39 million, which is right in line with the range provided during our Q3 update.
This amount is down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions.
In 2021, we expect our capital expenditures to be approximately $50 million for the current Callaway business.
Depreciation and amortization expense was $214 million in 2020.
D&A expense excluding the $174 million impairment charge was $40 million in 2020, compared to $35 million in 2019.
In 2021, we expect non-GAAP depreciation and amortization expense to be approximately $45 million for the current Callaway business.
I am now on Slide 14.
We're not providing revenue and earnings guidance for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19.
However, we would like to highlight certain factors that are expected to affect 2021 financial results compared to 2020.
On a premerger basis, which includes only Callaway golf business and does not take into account Topgolf's business following the proposed merger, consolidated net sales for the first quarter of 2021 will exceed 2020 net sales but will continue to be negatively impacted by COVID-19.
The company's soft goods business will continue to be impacted by the regulatory shutdown orders in Europe and Asia, which should then strengthen during the balance of the year as the regulatory restrictions subside.
The company's golf equipment business is expected to be impacted by temporary supply constraints caused by COVID-19 during the first quarter, which could affect the company's ability to fulfill all of the robust demand in its golf equipment business.
The company believes that there are opportunities for supply to catch up beginning in the second quarter.
On a premerger basis, the full-year 2021 non-GAAP gross margin will also be negatively impacted by increased operational costs due to COVID-19, including higher labor costs, logistical challenges as well as increased freight expense resulting from a shortage of ocean freight containers.
The freight container shortage alone is estimated to have a negative $13 million impact on freight costs in 2021, with the substantial majority of the impact occurring during the first half.
The company believes that its full-year 2020 gross margin will be approximately the same as in 2019 despite these gross margin headwinds, which should be offset by increased direct-to-consumer sales and foreign currency exchange rates.
On a premerger basis, full-year 2021 non-GAAP operating expenses are estimated to be approximately $70 million to $80 million higher compared to full-year 2019 non-GAAP operating expenses.
In addition to the negative impact of changes in foreign currency rates estimated to be approximately $20 million and inflationary pressures, the increased operating expenses generally reflect continued investment in the company's current business.
These investments include investment needed to assume the Korea apparel business, investment in the pro tour, and continued investment in the soft goods business, including the TravisMathew business related to opening new retail doors, investment in infrastructure and systems, and investments related to new market expansions for Jack Wolfskin in North America and Japan.
The company believes that these investments will continue to drive growth in sales and profit but expect to incur the expenses for these investments prior to receiving the associated benefit.
In 2020, the company realized gains from certain foreign currency hedges in the aggregate amount of approximately $25 million.
This gain is not expected to repeat in 2021.
In sum, the COVID-19 pandemic had a significant impact on our business beginning in the first quarter of 2021.
After we absorb the initial -- after we absorb the initial shock of the impact of the pandemic, including the various governmental shutdown orders and restrictions, Chip challenged us to protect our business, avail ourselves of opportunities that arise during the pandemic, and take actions so that we not only survive the pandemic but also emerge in a position of relative strength.
Given the recovery in our core business, our prospective merger with Topgolf, and our increased liquidity, I believe we have done that.
We are cautiously optimistic as we enter 2021.
All of our business segments as well as the Topgolf business support an active, outdoor, healthy way of life.
It is compatible with the world of social distancing, and we believe this will continue to mitigate the impact of COVID-19.
We continue to believe that 2021 will be a stepping stone to more normal conditions in 2022, and the resulting transformational growth we have projected for 2022.
As Chip mentioned in his remarks, the primary focus of the Q&A should be with regard to the Callaway business as we are still pending shareholder approval on the merger.
Operator, over to you.
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q3 non-gaap earnings per share $0.14.
q3 2021 consolidated net revenue increased $381 million to $856 million.
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Actual results may differ materially from those made or implied in such statements, which speak only of date they are made and which we undertake no obligation to publicly update or revise.
Our Chairman and CEO, Clarence Smith will now give you an update on our results.
And then, our President, Steve Burdette will provide additional commentary about our business.
We're very pleased with the record results for the second quarter with sales of $250 million.
We've done a good job in our expense controls across the board, and combined with pricing disciplines from the merchandising teams and stores, we achieved solid gross margins and 11.7% pre-tax operating profits.
Our ongoing objectives are to grow market share in our existing distribution footprint and maintain double-digit operating margins.
We believe that the increased importance of home that was jump-started with the impact of COVID last spring is a longer-term trend.
While we don't expect the rush that impacted our industry to be at the elevated levels we experienced in recent quarters, we do believe that home is a priority and a sustainable trend for the near future.
The strong desire for homeownership, combined with Havertys strong positioning in Florida, Texas and the Southeast, puts us in an ideal position for today and for the future.
Our supply merchandising and distribution teams are working with our factories and shippers to bring in product to fill orders and reduce our record backlog.
The shipping challenges that home-related industries are experiencing have caused major delays for furniture, which we believe will be problems until the spring of 2022.
We are working to increase our inventories as the production and product flow improves.
We're investing in our distribution capacity to support growth over $1 billion over our regions.
We just completed additional racking to our mothership, the Eastern Distribution Center in Braselton, Georgia, which adds 20% more storage capacity.
We will evaluate potential expansions to our network to better serve our planned growth.
Our current focus is on building market share in our key markets with store positioning and target marketing to our core customer and new homeowners.
Examples of this were the opening of Myrtle Beach earlier this year, the opening of a third store in Austin, in the fast-growing Pflugerville, Round Rock markets and a store opening tomorrow in the villages in Central Florida.
We're in a deep dive reviewing potential locations in our best markets, which will reach the fastest-growing areas and leverage our existing infrastructure.
We expect to announce several new fill-in locations for the 2022 openings.
We're very excited about the rollout of the WE FURNISH HAPPINESS marketing campaign, which we believe more clearly separates Havertys from our competitors and continues to raise the bar on service, quality, furniture and design.
We continue to be focused on our front door, havertys.com.
We've committed to significant investments in IT and state-of-the-art systems to better reach and appeal to our customers.
We've contracted with Adobe to bring on a collection of applications and services that will lay the foundation for unmatched customer experience.
The new foundation will improve functionality, help us create content easier and faster, provide better personalizations using AI-driven automation and enhance our analytics and reporting.
Our goal is to have the best-in-class website experience.
I'm very excited with our results for the second quarter.
This performance was due to the commitment, passion and determination of the store, distribution, home delivery, service and home office teams, whom I want to congratulate personally for their efforts.
Our supply chain network has been able to increase the flow of products into our warehouses over the second quarter even with all the headwinds.
Container capacity continues to be under pressure with the continued increase in demand across all of retail.
We expect this to continue to be an issue for the remainder of the year, even if there is a softening in demand.
Also, container prices on the spot market continue to increase with prices varying between $12,000 and $22,000 a container.
We have been able to balance our shipping mix, so that no more than 20% to 30% is on the water at one-time at these increased rates.
As I stated last quarter, we finalized our contracts on May 1, which are significantly below the spot market rates.
Foam continues to be an issue for some of our domestic vendors, however, their production has increased during the second quarter, but still not at 100%.
Our import vendors are not having any foam issues.
The recent closures in Vietnam due to the increased spread of the Delta variant are not expected to have an impact on our customers, if the closures remain at the projected two weeks.
They are expected to open back up beginning the week of 8/2.
However, if the closures are prolonged four to six weeks then there may be an impact to our customers, who already bought and future customer lead times.
Also, we are seeing port congestion in Vietnam and China, along with continued issues at the LA port and railyards.
Our merchandising and supply chain teams are monitoring the situation very closely with our vendors.
Our pool is now approximately 2 times larger than last year, with the average pool age stretching to approximately eight weeks from six weeks over the last 90 days.
Our special order lead times have increased to 12 weeks to 20 weeks, depending on the vendor, causing some softening in our special order business.
Our distribution, home delivery service network delivered a record quarter.
Over 90% of our markets are delivering within a week to the customer's home once we have the product in our warehouses.
Staffing continues to be our #1 concern in both distribution and home delivery.
The extra unemployment moneys that have stopped in most of the states we operate our warehouses, but there is still not enough people looking for work to fill the jobs available.
However, we remain optimistic that we will see this improve during the third quarter.
In the second quarter of 2021, delivered sales were $250 million, a 127.3% increase over the prior year quarter.
If you recall, our retail operations were closed due to the pandemic in the month of April in 2020.
103 stores reopened on May 1, 2020, and the remaining stores reopened by June 20th.
Total written sales for the second quarter of 2021 were up 67.5% over the prior year period.
Comparable store sales were up 46.9% over the prior year period.
This only include stores that were open for a full month in both periods.
Our gross profit margin increased 240 basis points from 54.2% to 56.6% due to better merchandising, pricing and mix and less promotional activity during the quarter.
These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product cost.
Selling, general and administrative expenses increased $39.8 million or 54.7% to $112.4 million, primarily due to increased sales activity.
However, as a percentage of sales, these costs declined over 2,000 basis points to 45% from 66.1%.
As demonstrated in the past three quarters, our financial model has substantial operating leverage at these sales levels.
Other income in the second quarter of 2020 was $31.8 million, which included the gain on the sale-leaseback transaction of three distribution facilities in 2020.
If you recall, the gross proceeds from the sale was approximately $70 million.
Income before income taxes increased $10.5 million to $29.2 million.
Our tax expense was $6.3 million during the second quarter of 2021, which resulted in an effective tax rate of 21.6%.
The primary difference in the effective rate and statutory rate is due to the state income taxes and the tax benefit from vested stock awards.
Net income for the second quarter of 2021 was $22.9 million or $1.21 per diluted share on our common stock compared to net income of $13.6 million or $0.72 per share in the comparable period last year.
Excluding the gain on the sale of our distribution assets in 2020, our adjusted earnings per share in the second quarter of last year was a $0.52 loss.
Now, turning to our balance sheet.
At the end of the second quarter, our inventories were $115 million, which was up $25 million from the December 31, 2020 balance, and up $10.2 million versus the second quarter of 2020.
At the end of the second quarter, our customer deposits were $116.1 million, which was up $29.9 million from the December 31st balance and up $58.5 million versus Q2 of 2020.
We ended the quarter with $235.3 million of cash, cash equivalents.
We have no funded debt on our balance sheet at the end of the second quarter of 2021.
Looking at some of our uses of cash flow, capital expenditures were $10.9 million for the first half of 2021, and we paid $8.6 million of regular dividends during the first half of 2021.
During the second quarter, we did not purchase any common shares in our buyback program, and we have $16.8 million remaining under current authorization for this buyback program.
We expect our gross margins for 2021 to be 56.5% to 56.8%.
We anticipate gross profit margins will be impacted by our current estimates of product and freight cost and changes in our LIFO reserve.
Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the $275 million to $278 million range.
This is an increase over our previous estimate, primarily due to rising warehouse compensation and benefit cost.
The variable type costs within SG&A for 2021 are expected to be in the range of 17.3% to 17.5%, a slight decrease over our previous guidance.
Our planned capex for 2021 has increased from $23 million to $37 million.
Anticipated new or replacement stores, remodels and expansions account for $18.7 million.
Investments in our distribution network are expected to be $15.2 million, and investments in our information technology are expected to be approximately $3.1 million.
The largest increase in our planned capex for 2021 is in our distribution network.
In the third quarter of this year, we will be buying back our Virginia warehouse, which we sold and leased back last year.
This is a key distribution asset that may be expanded in the upcoming years.
Owning this asset gives us more flexibility as we evaluate our future growth plans.
Our anticipated effective tax rate in 2021 is expected to be 24%.
This projection excludes the impact from vesting of stock awards and any potential new tax legislation.
This completes our commentary on the second quarter financial results.
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compname reports q2 earnings per share $1.21.
q2 earnings per share $1.21.
q2 same store sales rose 46.9 percent.
q2 sales $250 million.
qtrly diluted earnings per common share of $1.21.
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I am Dorian Hare.
Today's call is being recorded.
An archive of the recording will be available later today on the IR Calendar Section of the News & Events tab at our IR website www.
These materials are labeled Q2 2021 earnings conference call.
Certain risk factors that may impact our business are set forth in our filings with the SEC including our 2020 Form 10-K and subsequent filings.
Also, we will be referring to certain non-GAAP financial measures, including adjusted earnings per share attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance.
Before I address Equifax's strong second quarter results, I want to recognize our 11,000 associates around the globe for their continued hard work and dedication in these challenging times.
Our team members are our most important asset and they play a vital role in helping millions of consumers around the world to get access to credit.
On July one, we opened all of our U.S. offices fully, and rolled out our new Equifax Flex program, a hybrid working environment that gives our team the opportunity to work-from-home one day per week.
Our full one program recognizes our learnings from the past year around remote work during COVID, but maintains the core of our Equifax culture of collaboration and teamwork that is optimized by an in-person work environment.
We've also resumed in-person meetings with our customers, and I've been energized with the conversations that have taken place so far.
It's great to be moving back to a new normal.
We had a very strong second quarter and first half, which built off our strong outperformance in 2020.
Our team has executed extremely well against the critical priorities of our new Equifax 2023 strategy, which has shown on Slide 4.
We are accelerating new product introductions, beginning to leverage our expanding Equifax Cloud capabilities and our highly differentiated data assets.
We continue to expand our differentiated data assets, both organically and through acquisitions and partnerships.
While still in the early days, our new Equifax Cloud Data and Technology capabilities are providing competitive advantages and capabilities that only Equifax can provide.
And our Customer First initiatives are deepening our relationships with customers and delivering new products and solutions along with above-market Equifax growth.
And as always, we remain focused on extending our leadership in security.
Our EFX2023 growth strategy is our compass for the future and drives all of our growth initiatives as we move through the second half and into '22 and beyond.
We expect this focus to drive our top-line and bottom-line in the future.
Turning now to Slide 5.
Equifax's financial performance in the second quarter was very strong and outperformed our underlying markets.
Revenue at $1.235 billion was the highest quarterly revenue in our history, breaking the record from last quarter.
Local currency revenue growth of 23% and organic local currency growth of 20% were both very strong in some of the highest growth rates in our history.
Our U.S. B2B businesses, our Workforce Solutions and USIS, which together represent over 70% of our revenue, again drove our overall growth delivering very strong 25% total and 22% organic revenue growth despite the headwinds from the mortgage market that declined about 5%.
The 5% decline in the mortgage market was about 500 basis points more than our flat expectation we shared with you in April.
U.S. B2B organic non-mortgage growth of 20% accelerated sequentially from the 16% we delivered in the first quarter.
The 20% organic growth is also a record and reflects the underlying strength of Workforce Solutions and USIS has returned to a competitive position.
I'll cover the business performance rather performance in detail in a moment.
But at a high level, Workforce Solutions again led Equifax growth with revenue up a strong 40%.
And as a reminder, this is off growth of 53% in second quarter last year and the mortgage market that declined 5% in the quarter.
USIS delivered another strong quarter with revenue up 11%, driven by non-mortgage total revenue growth of over 20% and strong organic revenue growth of 14%.
International delivered a very strong quarter of COVID recovery with revenue growth of 25% in local currency and importantly all regions internationally delivered growth about 20%.
Slightly better than expected GCS revenue was down 3% in local currency.
However, our consumer-direct revenue delivered 11% growth in the quarter, its second consecutive quarter in double-digits.
Second quarter Equifax adjusted EBITDA totaled $431 million, up 20% with margins of 34.9%.
Margins were down a 160 basis points versus last year due to the inclusion of the cloud technology transformation costs in our adjusted results in 2021, which were excluded last year.
This negatively impacted second quarter adjusted EBITDA margins by 310 basis points.
Adjusting for cloud transformation costs of $38 million in the quarter, our margins would have been up a strong 150 basis points.
We are getting strong leverage out of our above market revenue growth.
Adjusted earnings per share of $1.98 per share was up a strong 21% from last year.
Again, adjusting for the cloud transformation costs, adjusted earnings per share would have been up a very strong 36%, reflecting the strong performance in operating leverage of Equifax.
During the quarter, we continue to make significant progress with the Equifax Cloud Data and Technology transformation, including an additional 7,700 customer migrations to the Cloud in the United States and more than 900 migrations internationally.
We remain on track with our Cloud transformation and are confident in our plan.
We continue to expect the North American transformation to be principally complete in early 2022 with the remaining customer migrations completed by the end of next year.
International transformation will follow North America being principally completed by the end of 2023.
And as you know, last year, we started to ramp-up our focus and resources on new products, leveraging the new Equifax Cloud Data and Capabilities.
In the second quarter, we released 46 new products, which is up almost 2x from the 24 products we released a year ago in the quarter.
These new products are increasingly leveraging the new Equifax Cloud to deliver better data and decisioning for our customers.
Driving NPIs leveraging the new Equifax Cloud is central to our EFX2023 growth strategy.
And we continue to expect our vitality index defined as revenue from new products introduced in the last three years to exceed 8%, a big step-up from the 5% last year and a reflection of the strong product focus across EFX.
Our first half performance exceeded our expectations and we are clearly seeing continued strong momentum as we move into the second half.
Based on our strong first half results and confidence in the future, we increased our full year revenue guidance by a $155 million to a midpoint of $4.78 billion, which is up 400 basis points to 16% growth.
We also increased our full year adjusted earnings per share guidance by $0.45 per share to a midpoint of $7.35 per share which adjusting for the technology transformation costs is up 700 basis points to 19% growth.
This includes our expectation that the U.S. mortgage market as measured by credit inquiries will decline approximately 8% in the year, which is consistent with the guidance we provided in April.
In the second quarter, Equifax core revenue growth, the green section of the bars on Slide 6 accelerated to 29%.
This is up significantly from the 20% core revenue contribution we delivered in the first quarter and 11% in the fourth quarter and well above our historical core growth rates.
While our outperformance in the mortgage market continues to drive significant core growth, the contribution from U.S. non-mortgage in International increased significantly in the quarter, reflecting approximately 50% of core revenue growth in the quarter, excluding acquisitions and FX favorability.
Turning now to Slide 7.
Our strong second quarter results were broad-based and reflect better than expected performance for all four Equifax business units.
Workforce Solutions, our largest business had another exceptional quarter, delivering 40% revenue growth and 58% adjusted EBITDA margins.
Again as a reminder, the 40% revenue growth is on top of 53% growth last year in the second quarter.
EWS is cementing itself is our largest and most valuable business and is powering our results, representing 40% of total Equifax revenue in the quarter.
EWS Verification Services revenue of $395 million was up a strong 57%.
Verification Services mortgage revenue grew 52% in the quarter, despite the 5% decline in the mortgage market from increased records, penetration and new products.
Importantly, Verification Services non-mortgage revenue was up over 60% in the quarter and up over 15% sequentially from the first quarter.
Our government vertical, which provide solutions to federal and state governments in support of assistance programs including food and rental support grew over 10% in the quarter.
Government remains one of our largest non-mortgage segments, representing about a third of non-mortgage verification revenue.
We continue to expand our products and solutions in the government vertical and expect our new Social Security Administration contract to go live this quarter with revenue ramping to a $40 million to $50 million run-rate in 2022.
Talent Solutions, which arise income and employment verifications as well as other information for the hiring and on-boarding process through our EWS Data Hub had another outstanding quarter from customer expansion and NPIs, growing over 200%.
Talent Solutions now represents almost 30% of non-mortgage verification revenue.
Building out the EWS Data Hub that leverages the work history in our TWN database with other unique data elements used in the hiring process is a priority for us.
Over 75 million people changed jobs in the U.S. annually, with the vast majority having some level of screening as a part of that hiring process.
Our non-mortgage consumer business, principally in Banking and Auto showed strong growth of about 50% in the quarter as well, though from deepening penetration with lenders and some recovery in these markets.
Debt management also returned to growth in the quarter.
Employer Services revenue of a $101 million was about flat in the quarter as expected.
Combined, our unemployment claims and employee retention credit businesses had revenue of about $64 million, down over 15% from last year.
Substantial declines in UC revenue in the second quarter were partially offset by new ERC revenue that began in the quarter as we support businesses and obtaining federal employee retention credit payments.
Employer Services non-UC and ERC businesses had revenue up over 50% in the quarter.
Our I-9 business driven by our new I-9 Anywhere product, continue to show very strong growth, up over 50%.
Our I-9 business is now almost half of Employer Services non-UC and ERC revenue.
Reflecting on the growth in I-9 and the return to growth of workforce analytics, we expect Employer Services non-UC and ERC businesses to deliver organic growth of over 20% for the year.
Reflecting the power and uniqueness of between dataset, strong verified revenue growth and operating leverage resulted in adjusted EWS EBITDA margins of 58%, a 160 basis point expansion from last year.
Excluding Technology Transformation expenses, EWS margins would have been up over 240 basis points.
Rudy Ploder and EWS team delivered another outstanding quarter and are position to deliver a very strong 2021.
Workforce Solutions is our most powerful and unique business and is powering Equifax results would grow substantially above the rest of the company.
Turning now to USIS.
They had another strong quarter with revenue up 11%, driven by strong performance across the business.
Total USIS mortgage revenue of a $160 million was down about 2% in the quarter, while mortgage inquiries were down 5%, a little bit flat expectation we shared in April.
John will cover our updated view of the mortgage market shortly.
USIS mortgage revenue outgrew the market by over 300 basis points, driven by growth in marketing and debt monitoring products.
Importantly, non-mortgage revenue performance was up 21% with strong organic growth of 14%.
This performance reflects the commercial focus of Sid Singh and his team and their competitive position in the marketplace.
Importantly, organic non-mortgage revenue also delivered strong sequential growth, acceleration of 250 basis points from the first quarter's 11%, an important indicator of the continued strengthening of the USIS business.
Banking and Insurance both grew over 20% in the quarter.
Auto and Direct-to-Consumer were both up over 10% and Telecom and Commercial were just about flat in the quarter.
Financial Marketing Services revenue, which is broadly speaking, our offline or batch business was $59 million in the quarter and up about 14%.
The strong performance was driven by marketing related revenue, which was up over 20% and ID and fraud revenue growth of over 15% as consumer marketing and originations ramped up coming out of COVID.
In 2021, marketing related revenue is expected to represent about 40% of FMS revenue, identity and fraud about 20% and risk decisioning about 35%.
This strong growth across our non-mortgage business is encouraging as we move into the third quarter and the rest of 2021.
The USIS new deal pipeline remains very strong and comparable to the strong levels we've seen so far in 2021.
We have seen the highest growth in auto, financial services and mortgage.
USIS adjusted EBITDA margins were 40.3% in the quarter, the decline of 380 basis points from second quarter last year was principally due to the costs related with Cloud transformation.
Both the cost of redundant systems and the inclusion in our adjusted results of the technology transformation costs, which were being excluded in 2020.
Sales and marketing expenses also increased in the quarter and sequentially to leverage both the stronger U.S. markets and increased NPI rollouts to drive growth.
Shifting now to International.
Their revenue was up a strong 25% on a local currency basis, which is a third consecutive quarter of growth in our global markets.
Revenue growth was up over 20% in all of our markets in Canada, Asia Pacific, Latin America and Europe.
Asia-Pacific, which is principally our Australia business had a very strong quarter with revenue up $91 million or up about 21% in local currency.
Australia consumer revenue turned positive and was up 23% versus last year and up about 2% sequentially.
Our Commercial business combined online and offline, revenue was up a very strong 26% in the quarter and almost 18%, up almost 18% sequentially.
Fraud and identity was up 30% in the quarter, following 15% growth in the first quarter.
European revenues of $68 million were up 27% in local currency in the quarter.
Our European credit reporting business was up about 20% with strong growth in both the UK and Spain.
In UK, which is our largest European market, we saw growth of over 25% in consumer, data analytics and scores and over 40% growth in commercial.
Our European debt management business revenue increased about 30% in local currency off the lows we saw in the second quarter last year during the COVID recession.
Canada delivered record setting revenue of $47 million in the quarter, up about 26% in local currency.
Consumer online was up about 26% in the quarter, an improvement of 12 percentage points from the first quarter.
Double-digit growth in commercial, analytical and decision solutions and ID and fraud also drove growth in the Canadian revenue in the quarter.
Latin American revenues of $44 million, grew 30% in the quarter in local currency, which was the second consecutive quarter of growth coming out of COVID.
We continue to see the benefits in Latin America of the strong new product introductions, the team has rolled out over the past three years.
International adjusted EBITDA margins of 27.3% were up 540 basis points from last year, driven by leverage on revenue growth and continued very good cost control by the international team.
Excluding the impact of the inclusion of the technology transformation costs in adjusted EBITDA, margins were up over 750 basis points.
Global Consumer Solutions revenue was down 2% on a reported basis and 3% on a local currency basis in the quarter and slightly above our expectations.
We again saw strong double-digit growth in our global consumer direct business, which sells direct-to-consumers through equifax.com and which represents a little over half of GCS revenue.
Direct-to-Consumer revenue was up a strong 11% in the quarter, their fourth consecutive quarter of growth.
The decline in overall GCS revenue in the second quarter was again driven by our U.S. lead generation partner business.
We expect the GCS partner business and GCS business overall to return to growth in the fourth quarter.
GCS adjusted EBITDA margins of 22.5% were up just about a 170 basis points, which was better than our expectations.
Turning now to Slide 8.
Workforce Solutions continues to power Equifax and is clearly our strongest fastest growing and most valuable business.
Workforce Solutions revenue grew a very strong 40% in the quarter, with core revenue growth of 46%.
And again the 40% growth in the quarter was on top of 53% growth in the second quarter last year.
This above market performance is driven by the uniqueness of the TWN income and employment data, the scale of the TWN database and the consistent execution by Rudy and his team.
At the end of the second quarter, TWN reached a 119 million active records, an increase of 13% or 14 million records from a year ago and included 91 million unique records.
At 91 million unique, we now have over 60% of non-farm payrolls, which makes our TWN dataset we're valuable to our customers by delivering higher hit rates.
Beyond focusing on adding the over 50 million non-farm payroll records not in the TWN database yet, we're also focused on adding data records from the 40 million to 50 million gig workers and around 30 million pension recipients in the United States marketplace to further broaden the TWN database.
We have plenty of room to grow.
We are now receiving contributions from 1.2 million companies across the U.S., up from 27,000 employers a short two plus years ago.
And as a reminder, over 60% of our records are contributed directly by employers that EWS provides comprehensive employer services to like unemployment claims, W-2 management, I-9, WOTC, Employee Retention Credit, HSA and other HR in compliance-related solutions.
These relationships have been built up over the past decade by the Workforce Solutions team.
The remaining 35% are contributed through partnerships with payroll providers in HR software companies, most of which are exclusive.
The exclusive arrangement with a major payroll processor that we announced on our February call is still on track to become active later this year.
We have a dedicated team with an active pipeline of record additions to continue to expand our TWN database in the future.
And as you know, as we add records to the dataset, they're monetized almost instantly with our customer system-to-system integrations interacting with our TWN database.
Workforce Solutions continues to grow, penetration in key existing markets while expanding into new markets.
We continue to increase our penetration in the mortgage market.
As of the most recent data available at the end of 2020, Workforce Solutions received an inquiry in almost 60% of completed U.S. mortgages, which is up from 55% in 2019.
This 500 basis point increase shows a continuation of growth in TWN mortgage penetration as well as the substantial opportunity for continued growth at existed mortgage with only 60% of mortgages using TWN data today.
We're also seeing substantial growth in TWN in the non-credit markets of government and Talent Solutions as well as increased TWN usage within the card and auto verticals.
As we discussed in the past, growing system-to-system integrations is a key lever in driving both increased penetration and the increased number of polls per transaction for Workforce Solutions.
During the quarter, about 75% of TWN mortgage transactions were fulfilled system-to-system, which was up 2x from the 32% in 2019.
The Workforce Solutions new product pipeline is also rapidly expanding, as our teams leveraged the power of our new Equifax Cloud infrastructure.
We plan to roll-out new products in mortgage Talent Solutions government and I-9 in the second half of the year.
New product revenue will increase in '21 and '22 as we begin to reap the benefits of our new products introduced in the market by Workforce Solutions in the past 18 months.
Rudy in the Workforce Solutions team had multiple levers for growth in '21, '22 and beyond.
Workforce is clearly our largest and most valuable business and will continue to power our results in the future.
Workforce Solutions growth rates and margins are highly accretive to Equifax now and in the future.
Slide 9 provides perspective on the tremendous growth Workforce has delivered since 2017 and the increasing impact of the business has on Equifax with its highly accretive revenue growth rates and margins.
In 2017, Workforce Solutions revenue and EBITDA made up 23% of Equifax revenue and 27% of business unit EBITDA.
For the first half of '21, Workforce Solutions revenue and EBITDA have increased to 40% of Equifax revenue and over half of Equifax business unit EBITDA.
In a short four years, Workforce Solutions has more than doubled in size and is now almost 50% in the first half versus the same period last year.
It is up almost 50% in the first half versus same period last year.
Our unique TWN employment in income assets and the continued expansion of employment-related assets within the Equifax Data Hub provides opportunities for both ongoing outsized growth in Equifax's traditional financial markets of mortgage, banking, auto as well as a substantial growth in new verticals in government talent solution others to come.
We expect that Workforce Solutions will continue to be an increasingly large part of Equifax and power our top and bottom-line with the above-market growth in margins.
Turning to Slide 10.
This provides a perspective on the return to growth USIS delivered since 2018.
USIS has delivered strong double-digit revenue growth over the past six quarters.
The strong mortgage market has advantage USIS as shown in the bottom left of the slide, USIS has driven consistent sequential improvement in non-mortgage growth in second quarter last year, with the overall growth in USIS being driven by 18% non-mortgage growth in the first half of 2021.
USIS team is also increasingly leveraging the Equifax Cloud to design and implement new NPIs for customers.
The Equifax Cloud new products in our unique data assets are making USIS teams more competitive in the marketplace.
And the USIS team is focused on integrating count in the new Equifax Cloud, we're seeing increased used cases in opportunities with our ID and fraud vertical from the count acquisition.
We expect ID and fraud to play a large role in USIS growth in 2021 and beyond.
Turning to Slide 11.
This highlights the core growth performance in our mortgage for our U.S. B2B businesses, Workforce Solutions and USIS.
Our U.S. B2B businesses delivered a combined 25% revenue growth in mortgage in the second quarter, which was 30 point stronger than the 5% mortgage decline we saw in overall mortgage market.
The strong outperformance was again primarily driven by Workforce Solutions with core mortgage growth of 57%.
Consistent with past quarters, EWS's outperformance was driven by new records, increased market penetration, larger fulfillment rates and new products.
Proof that lenders are increasingly becoming reliant on the unique TWN income and employment data on making credit decisions in the mortgage space.
USIS delivered 4% core mortgage revenue growth in the second quarter, driven primarily by new debt monitoring solutions and further support from marketing.
Our ability to substantially outgrow underlying markets is core to our business model and core to our future growth.
As Mark discussed, our Q2 results were very much stronger than we discussed with you in April, with revenue about $85 million higher than the midpoint of the expectations we shared.
For perspective, all we used performed well relative to the expectations we shared.
Performance in non-mortgage in our U.S. businesses Workforce and USIS was very strong in absolute terms, and relative to the expectations we shared.
Our unemployment claims and employee retention credit businesses in Workforce Solutions declined in the quarter, but much less than expected.
International revenue performance was also very strong, again both in absolute terms, and relative to our expectations.
And although the mortgage market was down 5% versus our expectation of flat, our mortgage revenue principally in Workforce was not impacted to the same degree.
This strong revenue drove the upside in adjusted earnings per share relative to the expectations we shared.
Now, turning to mortgage.
As shown on Slide 12, U.S. mortgage market credit increase declined 5% in 2Q'21, weaker than the about flat we had included in our guidance.
Our financial guidance for 2021 assumes that the trend in mortgage credit increase we saw in late June and July continues in 3Q'21 resulting in a decline of mortgage market credit increase of about 23% in 3Q'21 versus 3Q'20.
Although our second half '21 market credit inquiry assumptions are down significantly from the second half of '20, they remained above the average as we saw prior to 2020.
As shown in the left side of Slide 13, mortgage market indicators remain above the peak seen in previous mortgage cycles.
Despite the substantial refinance activity that has occurred over the past year, the number of U.S. mortgages that could benefit from a refinancing remains at a relatively strong level of about $12 million.
Refinance activity continues to benefit from low and recently declining mortgage rates and a substantial appreciation in home prices over the past year.
Based upon our most recent data from January, mortgage refinancings continue to run just under 1 million per month.
As shown on the right side of Slide 13, the pace of existing home purchases continues at historically very high levels.
The strong new purchase market is expected to continue throughout 2021 and into 2022.
Slide 14 provides our guidance for 3Q'21.
We expect revenue in the range of $1.160 billion to $1.180 billion, reflecting revenue growth of about 9% to 11%, including a 1% benefit from FX.
Acquisitions are positively impacting revenue by 1.8%.
We're expecting adjusted earnings per share in 3Q'21 to be $1.62 to $1.72 per share compared to 3Q'20 adjusted earnings per share of $1.91 per share.
In 3Q'21, technology transformation costs are expected to be around $40 million or $0.25 a share.
Excluding these costs, which were excluded from 3Q'20 adjusted EPS, 3Q'21 adjusted earnings per share would be $1.87 to $1.97 per share.
This performance is being delivered in the context of the U.S. mortgage market, which is expected to be down 23% versus 3Q' 20.
Comparing the midpoint of our 3Q'21 guidance sequentially to our very strong 2Q'21 performance, revenue is down about $65 million.
The drivers of this decline are two main factors.
The largest factor is a decline in mortgage revenue driven by the impact of the expectation we shared regarding the decline in the U.S. mortgage market.
The other significant factor is our expectation that we'll see a significant sequential decline in unemployment claims revenue.
Our guidance for adjusted earnings per share declines about $0.30 per share sequentially.
The bulk of this decline is driven by lower gross profit and the revenue expectation I just discussed.
In addition, we are increasing investment sequentially in sales and marketing, particularly in the U.S. as well as increasing investment in product and technology.
Slide 15 provides the specifics on our 2021 full-year guidance.
We are increasing guidance substantially, reflecting our very strong 2Q'21 performance.
In the second half of 2021, we expect strong growth in our U.S. non-mortgage business and international and a return to growth in GCS.
We also expect our U.S. mortgage business to grow about 15% in 2021 over 20 points faster than we expected approximately 8% decline in the U.S. mortgage market.
2021 revenue of between $4.76 billion and $4.8 billion reflects revenue growth of about 15% to 16% versus 2020, including the 1.5% benefit from FX.
Acquisitions are positively impacting revenue by 1.9%.
EWS is expected to deliver about 30% revenue growth with continued very strong growth in Verification Services.
USIS revenue is expected to be up mid to high single-digits, driven by growth in non-mortgage.
International revenue is expected to deliver constant currency growth of about 10% and GCS revenue is expected to be down mid single-digits in 2021.
3Q'21 revenue is also expected to be down mid single-digits, with 4Q'21 revenue returning to growth.
As a reminder, in 2021, Equifax is including all technology transformation costs in adjusted operating income, adjusted EBITDA and adjusted EPS.
These one-time costs were excluded from adjusted operating income, adjusted EBITDA and adjusted earnings per share in 2017 through 2020.
In 2021, Equifax expects to incur one-time Cloud technology transformation costs of approximately a $155 million, a reduction of over 55% from the $358 million incurred in 2020.
The inclusion in 2021 of this about a $155 million and one-time costs would reduce adjusted earnings per share by about $0.97 per share.
This estimate of one-time technology transformation costs is up $10 million from a $145 million we guided in April.
Given our very strong performance in 2021, we are investing to accelerate our tech transformation globally.
2021 adjusted earnings per share of $7.25 to $7.45 per share which includes these tech transformation costs is up 4% to 7% from 2020.
Excluding the impact of the tech transformation cost of $0.97 per share, adjusted earnings per share in 2021 which show growth of about 18% to 21% versus 2020.
2021 is also negatively impacted by the redundant system costs of $79 million related to 2020.
These redundant system costs are expected to negatively impact adjusted earnings per share by about $0.49 per share and negatively impact adjusted earnings per share growth by about 7 percentage points.
Slide 16 provides a view of Equifax total and core revenue growth that is included in our current guidance.
Core revenue growth excludes the impact of movements in the mortgage market and Equifax revenue as well as the impact of changes in our UC claims and employee retention credit businesses within our Employer Services business.
Employee retention credits are specific U.S. government incentives for companies to retain their employees in response to COVID-19 and the associated revenue is not expected to continue into 2022.
The data shown for 3Q'21 and full year 2021 reflects the midpoint of the guidance ranges we provided.
In 1Q'21 and 2Q'21, we delivered very strong core revenue growth of 20% and 29% respectively.
We continue to deliver strong core revenue growth in 3Q'21 of 17% and 19% for all of 2021 in our expectations.
As Mark mentioned earlier, the composition of our core revenue growth is becoming more balanced, reflecting substantially increasing contributions from U.S. non-mortgage, international and as we enter 4Q'21 GCS.
And we continue to expect our mortgage business to grow at that rates faster than the overall mortgage market.
This very strong performance we believe positions us well entering 2022 and beyond.
And now, I'd like to hand it back to Mark.
Turning now to Slide 17.
As I referenced earlier, pricing in our technology teams continue to make very strong progress on our new Equifax Cloud Data and Technology Transformation, with the North American technology transformation expected to be principally complete in early '22 and the remainder of North America transformation and customer migrations completing by the end of next year.
And our international transformation following North America being principally complete by the end of 2023.
Equifax's transformation to a Cloud native environment delivers a host of capabilities that only Equifax can provide as the only cloud native data and technology company.
The Equifax Cloud will deliver always on stability, accelerate response time and built in industry-leading security.
It will provide our customers with real-time access to data and insights that they can rely on to make decisions.
The Equifax Cloud through our Ignite analytics platform, where our customers and Equifax data scientists to work together utilizing EFX unique data assets and customer proprietary assets to define attributes and models to improve customer outcomes.
And we will continue to accelerate the time from analytics to production to bring new products and solutions to market faster and more efficiently enhancing customer benefits and Equifax revenue.
Already the Equifax Cloud is enabled us to produce new products designed and delivered on our Cloud infrastructure four times faster in the past.
We began to leverage these cloud benefits in 2020, as we more effectively developed new products and delivered them to market leveraging the new EFX cloud, growing new product introductions by 44% last year, in 2020.
These new improvements have been further accelerated in 2021 as we are delivering the highest number of new products in our history and we are realizing higher revenue from new product introductions.
Slide 18 provides an update on NPIs, a key driver of our current and future revenue growth.
As we just discussed, the new cloud transformation is significantly strengthened our NPI capabilities, allowing us to increase both the number of NPIs and the revenue generated from new products.
We continue to expand our product resources and focus on transforming Equifax into a product led organization, leveraging our best-in-class Equifax cloud native data and technology to fuel top-line growth.
As I discussed earlier in the second quarter, we delivered 46 new products, which is up about almost 2x from the 24 we delivered last year.
Year-to-date, we've rolled out 85 new products, which is up 44% from the 59 that we delivered in the first half last year.
We're energized as we continue to grow off an NPI record-setting 2020.
We want to highlight some of these products rolled out during the quarter, which we expect to drive revenue growth over the second half and the next few years.
Our new payment Insights products launched by USIS in April was delivered in partnership with Urjanet and uses consumer permission utility in telco data to improve use of customers, consumers' financial picture and help credit invisibles.
The cloud-based solution promotes greater financial inclusion regardless of the consumers' traditional credit score by empowering consumers to show utility in telco payment history with banks or lenders when applying for loans or other services.
The product also allows lenders to seamlessly integrate data into review processes while meeting industry leading standards for protection of consumer data security, confidentiality and integrity.
Workforce Solution launched a new mortgage 36 product in May.
This solution addresses income verification needs by enabling mortgage lenders to pull an extended set of both active and inactive income in employment data for a more complex income mortgage applicants were additional history may be needed in the underwriting process.
EWS also launched a new talent report employment staffing product in April.
This solution provides flexibility on the number of past employers pulled to meet the employment verification needs of the employer.
Staffing agencies leveraged VOE as a reference check was often looking to verify only to employers, which this product helps deliver.
In the United Kingdom, we launched the credit vitality view app.
This Ignite-based app visualizes key credit data trends across the UK versus a company's own performance.
It uses a range of macroeconomic measures and includes filtering capability, so our customers can focus on the performance of their own portfolio and product lines such as mortgages or credit cards.
The app also can illustrate these company and market trends over multiple years.
Lastly, we introduced the Equifax Affordability Solutions in Australia New Zealand.
These solutions deliver automated categorized income and expense verification in a way that delivers meaningful and actionable insights for our customers.
Our customers can easily digest and act on these insights through the delivery of comprehensive consumer affordability reports, which are now required from a regulatory standpoint in these markets.
This new solution will reduce loan application processing timing cost, improve conversion rates and maximize efficiency while fulfilling responsible lending regulatory requirements, delivering overall improvements to the consumer experience.
These are just some examples of the new solutions we launched during the quarter.
We're focused on leveraging our new cloud capabilities to increase NPI rollouts and new product revenue in 2021 and beyond.
Growing NPIs is central to our EFX2023 growth strategy.
And as a reminder, our vitality index is defined as the percentage of revenue delivered by NPIs launched during the past three years.
In April, we increased our vitality index outlook for 2021 from 7% to 8% and we remain confident in this framework for 2021.
As you can see from the left of the slide, our 8% vitality outlook for 2021 is a big step forward from the 5% vitality we delivered last year.
NPIs are a big priority for me and the team as we leverage the Equifax Cloud for innovation new products and growth.
Slide 19 showcases the capabilities we've been building over the past three years that only Equifax can bring to the marketplace.
We have unique market-leading differentiated data at scale that includes our 228 million ACRO credit records, 119 million TWN income and employment records and additional data at scale that comes from our alternative datasets, including Kount and CTUE, PayNet, IXI and others.
Our advanced analytics allow us to build and test attributes faster, leverage artificial intelligence and machine learning, and developing models in days and weeks where used to take months.
Our team of 320 data scientists located around the world are leveraging our advanced analytics in Equifax Cloud native infrastructure to define and deploy cloud native products and solutions.
And our cloud native data fabric is allowing us to key EnLink our unique data asset in ways that we could never do before.
Our data fabric scratches across the globe and we are in the early innings of leveraging its global capabilities.
Only Equifax can provide these capabilities, and we are on offense as we deploy these into the marketplace.
Wrapping up on Slide 20.
Equifax delivered a record-setting second quarter.
We have strong momentum as we move into the second half.
Our 26% overall and 29% core revenue growth in the quarter reflects the strength and breadth of our business model and early benefits from our Equifax Cloud investments and of course it's enhanced focus on new products.
We delivered six consecutive quarters of strong above market double-digit growth.
Our strong performance reflects the execution against our EFX2023 strategic priorities Equifax's on offense.
As we discussed earlier, we're confident in our outlook for 2021 and we raised our full year midpoint revenue guidance to $4.78 billion, increasing our 2021 growth rate by over 370 basis points, almost 16%.
We also raised our midpoint earnings per share guidance to $7.35, increasing the growth rate by over 640 basis points.
As we discussed earlier, Workforce Solutions had another outstanding quarter, delivering 40% revenue growth and 58% EBITDA margins.
EWS is our largest fastest growing and most valuable business.
During the quarter, Workforce Solutions delivered 40% of Equifax revenue and we expect EWS to continue to drive Equifax's operating performance throughout 2021 and beyond, as consumers recognize the value of our growing TWN database.
Rudy and his team remain focused on driving outsized growth by focusing on their key growth drivers of adding new records, rolling out new products, driving penetration, driving their new Talent Solutions Data Hub, expansion in new verticals and leveraging their new EFX cloud capabilities.
USIS also delivered another strong quarter of 11% growth, driven by their 14% non-mortgage organic growth.
We expect USIS non-mortgage growth to continue to be strong due to the economic recovery, the commercial focus of the team, new products and our unique alternative data assets.
Sydney USIS teams are competitive and winning in the marketplace and will continue to deliver in '21 and beyond.
International grew for the third consecutive quarter, accelerating to 25% in local currency in the second quarter as economies reopened and business activity resumes.
Our new international leader Lisa Nelson has high expectations for our team and we expect continued strong growth through the rest of 2021.
We are beginning to realize the benefits of our EFX Cloud Data and Technology transformation as we accelerate new product innovation with products designed and built off of our new EFX Cloud infrastructure.
We spent the last three years building the Equifax Cloud and we're now starting to leverage our new cloud capabilities.
As we move through the rest of the year and into 2022, we'll be increasingly realize the topline, cost and cash benefits from these new cloud capabilities.
Accelerate new products, leveraging our differentiated data and the new EFX cloud capabilities is central to our EFX2023 growth strategy.
We're beginning to see the benefits of our new product focus and resources leveraging the EFX cloud with the 85 NPIs completed in the first half, pacing well ahead of the record 134 we delivered last year.
As we discussed in the past, bolt-on acquisitions that expand our differentiated data assets, strengthening Workforce Solutions and broadening our ID and fraud capabilities are integral to our future growth framework.
We have reinvested our strong cash flow in five bolt-on acquisitions so far this year, that will add a 170 basis points to our revenue in the second half.
We will continue to focus on accretive bolt-on acquisitions that strengthen Workforce Solutions.
I'm more energized now than when I joined Equifax three years ago.
What the future holds as we move from building the cloud through our next chapter of growth, leveraging the new Equifax cloud for innovation, growth and new products.
We have strong momentum across our business as we move into the second half and we're beginning to deliver on the benefits of the significant Cloud Data and Technology investments we made over the past three years.
Equifax's on offense in position to bring new and unique solutions for our customers, then only Equifax can deliver, leveraging our new EFX cloud capabilities.
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equifax q2 adjusted earnings per share $1.98.
q2 adjusted earnings per share $1.98.
q2 revenue rose 26 percent to $1.235 billion.
increasing full-year revenue and earnings per share guidance.
qtrly adjusted earnings per share attributable to equifax was $1.98.
sees fy adjusted earnings per share $7.25 to $7.45.
sees q3 adjusted earnings per share $1.62 - $1.72.
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The factors that could cause our actual results to differ materially are discussed in the Company's most recent 10-K and 10-Q filed with the SEC.
Lastly, because the offer period for our IEnova exchange offer is open, we're limited in what we can say about the exchange offer and we will be unable to respond to questions about this transaction.
I'm pleased with our first quarter results, and I think it sets us up well for the balance of 2021.
You'll recall, we shifted our market focus back to North America several years ago and have been consistently investing new capital in our utility platforms in California and Texas.
This strategic focus, together with strong operational execution, are continuing to drive improvements in our financial performance.
A second part of our strategy is focused on consolidating our unregulated investments under Sempra Infrastructure and we're making great progress there as well.
Just last month, we announced our agreement to sell a 20% equity interest in that business to KKR and it's an important step for two reasons: first, bringing in a new strategic partner allows Sempra Infrastructure to strengthen its own balance sheet while also position the business to self-fund its future growth; and second, this transaction sends a clear market signal about the value and expected growth of our Infrastructure platform.
Turning now to the Company's financial results.
We're also affirming our 2021 adjusted earnings per share guidance range.
We've had several positive developments at our operating companies this past quarter.
At our California Utilities, we received a proposed decision for 2022 and 2023 attrition rates, which if approved, will provide greater support for safety and reliability initiatives, as well as improved visibility into future earnings.
In 2020, Oncor experienced its highest organic premise growth ever and we're excited to see the growth continue this year.
In the first quarter alone Oncor connected approximately 19,000 new premises, greater than the connections in the first quarter of 2020, again validating the underlying strength of economic and demographic growth in the region.
Now, shifting to our Infrastructure business.
At Sempra LNG, we have begun engineering, construction of ECA Phase 1 and continue to progress our LNG development projects.
At Cameron Phase 2, we continue to work with our Cameron partners on the technical design of the project and to advance commercial discussions.
At Port Arthur LNG, we continue to work with partners and customers to focus on options to reduce the projects' greenhouse gas profile and continue improving its competitive position in the global energy transition.
At this time, given this work and the continued impacts of the pandemic on the global energy markets, it is more likely that final investment decision at Port Arthur will move to next year.
We will keep you updated as things progress.
Moving to our Mexican business.
We continue to advance our pipeline of development projects, focused on diversifying its energy supplies and improving the country's energy security.
In March, we expanded the renewable energy platform by finalizing the acquisition of the remaining 50% equity interest in ESJ and placing the Border Solar project into operation.
Also, as Jeff mentioned earlier, we're making great progress on Sempra Infrastructure and the associated series of transactions.
Just last week, we received the necessary regulatory approvals to launch the IEnova exchange offer.
As that process moves forward, it's important to note that it does not have a minimum requirement to close.
With that, please turn to the next slide for a short update on additional details of the pending sale announcement in Sempra Infrastructure.
With the announced sale of a 20% equity interest in Sempra Infrastructure to KKR, we've gained a strategic partner to help fund future growth.
The $3.37 billion in proceeds is expected to be used to fund growth at our US utilities and to strengthen our balance sheet, and also establishes an implied enterprise value of approximately $25.2 billion.
Equally important, we're pleased to be partnering with an investment firm that has a shared vision for growth in North America.
Lastly, we expect to close the transaction in the middle of this year, subject to customary closing conditions and certain approvals from third parties and regulatory agencies.
Please turn to the next slide, where I will review the financial results.
This compares to first quarter 2020 GAAP earnings of $760 million, or $2.53 per share.
On an adjusted basis, first quarter 2021 earnings were $900 million, or $2.95 per share.
This compares to our first quarter 2020 adjusted earnings of $741 million, or $2.47 per share.
Please turn to the next slide.
The variance in the first quarter 2021 adjusted earnings compared to the same period last year was affected by the following key items: $73 million of lower losses at parent and other, primarily due to net investment gains, lower net interest expense, lower retained operating costs and lower preferred dividends; $62 million of higher equity earnings from Cameron LNG JV, primarily due to Phase 1 commencing full commercial operations in August of 2020; $35 million of higher CPUC base operating margin at SoCalGas, net of operating expenses; and $30 million of higher equity earnings at Sempra Texas Utilities, primarily due to increased revenues from rate updates to reflect invested capital and customer growth and higher consumption due to weather.
This was partially offset by $56 million of lower earnings due to the sales of our Peruvian and Chilean businesses in April and June of 2020, respectively.
Please turn to the next slide.
We're pleased to report a successful quarter, both operationally and financially, and we are affirming our full-year 2021 adjusted earnings per share guidance range.
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simon property sees fy ffo per share $11.50 to $11.70.
sees fy ffo per share $11.50 to $11.70.
q4 ffo per share $3.09.
sees 2022 net income to be within a range of $5.90 to $6.10 per share and ffo within a range of $11.50 to $11.70 per share.
u.s. malls and premium outlets occupancy was 93.4% at december 31, 2021.
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The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; David Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call.
Reconciliations of these non-GAAP measures can be found in the Investor Relations area of our website.
Also, in the event our call was to incur technical difficulties, we'll try to resolve as quickly as possible.
And if the need arises, we'll post additional information to our IR website.
I'll begin by giving a quick overview of our accomplishments in 2020, and our strategic focus for 2021 and beyond.
Ross will follow with updates on transactions, and Glenn will close with our key metrics and guidance for 2021.
For all of us, 2020 was a year that will not soon be forgotten.
COVID, the political landscape, social unrest and the responses to these events; all converged in a way that will forever change our way of life.
2020 was also a year that demonstrated in volatile times the best companies are the ones that are able to withstand economic challenges, mitigate risk and take advantage of opportunities.
In the shopping center sector, this requires a strong balance sheet; a resilient, well-located portfolio; and a superior management team.
I'm happy to report that while we are not immune to the volatility of 2020, Kimco's open-air grocery-anchored shopping centers and mixed-use assets performed well.
And we have stayed strong, confident and positive about the opportunity in the coming year.
Our portfolio withstood all that the pandemic threw at us, as our 2020 vision strategy to reposition our portfolio will validate.
Our grocery-anchored essential services and mixed-used assets concentrated in the strongest markets in the U.S. proved resilient.
In 2020, we saw continued improvement in both the percentage of ABR coming from essential retailers and grocery-anchored centers.
Growing the portfolio from 77% of ABR from grocery-anchored properties to 85% plus remains a strategic focus across the organization.
We are encouraged by the progress and the increasing level of opportunities in the pipeline we are currently evaluating.
As part of these efforts, we are pleased to share today the upcoming opening of Amazon Fresh at our Marketplace at Factoria in Bellevue, Washington.
During the fourth quarter, we executed 92 new leases, totaling 406,000 square feet, which exceeded the amount achieved in the fourth quarter of 2019.
The true test of a portfolio's quality and durability is leasing and the ability to drive rent.
At that point, new leasing spreads remained positive, rising 6.8% during the fourth quarter.
We anticipate that our range between economic and physical occupancy will continue to widen, as a precursor to future cash flow growth.
With the help of our nationwide network of relationships, tenants, brokers and our in-house team, we are experiencing robust demand from our essential retailers, who continue to take advantage of the COVID surge that allows them to boost cash reserves, invest in existing stores and expand their store portfolio to better serve their customers.
We are also laser-focused on keeping our existing tenants and continue to do everything we can to help them overcome the pandemic and to be positioned [Indecipherable].
Our tenant assistance program or TAP helps small businesses navigate the new round of PPP funding.
After successfully helping our small shop tenants navigate the first round of PPP funding, we believe we have aligned with best-in-class partners to continue to aid our small business tenants in accessing capital at their most critical time of need.
Our strong balance sheet, well-positioned portfolio and tenant initiatives are all the result of our best-in-class team and approach.
Specifically, our leasing team is proactive in its efforts to work with current and prospective tenants.
And our finance, planning, technology, investor relations and legal teams effectively navigated numerous obstacles and kept us focused without skipping a beat.
So, where do we go from here?
First, our highest priority is leasing, leasing, leasing.
The good news is we have visible growth in the portfolio and meaningful free cash flow to fund our leasing strategy.
This has provided us the confidence to provide an outlook for 2021.
We anticipate the first half of the year to remain challenging, especially for those categories dramatically impacted by the pandemic-induced shutdowns.
It is worth highlighting that our team pushed this portfolio to all-time high occupancies pre-pandemic.
And we are determined to get back to that level and exceed it.
While anticipating the speed at which we will recover NOI is challenging, we do expect rents to hold up, especially in our well-located boxes that are in high demand from categories that include grocery, off price, home goods, home improvement, furniture, health, wellness, medical and beauty.
Interesting to note, we are starting to experience a rebound in both restaurant demand and value fitness retailers.
Finally, on our long-term strategic focus.
We continue to believe that streamlining the portfolio over the past five years will result in meaningful long-term value creation for our shareholders.
We are focused on the highest and best use of our real estate and believe the 80-20 rule applies to our assets and gives us tremendous flexibility and adaptability to create value in the future through our entitlement initiatives.
Specifically, 80% of our real estate consists of parking lots, that are not generating any revenue; and 20%, the single-storey buildings.
With our focus on clustering our assets in dense areas with significant barriers to entry, our assets are in an ideal position for growth as the surrounding areas have gone vertical.
Our entitlement team is sharing our ESG accomplishments with all local municipalities, as part of our efforts to show that we will be good stewards of their neighborhoods and that we want to work together to make sure our assets continue to evolve alongside the community.
We believe it is important that our approach to real estate evolve with changing circumstances, because that is exactly what our tenants are doing.
The best-in-class tenants are looking at their real estate differently.
And in many cases, their real estate team is now integrated in the entire supply chain.
Distribution, fulfillment, e-commerce and store decisions are all integrated on how to best service the customer.
The store which is optimized for distribution and fulfillment continues to shine as the most economic way to get goods and services into customers' hands.
Best Buy CEO, Corrie Barry, at the CES Conference, was very clear when she said, physical stores are expected to play a massive role in the company's fulfillment efforts.
Target also stated that more than 95% of sales are fulfilled by the stores.
I continue to share the words from our largest tenant; the role of the physical store is poised to become broader than ever with the location serving as fulfillment epicenters that quickly and easily get customers whenever they need.
Put another way, the convergence of retail and industrial is accelerating and we are positioning the Kimco portfolio to take advantage of this new utilization by partnering with our retailers to ensure that Kimco assets are optimized to gain market share and to make the stores of Kimco even more valuable.
In closing, Kimco's open-air grocery-anchored portfolio provides consumers a safe and easily accessible destination for goods and services.
Our diverse tenant mix and targeted geographic presence in the strongest growth markets, supported by our well-capitalized balance sheet and our entrepreneurial approach, positions us to unlock value for all stakeholders in the years to come.
As Conor discussed, 2020 was a challenging year.
But there are signs of life in the transactions market with deal flow starting to pick back up.
The overall transaction volumes from March through year-end were down close to 85%, but there were several late 2020 deals that showcased the general theme we have seen occurring.
The majority of transactions have been with the essential-based retail anchors, notably grocery.
For the most part, size is good.
But too big can result in the inability to finance the large or non-essential based tenancy, thus requiring a much bigger equity check to those deals.
For the smaller grocery assets, the financing community has remained resilient.
But again, rolling cash flow uncertainty for the chunkier assets have made those a bit more challenging.
Multiple grocery-anchored deals have transacted at sub 6% cap rates in Denver, South Florida, California, Washington DC, North Carolina and throughout the major primary and secondary markets in the U.S. While we are bullish on that asset side, which represents the core products within our portfolio, there is no shortage of capital chasing those deals.
As we discussed on last quarter's earnings call, the limited supply of attractively priced high-quality assets versus our current cost of capital has led us to tailor our investment program.
As it relates to our structured investment program, we made two small investments on a pair of very high-quality shopping centers during the quarter.
A $25 million mezzanine financing on a strong South Florida shopping center and a $10 million preferred equity investment on a densely located center in Queens, New York; both of which will generate an accretive return versus our cost of capital, with a chance to possibly acquire in the future.
Additionally, as we have done many times, recently, we were able to leverage our strong tenant relationships, particularly with those that are real estate rich, to uncover another unique investment that represents significant dislocation in value.
To that point, we completed a sale leaseback transaction in which we acquired two Rite Aid distribution centers in California for approximately $85 million.
These distribution centers service all 540 plus stores for the pharmacy chain in the State of California.
Rite Aid is releasing these back on a long-term basis with annual rent bumps and zero landlord obligation.
This investment will provide an attractive return with an IRR well in excess of our cost of capital and enhance the NAV for the company.
We continue to evaluate new opportunities selectively and believe our tenant relationships, flexible structuring and conviction in our product type puts us in an enviable position to capture upside in a period of dislocation.
This is an important long-term complement to our business with the one constant being our approach of owning high-quality assets at a positive spread to our current cost of capital, while mitigating potential downside risk.
Furthermore, we believe this approach will create a future pipeline of opportunistic acquisitions with a right of first refusal or right of first offer when our cost of capital returns.
With that, I will pass it along to Glenn for the financial summary.
With our fourth quarter operating results, we delivered further improvement compared to the sequential third quarter, with higher rent collections and improvement in credit loss.
For the fourth quarter 2020, NAREIT FFO was $133 million or $0.31 per diluted share as compared to $151.9 million or $0.36 per diluted share for the fourth quarter 2019.
The reduction was mainly due to rent abatements and increased credit loss of $21.2 million and lower net recovery from a $5.7 million.
This reduction was offset by lower preferred dividends of $3.1 million and a $7.2 million charge for the redemption of preferred stock in the fourth quarter of 2019.
Now, although not included in NAREIT FFO, during the fourth quarter 2020, we did record a $150.1 million unrealized gain on the mark-to-market of our marketable securities, which was primarily driven by the change in value of our $39.8 million shares of Albertsons stock.
Our stake in Albertsons is valued in excess of $650 million today.
For the full year 2020, NAREIT FFO was $503.7 million or $1.17 per diluted share as compared to $608.4 million or $1.44 per diluted share for the prior year.
The change was primarily due to increases in rent abatements, credit loss and straight line reserves, aggregating $105.8 million and the NOI impact of disposition activity during 2019 and 2020 totaling $24.7 million.
In addition, during 2020, we incurred a $7.5 million charge for the early extinguishment of debt.
These reductions were offset by lower financing costs of $15.7 million and an $18.5 million charge for the redemption of $575 million of preferred stock during 2019.
Although we continue to be impacted by the effects of the pandemic, our operating portfolio was showing signs of improvement, as Conor discussed earlier.
All our shopping centers remain open, and over 97% of our tenants are open and operating.
Collections have continued to improve.
We collected 92% of fourth quarter base rents, and this compares to third quarter collections of 90%.
The furloughs granted during the fourth quarter were just under 2%, down from 5% during the third quarter.
At year-end 2020, 8.2% of our annual base rents were from tenants on a cash basis of accounting.
And 50% of that has been collected.
As of year-end, our total uncollectible reserve was $80.1 million or 46% of our total pro rata share of outstanding accounts receivable.
Now, turning to the balance sheet.
We finished the fourth quarter with consolidated net debt to EBITDA of 7.1 times.
And on a look-through basis, including pro rata share of JV debt and preferred stock outstanding, the level was 7.9 times.
This represents further progress from the 7.6 times and 8.5 times levels reported last quarter, with the improvement attributable to lower credit loss.
On a pro forma basis, if our Albertsons investment was converted to cash, these metrics would improve by a full turn to 6.1 times and 7 times respectively.
Levels better than we began last year.
We ended 2020 with a strong liquidity position, comprised of over $290 million in cash and $2 billion available on our untapped revolving credit facility.
We have only $140 million of consolidated mortgage debt maturing during 2021.
And our next bond does not mature until November 2022.
Our consolidated weighted average debt maturity profile stood at 10.9 years, one of the longest in the REIT industry.
In addition, our unsecured bond credit spreads have improved significantly.
By way of example, our 10-year green bond issued in July 2020 at 210 basis points over the 10-year treasury is currently trading in the area of 90 basis points over treasury.
This spread is the lowest among all our peers.
Regarding our common dividend, we paid a fourth quarter 2020 common dividend of $0.16 per share.
As such, we expect our Board of Directors to declare the common dividend during the first quarter of 2021, reflecting a more normalized level that at least equals our expected 2021 taxable income.
While the pandemic and its effects on certain of our tenants continues, we are comfortable establishing NAREIT FFO per share guidance for 2021.
Our initial NAREIT FFO per share guidance range is $1.18 to $1.24.
This is also a wider range than we have historically provided, taking into account the potential variability of credit loss levels due to the ongoing pandemic.
Other assumptions include flat to modestly higher corporate financing costs and G&A expenses, as well as minimal net neutral acquisition and disposition activity.
This 2021 guidance range assumes no transactional income or expense, no monetization of our Albertsons investment and no additional common equity issued.
Lastly, keep in mind that our 2021 first quarter results will be relative to a pre-COVID first quarter in 2020.
Notwithstanding the expected optics of the first quarter results, our NAREIT FFO per share guidance range of $1.18 to $1.24 reflects growth over 2020 at both the low and high end of the range.
Before we start the Q&A, I just want to let you know that the line up for people in the queue is very deep.
So, in order to make this efficient, again, just a reminder, that you may ask a question and then have one follow-up.
With that, you can take the first caller.
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compname says q3 ffo per share $0.25.
q3 ffo per share $0.25.
collected approximately 89% of base rents for q3 highlighted by a 91% collection rate for month of september.
collected 90% of october's rents.
qtrly net loss $0.10 per diluted share.
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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.
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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.
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It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations homepage.
Please see the Events section of our Investor Relations homepage for a full list.
Our actual results may differ significantly from the matters discussed today.
When you hear us say on a comparable basis that means excluding the impact of FX, net M&A and other noncomparable items.
When you hear us say adjusted, that means excluding noncomparable items.
When you hear us say organic, that means excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market.
When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus this market.
We encourage you to follow along with these slides during our discussion.
Let's start on slide five.
We're very pleased to share our results for the third quarter and provide an overall company update.
The third quarter operating environment was very challenged, both from an absolute volume perspective and in light of the production volatility we experienced throughout this quarter.
Overall, we're doing a solid job managing the near-term environment while securing our future growth.
With just over $3.4 billion in sales, our third quarter revenue decreased by about 7% organically.
Excluding the year-over-year growth in our aftermarket business, our OEM business declined 9% compared to the 22% decline in our market during the quarter as we benefited from new business and favorable mix.
Our margin and cash flow performance in the quarter was impacted by the volatile production environment, which put pressure on near-term cost containment and drove excess inventory within our plans.
Even with those challenges, we're still on track to delivering a near double-digit operating margin for the full year.
And we still expect full year free cash flow to be among the strongest results in our history.
At the same time, we're very focused on ensuring that we secure our future.
To that end, this past quarter, we won multiple new product awards for electric vehicles, which I will speak about in a few moments.
As a result of these awards, along with wins in prior quarters, we are well on our way to achieving the organic electric vehicle 2025 revenue targets underlying our project CHARGING FORWARD.
In fact, we estimate that more than 90% of that target is already booked.
The market environment continues to be extremely volatile with the risk of future production disruption arising from ongoing supply constraints.
With that in mind, on a full year basis, we now expect our global weighted light vehicle and commercial vehicle markets to be down 2.5% to flat year-over-year.
This is down materially from our previous assumption, reflecting both the third quarter decline and our most recent expectations for the fourth quarter.
As you can see from the line chart showing the different scenario, we do expect light vehicle industry production to improve sequentially Q3 to Q4.
Underlying customer demand remains robust.
However, just like we saw in the third quarter, industry production levels will be dependent on the varying impact of ongoing supply constraints and on the potential impact on our customer mix.
Overall, we expect the challenging environment to continue throughout the remainder of 2021.
And at this point, we think it will carry on well into 2022.
As we manage this challenging environment, we're also continuing to focus on securing our mid- to long-term opportunities in electric vehicle.
And we did just that during this quarter, securing several awards for electric vehicle programs.
I'm very proud of the teams.
Two of those awards are highlighted on slide seven.
First, we secured a major award for a North American inverter with a global OEM expected to launch in 2024.
This high-voltage silicon carbide program is our largest inverter win to date.
This business award also marks the company's first major win in the North American market.
It will also be used in multiple battery electric vehicle platforms, including pass cars and trucks.
Our product performance, scalability, cost competitiveness, size optimization and global manufacturing footprint, all contributed to securing this business win.
Additionally, we announced a new 800-volt silicon carbide inverter award with a German OEM expected to launch in early 2025.
This award expands our existing 400-volt inverter business with this same German customer by now adding 800-volt products.
This new technology offers enhanced power density, proven performance and long-term reliability.
Given these two new and significant inverter awards, I would like to give you an update on our positioning in the inverter market on slide eight.
We've had tremendous success establishing ourselves in this market.
When I think about BorgWarner's competitive advantages in power electronics, it's driven by, first, the breadth of our product portfolio.
This allows us to be faster and more effective at bringing products to market.
Second, our ability to innovate, like with our Viper power module technology.
We can continue our innovations in part due to our vertical integration strategy.
We have in-house capabilities for power modules, integrated circuit development and software, which we feel are an advantage in the marketplace.
And finally, I think the last driver is our ability to leverage the electronic scale that we already have across our company, and especially within our engine control units.
The result is that we've secured significant new business award.
And as you can see by the chart on the slide, we expect the business to grow rapidly from about 500,000 units in 2021 to 2.5 million units by 2025, representing about 50% CAGR.
We expect this volume to drive total inverter sales of $1.7 billion by 2025 -- in 2025, sorry.
And remember, these programs are already booked.
We continue to pursue additional inverter opportunities with production volumes in 2025 and beyond, and would expect to secure more awards in the coming quarters.
And one more thing, with the business we've already won, we believe that we are positioned to be the number one noncaptive inverter producer globally by 2025.
As we look at our year-over-year revenue walk for Q3, we begin with pro forma 2020 revenue of just under $3.6 billion, which includes a little over $1 billion of revenue from Delphi Technologies.
Next, you can see that foreign currencies increased revenue by about 2%.
Then our organic revenue decline year-over-year was approximately 7% or almost 9%, excluding growth in our aftermarket segment.
That compares to a 22% decrease in weighted average market production, which suggests that our outgrowth in the quarter was more than 13%.
Now with that said, the significant volatility in production schedules and the varying levels of supply disruptions among our customers are continuing to make it difficult to draw conclusions from the quarterly outgrowth figures.
Nonetheless, we were pleased that we delivered strong relative revenue performance in all three major markets despite the overall decline in revenue.
Regionally, in Europe, we outperformed, driven by new business in small gasoline turbochargers and fuel injection products.
In China, we also outperformed the market, driven by the resilience in the former Delphi businesses.
And in North America, we outperformed the market, primarily due to new business as well as vehicle and customer mix.
The sum of all these was just over $3.4 billion of revenue in Q3.
Now let's look at our earnings and cash flow performance on slide 10.
Our third quarter adjusted operating income was $311 million compared to pro forma operating income of $396 million last year.
This yielded an adjusted operating margin of 9.1%.
On a comparable basis, excluding the impact of foreign exchange and the impact of AKASOL, adjusted operating income decreased $79 million on $261 million of lower sales.
That translates to a decremental margin of approximately 30%.
This higher than typical decremental margin was primarily driven by $24 million of higher commodity costs, net of customer recoveries.
Excluding these higher commodity costs, our year-over-year decremental margin was approximately 19%, which we view as a sign that we're effectively managing our operating cost performance in spite of the supply chain disruptions.
Moving on to cash flow.
We consumed $10 million of free cash flow during the third quarter.
This was worse than our expectations going into the quarter due to lower-than-expected operating income as well as higher-than-planned inventories.
Fundamentally, when production declines this rapidly and expectedly, it's difficult to get inventory out of the system in the near term.
We expect inventory to improve in the coming quarters once we see less volatility in production orders, which will give us the ability to rightsize our supply chain demands accordingly.
Now let's talk about our full year financial outlook on slide 11.
We now expect our end markets to be down 2.5% to flat for the year.
Next, we expect to drive market outgrowth for the full year of approximately 1,000 basis points.
This contemplates the strong performance to date with a sequential step down in the fourth quarter as we expect to return to more normalized year-over-year outgrowth in Q4.
Based on these assumptions, we expect our 2021 organic revenue to increase approximately 8.5% to 11% relative to 2020 pro forma revenue.
Then adding an expected $425 million benefit from stronger foreign currencies and an expected $70 million related to the acquisition of AKASOL, we're projecting total 2021 revenue to be in the range of $14.4 billion to $14.7 billion.
This wide revenue guidance range reflects the continued production uncertainty we have in the fourth quarter.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 9.6% to 10% compared to a pro forma 2020 margin of 8.3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi-related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance continues to include $100 million to $105 million of incremental benefit in 2021, the same as our prior guidance.
Based on this revenue and margin outlook, we're now expecting full year adjusted earnings per share of $3.65 to $3.95 per diluted share.
And finally, we expect that we'll deliver free cash flow in the range of $600 million to $700 million for the full year.
The reduction versus our prior guidance is a little larger than our projected decline in operating income as we expect inventory to remain higher than usual through the fourth quarter.
Then once we head into 2022, we expect to start to see reductions in inventory toward more normalized levels.
That's our 2021 outlook.
Given the uncertain outlook for the remainder of 2021, we felt it appropriate to provide you with some of our initial thoughts on some key financial drivers and strategic priorities heading into 2022.
Starting with our top line.
As of right now, we do expect to see supply chain challenges, particularly with respect to semiconductors, continue well into 2022.
Ultimately, where full year 2022 industry production shakes out will depend on the scope and duration of these challenges.
But at this point, we would still expect a modest level of growth in industry production next year.
Next, we expect to deliver outgrowth in 2022.
However, we're currently assessing the extent to which the much stronger-than-expected outgrowth in 2021 will result in any headwind to our outgrowth next year.
From a cost perspective, we expect incremental Delphi-related cost synergies in the $40 million to $45 million range, and we also expect incremental restructuring savings of $40 million to $50 million.
These combined savings are expected to largely offset our estimated increase in R&D spending of approximately $100 million.
We're planning for this significant increase in R&D spending in order to support the new business wins we've achieved to date and to pursue additional EV opportunities consistent with our CHARGING FORWARD organic growth objectives.
And finally, we're building our plans based on the assumption that we'll see sustained levels of commodity inflation continuing into 2022, which means we expect that to create a year-over-year headwind during the first and second quarters.
That's the near term.
But while we're managing the near term, we're also focused on securing our long-term future.
So consistent with our CHARGING FORWARD initiative, we have three key strategic priorities heading into next year.
First, we plan to continue to pursue and secure additional electric vehicle awards for both components and systems.
Second, we intend to execute additional M&A to accelerate our positioning in electric vehicles.
And finally, we expect to complete the disposition of approximately $1 billion in combustion revenue.
Ultimately, it's the pillars of near-term execution, securing future profitable growth and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders.
I'm now really excited to share an update of our progress toward our project CHARGING FORWARD targets on slide 13.
And as evidenced by our program announcements over the past several quarters, including the two wins that I alluded to earlier, we're making significant progress on the organic growth in electric vehicles underlying our CHARGING FORWARD plan.
Or to put it another way, with this booked business, we're more than 90% of the way toward our $2.5 billion organic revenue target we gave you back in March.
The breakdown of these programs is highlighted on the chart to the left.
We're excited about the mix of both components and system awards.
Plus we expect to add to this booked business portfolio over the next quarters by securing additional EV awards with 2025 revenues.
And then we will supplement this organically developed revenue with EV revenues from AKASOL and any future acquisitions.
The takeaway from today is this.
It's a challenging near-term environment.
Once again, BorgWarner is successfully managing the present and delivering solid financial results.
At the same time, we're delivering our future.
We're doing this by establishing product leadership and winning new business in the world of electrification.
And with these wins, we are successfully executing on our long-term strategy, CHARGING FORWARD, which will deliver value to our shareholders long into the future.
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sees fy sales $14.8 billion to $15.4 billion.
for full-year 2021, net sales are expected to be in range of $14.8 billion to $15.4 billion.
borgwarner - full year 2021 free cash flow is expected to be in range of $800 million to $900 million.
borgwarner - expects its weighted light and commercial vehicle markets to increase in range of approximately 9% to 12% in 2021.
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These statements include expectations and assumptions regarding the Partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic.
Actual results could differ materially and the Partnership undertakes no obligation to update these statements based on subsequent events.
During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted.
For the fourth quarter of 2020, the Partnership recorded net income of $83 million, adjusted EBITDA was $159 million compared to $168 million in the fourth quarter of 2019.
Volumes of 1.8 billion gallons were relatively unchanged from the third quarter, but remain down about 12% from levels seen a year ago.
Fuel margin was $0.092 per gallon and included approximately $8 million of one-time write-offs associated with prior period fuel tax and inventory-related items.
Fourth quarter margin also included approximately $9 million of unfavorability related to inventory valuation and associated hedges.
For the full-year 2020, the impact of this inventory valuation and hedging activity resulted in approximately $2 million of margin favorability.
Karl will elaborate further on our fuel margin in his remarks.
Fourth quarter distributable cash flow, as adjusted, was $97 million, yielding a coverage ratio of 1.1 times.
We ended the full-year 2020 with the coverage ratio of 1.5 times.
On January 28, we declared an $0.8255 per unit distribution, the same as last quarter.
The proven resiliency of our business and history of delivering results has allowed us to maintain a stable and secure distribution for our unitholders.
We continued to deliver strong results in 2020, despite the challenges of the COVID pandemic and fully expect to continue building on the strong performance in 2021 and beyond.
First off, I'd like to highlight some of our accomplishments for 2020 before walking through the 2021 guidance that we unveiled in December.
Our full-year 2020 accomplishments include the following: adjusted EBITDA of $739 million, a record for SUN and up 11% from 2019 levels; distributable cash flow, as adjusted, was $517 million, also a record for SUN and up 14% from 2019.
We improved our already strong coverage ratio to 1.5 times, up from 1.3 times in both 2018 and 2019.
Our cost reduction initiatives resulted in total operating expenses of $448 million, which was a reduction of 11% from 2019 levels.
Our fuel margin increased $0.018 per gallon from 2019 to $0.119 per gallon.
We successfully refinanced our 4.875% Senior Notes due 2023, with new 4.5% Senior Notes due 2029, thereby lowering interest expense, while significantly expanding the weighted average maturity of our debt.
For reference, our nearest Senior Note debt maturity is now the 2026 Senior Notes.
And finally, we improved our leverage to 4.18 times, or 4.1 times when adjusted for total cash on hand from 4.6 times at the end of 2019.
Our liquidity remains strong, with an undrawn $1.5 billion revolving credit facility and $97 million in cash at year-end.
With all these accomplishments as a backdrop, we enter 2021 poised to continue to deliver strong results.
In December, we provided guidance for 2021 for adjusted EBITDA of between $725 million and $765 million.
Underpinning this guidance are the following: fuel volumes in a range of 7.25 billion to 7.75 billion gallons; annual fuel margin between $0.11 per gallon and $0.12 per gallon; total operating expenses of between $440 million and $450 million; maintenance capital of $45 million; and growth capital of at least $120 million.
Free cash flow generating capability of this business allows us to focus on the pillars of our capital allocation strategy.
First, to maintain a stable and secure distribution for our unitholders.
Second, to protect our balance sheet through debt paydown when prudent.
And third, to pursue disciplined investment in our growth opportunities.
We will be financially disciplined with the target coverage ratio of 1.4 times, which is up from our prior target of 1.2 times and a target leverage ratio of 4 times, which is down from our prior target of 4.5 times to 4.75 times.
I'd like to conclude my remarks by stating that Sunoco established a strong financial footing early on in 2020 and this continues to carry through as we enter 2021.
Scott and Dylan walk you through the numbers for the quarter and the full year.
I want to take a few minutes and give you a sense of how we view these results and what kind of insight they give us into 2021.
Let's start by talking about volume.
On the surface, our fourth quarter results were very similar to the third quarter.
There are a few additional factors though that we view as promising.
First, during our last conference call, I shared the volumes were off around 12% for October.
When we moved into November and December, we all experienced some additional restrictions on travel and business activity, with the increase in COVID cases across the country.
Even with those additional restrictions, our volumes held and we finished the quarter at about the same level relative to the prior year.
The second factor is around J.C. Nolan volumes.
Last quarter, I explained that our J.C. Nolan diesel volumes were off much more than the rest of our business.
We were also lapping the start-up of the pipeline in the third quarter of 2019.
In the fourth quarter, this was an even bigger impact, since we were comparing against a full period of pipeline operation.
Year-over-year, J.C. Nolan volume reductions accounted for 3% of total volume for the fourth quarter.
So that would put our volumes down only 9%, if you remove the impact of J.C. Nolan.
My final thought on volumes provides some insight into one of the reasons for the solid performance, which is our ability to add new customers.
Starting last summer, we started ramping backup our growth focus on signing up new customers, and we're starting to see that in our Q4 numbers, and that will carry forward into 2021.
The bottom line is that we see our volumes continue to grow through the rest of this year, both from overall economic recovery and our own growth efforts.
Moving over to margins, the market continues to support stronger margins.
Let me give you some perspective on our reported margins for the fourth quarter.
First, we saw a challenging market environment with a fairly steady and relentless claim in RBOB prices for most of the quarter.
If you look back at our history, that would have likely resulted in margins close to $0.09 a gallon, maybe even dipping a little lower.
Fast forward to the post-COVID environment and the floor is higher, which is what our fourth quarter results look like after you account for the one-time adjustments and inventory timing impacts as Scott mentioned.
As we have stated before, the higher breakeven environment for many industry participants, both in the wholesale and retail channels, helps support the higher margin floor.
As we look to the first quarter, we've continued to see a steady rise in RBOB prices, putting pressure on margins.
And we still feel like a floor in the $0.095 to $0.10 range is reasonable for these tough market environments, excluding one-time issues in the quarter.
We already discussed some one-time items for the fourth quarter, and we expect the 7-Eleven catch-up payment in the first quarter that will provide a boost to our base margins.
Finally, I want to provide some more color around our expense performance.
For the last few years, we've been extremely focused on looking hard at what it takes to efficiently run our business.
When COVID hit, we took an even deeper look and made some tough choices.
Our expense performance in the third and fourth quarters show that we are able to operate at these levels.
There will always be some fluctuations in timing, and there were a few favorable one-time impacts in the fourth quarter that brought the expenses down even a little further than our run rate.
But the takeaway is that we have continued to deliver on our expense commitments, and are very comfortable with our guidance for this year.
We continue to add volume to our network.
Margins are solid, and our expense focus falls directly to the bottom line.
We delivered very strong results in 2020.
We came into 2020 financially healthy, and we finished the year stronger than where we started.
While countless companies had significant financial difficulties, our 2020 results demonstrate the resiliency of our business model.
Last year, we delivered record EBITDA and DCF.
Over the last three years, we have steadily improved our coverage, while at the same time, decreasing our leverage ratio.
Looking forward, we expect to have another good year.
We're about a month and a half into the New Year and both fuel volume and RBOB costs continue to rise.
Since early November, both gasoline and diesel prices has steadily increased.
Over that time period, New York Harbor RBOB has gone up around $0.75 per gallon.
As you know, this is not the most conducive margin environment.
With that said, there are other important factors to consider.
Industry break-evens are higher.
We're seeing this play out, as the market continues to pass on price increases to the rack and to the street.
However, the steady constant rise in costs does create a time lag, resulting in short-term margin pressure.
Taking a step back, there will always be some quarters where the commodity environment provides noticeable headwind.
But there will also be quarters where the commodity environment will be highly supportive of wide margins.
History has shown that run-ups in prices are followed by periods of more volatile or falling prices that provide margin tailwinds.
When you look at our business beyond a quarter-by-quarter basis, we expect to have quality long-term results.
On the volume side, we're seeing positive increases in volume, excluding material regional weather events.
We expect this to continue over the course of this year.
Finally, you can expect us to deliver on expenses.
Moving on to growth, we'll continue to grow our field distribution business.
The opportunity set remains strong, and we expect these organic and M&A opportunities to remain for the foreseeable future.
On the midstream side, we remain patient looking for the right opportunity at the right price.
We'll continue to look for highly synergistic opportunities, while remaining financially disciplined.
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partnership sold 1.8 billion gallons in q4 of 2020, down 12% from q4 of 2019.
partnership expects full year 2021 adjusted ebitda to be between $725 and $765 million.
expects 2021 growth capital expenditures of at least $120 million.
expects 2021 fuel volumes to be between 7.25 and 7.75 billion gallons.
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Due to the material impact of COVID-19 on our business in fiscal 2020, we will also include comparisons to fiscal 2019 results.
We are extremely pleased to be reporting an incredibly strong start to fiscal 2021.
We took decisive actions at the start of the pandemic to protect our people, our brands and our liquidity.
This combined with our focus over the past year on delivering happiness to our customers and investing in enhanced digital, marketing and store capabilities, as well as in our bars and restaurants, have strengthened our foundation for profitable growth.
As consumers have become increasingly more comfortable returning to physical shopping, our overall engagement levels have greatly accelerated, leading to strong momentum across our entire portfolio of brands.
Given conditions last year, it is not surprising that we were able to post strong sales gains across all brands and all channels of distribution during the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020.
What's much more impressive about our first quarter 2021 performance is how it compares to the first quarter of 2019.
We believe that the comparison to 2019 is much more informative for most purposes than comparing to 2020.
Accordingly, during our discussion today, we will focus on the positive traction we have made toward returning to and even exceeding our 2019 levels of performance.
First quarter sales came in at $266 million compared to $282 million in fiscal 2019 and versus our guidance range of $220 million to $240 million.
It is worth noting that $14 million of the $16 million sales decrease from the first quarter of fiscal 2019 is due to lower sales in Lanier Apparel, which, as you know, we are in the process of exiting.
On an adjusted basis, earnings per share increased to a $1.89 compared to our earnings of a $1.30 in the first quarter of fiscal 2019.
Scott will provide more detail in a few minutes, but these results were driven by very strong performance in our e-commerce businesses and outstanding gross margins.
Our bar and restaurant business also performed very nicely during the quarter.
In our bricks and mortar stores, we generally saw a sequential improvement in traffic and sales in the quarter with regions in Florida, the Southeast and Texas showing the most strength while the Mid-Atlantic, the Northeast and the Midwest are recovering at a somewhat slower pace.
There is no question that we are benefiting from some pent-up demand so far this spring and summer and the alignment of our brands' focus on products related to travel, vacation and social occasions with the consumers' desire to travel and reengage socially.
We expect this to continue as more regions of the country begin to normalize.
That said, we believe that the results we have seen thus far this year and that we are projecting for the balance of the year also demonstrate the value of staying true to our brands during the challenges that we faced last year.
Our commitment to the happy, upbeat and optimistic messages of our brands and delivering those messages to our consumers through our products and services is paying off handsomely as the world reengages.
In addition, we are seeing positive returns on the investments we have made and continue to make in enhancing our brands' creative content in improving our omni-channel customer service and continuing to hone our digital marketing capabilities, and in our stores, bars and restaurants.
In our biggest brand, Tommy Bahama, we are anchored in the relaxed island lifestyle.
We deliver this lifestyle to our guests through our amazing products, our wonderful stores and e-commerce website, and very importantly through our bars and restaurants.
By staying true to our Live the Island Life brand message and making the types of investments outlined above, we were able to deliver outstanding first quarter results.
Sales overall came close to 2019 levels, driven by healthy gains in e-commerce and restaurants while stores in the wholesale continued to improve sequentially.
Very importantly, increased full-price selling and stronger initial IMUs, coupled with excellent expense control, helped contribute to a marked improvement in gross margin, operating margin and a 36% increase in operating income over first quarter of 2019.
We are delighted with the margins we achieved for the quarter.
Finally, we were pleased to see that while performance in our men's business was strong, our women's business at Tommy Bahama was even stronger.
We are honored to have the dedicated cadre of true Tommy Bahama fans that comprise our very loyal customer base.
That said, we believe there is room on the island to delight even more customers.
Through the investments we are making and the priorities we have established, we are intent on expanding our customer reach while continuing to serve our loyal guests.
Staying anchored to its resort chic lifestyle and as we say being the sunshine served Lilly Pulitzer very well during the first quarter.
Lilly's product priority for spring '21 was feel-good fashion with a focus on the happy color and print, easy chic comfortable pieces and a resort state of mind.
This focus together with the investments that we have made in enhancing our brand creative and enhancing our store and digital capabilities paid off in strong first quarter results.
We continue to see strong growth from e-commerce while our stores in the wholesale business continue to improve as consumers feel increasingly comfortable engaging in the physical world.
In total, first quarter '21 sales exceeded first quarter 2019 sales, and operating margin came in at an impressive 27% as compared to 21% in 2019.
Our Luxletic and lounge product continued to drive growth and we saw a healthy rebound in our dress business as for social calendar begins to fill up.
At the same time, our golf and tennis collections have also been bright spots and the consumer is showing strong renewed interest in swim as she thinks about travel and vacation this summer.
Our recent results demonstrate that we have the product she wants and our brand message is resonating with her.
We look forward to continuing to drive a strong business through the balance of the year.
Our smaller brands, Southern Tide, The Beaufort Bonnet Company and Duck Head, also had a great first quarter, all posting meaningful sales gains above first quarter 2019 levels.
All three are poised to contribute to our profitability this year.
We are very pleased with our first quarter results and are excited about the balance of the year.
Scott will provide more details in our guidance momentarily, but I will say that we do expect to have a strong year, particularly in terms of profitability.
Our enthusiasm is based on both external factors as well as the internal priorities that we have been focusing on for the last year.
I'll start with the external factors.
As the summer progresses, we expect some of the regions that have been slower to recover for us, namely the Mid-Atlantic, the Northeast and the Midwest, to pick up momentum.
We also believe that consumers will continue to have a high degree of interest in travel, vacation and social events through the year.
Finally, after a long pandemic, consumers appreciate the highly differentiated happy, colorful, upbeat nature of our brands and products more than ever.
All of these external factors portend a strong 2021.
We are also excited about the benefits we are seeing as the result of our internal priorities.
There are many, but I will highlight five here.
First, in our brand message, we are taking care to ensure that our messages are both true to our core brand values and relevant for today's consumer and marketplace.
Second, we have realigned our creative teams and are enhancing our creative content to make sure it is delivering the full impact of our powerful brand messages.
Third, as part of our effort to enhance our digital capabilities, we are improving our ability to capture and analyze customer data in a way that respects her privacy but also puts us in position to serve her in a better and more personalized way.
It also helps us identify and reach new audiences of potential customers.
Fourth, we are honing our skills in measuring the effectiveness of and optimizing the various channels, many of them digital media that we used to reach both existing and potential new customers.
Fifth, we continue to enhance our store order fulfillment capabilities.
This allows us to use inventory located anywhere in our footprint to satisfy demand from anywhere.
The implications for inventory efficiency sell-through rates and ultimately gross margin are huge.
We believe the combination of the positive external factors as well as the benefits from our work on our internal priorities gives us ample reason to be bullish on 2021.
In closing, please allow me to express my sincere appreciation for our wonderful and loyal customers and for our world-class employees, an incredible group of women and men who worked harder than ever over the last year and a half to deliver happiness to those customers.
As Tom just mentioned, fiscal 2021 is off to a great start with record earnings in the first quarter.
I'll walk you through how we got there.
Sales were stronger than expected, and excluding the impact of the exit of the Lanier Apparel business were comparable to 2019 levels.
Our full-price e-commerce channel was 55% higher than in 2019, with significant growth over 2019 in all of our branded businesses.
Our retail store performance reflects the significant regional differences in the pace of recovery.
We saw real strength in the Southeast and Southwest, particularly in Florida, where retail sales achieved 2019 levels.
However, we are experiencing a much slower recovery in other parts of the country where sales levels in the Northeast, Mid-Atlantic and Midwest while improving versus Q4, were still over 30% lower than in 2019.
Overall, our retail sales were 16% lower than in 2019.
We continue to see improvement so far in the second quarter and expect that improvement to continue as restrictions lift and as summer arrives in these areas.
Our restaurants benefited from the addition of five Marlin Bars and the strong recovery in certain regions with a sales increase of 7% compared to 2019.
All restaurants are now open except for New York, which we plan to reopen this fall.
We are particularly proud of the work we have done to improve our gross margin, which on an adjusted basis expanded 520 basis points over 2019 to 64%.
As demand remained high, more of our sales in the first quarter were at full price than in the first quarter of 2019.
Gross margin also benefited from our focus and investments in our direct-to-consumer businesses and lower sales in Lanier Apparel, which has resulted in a meaningful shift in our sales mix to these higher margin channels of distribution.
In the first quarter of 2021, our direct business was 72% of revenue compared to 64% in the first quarter of 2019.
We have also increased our IMUs by reducing product cost and selectively increasing prices.
SG&A modest -- decreased modestly from 2019 levels with lower employment costs, occupancy costs, variable expenses and travel costs, partially offset by increased performance-based incentive compensation.
Putting it altogether, in the first quarter, our consolidated adjusted operating margin expanded 410 basis points over 2019 to 15%, with operating margin expansion in all operating groups.
Our business is supported by our strong balance sheet and cash flow from operations.
Here are some highlights.
On a FIFO basis, inventory decreased 29% compared to the end of the first quarter of 2020.
Excluding Lanier Apparel, which we are exiting, FIFO inventory decreased 22% compared to the end of the first quarter of 2020.
Tommy Bahama, Lilly Pulitzer and Southern Tide each decreased inventory levels significantly year-over-year with conservative purchases of seasonal inventory and higher-than-expected first quarter sales.
Ongoing enhancements to enterprise order management systems are also contributing to a more efficient use of inventory.
On a LIFO basis, inventory decreased 36% compared to the end of the first quarter of 2020.
Supply chain challenges, including higher transit cost and production and transit delays, are ongoing.
However, our emphasis on direct-to-consumer channels gives us more flexibility on product release dates.
Our liquidity position is strong with $92 million of cash and no debt at the end of the first quarter.
In the first quarter of 2021, cash provided by operating activities was $41 million compared to cash used in operating activities of $46 million in the first quarter of 2020.
Turning to our outlook.
The positive momentum we experienced in the first quarter has continued, and we expect to deliver strong revenue and earnings in the second quarter.
Sales in the second quarter expected to be in a range of $300 million to $310 million compared to $302 million in the second quarter of 2019.
Impacting sales in the second quarter is the wind down of our Lanier Apparel business.
We estimate Lanier Apparel revenue to decline to approximately $5 million in the second quarter of fiscal 2021 compared to $20 million in the second quarter of fiscal 2019.
Strong full-price sales, a shift of our sales mix toward our brands and our direct-to-consumer channels, and higher IMUs in the second quarter are expected to contribute to a meaningful increase in consolidated gross margin over 2019.
On an adjusted basis, earnings per share for the second quarter of 2021 are expected to be in a range of $2.15 to $2.35 compared to $1.84 per share in the second quarter of 2019.
Our third quarter is historically our smallest sales and earnings quarter due to the seasonality of our brands.
We also cleared end-of-season inventory in both the third and fourth quarters with the highly profitable Lilly Pulitzer after party sales as the most notable of our events.
High sell-throughs in the first quarter and elevated sales plan -- levels planned in the second quarter are expected to reduce the availability of excess inventory for these clearance events.
As a result of lower planned revenue from clearance events in the third quarter and the impact of the Lanier Apparel exit, we are projecting an adjusted loss in the quarter in a range of $0.20 per share to $0.35 per share compared to adjusted earnings of $0.10 per share in the third quarter of 2019.
With our better-than-expected first quarter results, combined with our projection for a strong finish to the year driven by continued strength planned in our full-price e-commerce channel, retail and restaurant channels of distribution, we are raising our previously issued guidance for 2021.
We now expect sales in the range of $1.015 billion to $1.05 billion compared to net sales of $1.12 billion in 2019.
For the full year, Lanier Apparel sales are expected to be approximately $20 million or $75 million lower than 2019, with no Lanier comparable sales planned in the fourth quarter.
Adjusted earnings per share for 2021 are expected to exceed 2019 levels, benefiting from meaningful gross margin expansion.
SG&A for the full year is expected to be comparable with 2019, with lower employment cost, occupancy cost and travel cost partially offset by increased performance-based incentive compensation and investments in marketing, including top-of-the-funnel expenditures.
We now expect adjusted earnings in a range of $4.85 per share to $5.15 per share compared to $4.32 per share in 2019.
We plan to continue investing in our growth opportunities, primarily in information technology initiatives such as the redesign and relaunch of the Lilly Pulitzer mobile app and additional development of digital marketing and customer service enhancements.
We also plan to open new retail stores and a new Marlin Bar at Town Square in Las Vegas, which will replace our full service restaurant in the center.
In 2021, capital expenditures for the full year is expected to be approximately $35 million comparable to 2019 levels.
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sees fy 2021 gaap earnings per share $4.55 to $4.85.
q1 adjusted earnings per share $1.89.
sees fy adjusted earnings per share $4.85 to $5.15.
sees fy sales $1.015 billion to $1.05 billion.
q1 sales $266 million versus refinitiv ibes estimate of $233.1 million.
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We'll begin today with a brief strategic overview from Randy, Mike will review the title business, Chris will review F&G, and Tony will finish with a review of the financial highlights.
There is a significant uncertainty about the duration and extent of the impact of this pandemic.
Such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 p.m. Eastern Time today until March 4.
Our primary focus has been and continues to be the health and well-being of our employees while maintaining our business continuity and ensuring the needs of our customers are consistently met.
For the fourth quarter, we generated record adjusted pre-tax title earnings of $624 million compared with $355 million in the year ago quarter and a record 22.7% adjusted pre-tax title margin compared with 16.3% in the fourth quarter of 2019.
While we are very pleased with our strong financial results, we also made significant headway on our technology investments in our title business, having recently announced both the inHere platform and subsequently Close inHere.
Mike will go into more detail on this, but as we continue to drive the innovation of the title industry, we believe our significant national footprint will prove to be a real plus as further adoption of our client-facing and title automation technology expands our competitive advantage.
Turning to our acquisition of FGL Holdings.
F&G continues to execute on its growth strategy, generating retail sales growth of over 40% in the fourth quarter.
The credit rating upgrade that F&G has enjoyed as a result of the acquisition by FNF has opened additional large market opportunities.
F&G is gaining momentum in the newly entered bank and broker-dealer channel, generating $500 million of channel sales since our launch on July 1.
Additional distribution channels, including institutional products, will continue to be a strategic area of focus for F&G in 2021, including the pension risk transfer marketing.
Chris will go into more detail on F&G's fourth quarter results shortly.
Looking forward, our priority continues to be focused on long-term value creation for our shareholders through our diligent capital allocation program, while also remaining focused on investing in our business to sustain growth.
Last week, we announced a quarterly cash dividend of $0.36 per share, reflecting the fourth quarter dividend increase of 9%.
Additionally, in October, we announced a 12-month $500 million share repurchase target.
And since that announcement, we have repurchased 3.8 million shares for approximately $140 million.
And for 2020 in total, we repurchased 7.5 million shares for approximately $244 million.
As Randy mentioned, the fourth quarter was a record for adjusted pre-tax title earnings and adjusted pre-tax title margin, as we continue to benefit from low interest rates driving sustained momentum in refinance volumes, strong purchase demand and the continued rebound in commercial real estate activity.
For the fourth quarter, we generated adjusted pre-tax title earnings of $624 million, a 76% increase over the fourth quarter of 2019.
Our adjusted pre-tax title margin was 22.7%, a 640 basis point increase over the prior year quarter.
We had a 40% increase in direct orders closed -- 48% increase in direct orders closed, driven by an 86% increase in daily refinance orders closed, an 18% increase in daily purchase orders closed and a 1% increase in total commercial orders closed.
Total commercial revenue was $322 million compared with the year ago quarter of $321 million due to the 1% increase in closed orders.
Total commercial fee per file was flat compared to the year ago quarter.
For the fourth quarter, total orders opened averaged 11,600 per day, with October at 11,800 and November at 11,900 in December at 11,000.
For January, total orders opened were over 13,400 per day and through the first three weeks of February were over 13,500 per day as we continue to see strong demand and purchase activity and continued strength in the refinance market.
Daily purchase orders opened were up 14% in the quarter versus the prior year.
For January, daily purchase orders opened were up 15% and versus the prior year.
And through the first three weeks of February were up 4% versus the prior year.
Refinance orders opened increased by 90% on a daily basis versus the fourth quarter of 2019.
For January, daily refinance orders opened were up 96% versus the prior year and, through the first three weeks of February, were up 40% versus the prior year.
Lastly, total commercial orders opened increased by 3% over the fourth quarter of 2019.
Commercial opened orders per day remained strong, with the fourth quarter flat sequentially from the third quarter.
For January, total commercial orders opened per day were up 5% over January 2020 and were up 2% through the first three weeks of February versus the prior year.
We remain encouraged by the order volumes we have seen in the last two quarters as open orders have rebounded across multiple geographies to the levels we saw before the outbreak of the pandemic.
As Randy briefly touched on, we made significant progress on our technology investments.
We have a long history of investing in and developing technology from title automation to data collection and order processing.
Our inHere Platform is focused on transforming the real estate transaction experience by improving the safety and simplicity needed to start and track the progress of a real estate transaction as well as notarizing and signing the necessary documents.
inHere works with our network of local trusted escrow and settlement professionals nationwide, leveraging the industry's largest footprint and the latest cloud-based technology.
In January, we launched Close inHere, our guided digital closing experience for consumers finalizing their real estate transactions.
For many, the closing of the transaction is the most overwhelming part of the process of buying or refinancing a home.
Close inHere based upon digital tools instead of the traditional paper allows our staff of closing professionals to deliver a truly digital intelligent and interactive guided approach to closing.
Today, the entire suite of inHere solutions are currently undergoing deployment throughout FNS family of companies, and this will continue throughout 2021.
To conclude, we are committed to driving innovation in the title industry and to investing in technology for the benefit of all of our customers, employees and shareholders.
The fourth quarter capped off another record year of growth at F&G.
Building on the momentum we saw in the third quarter, we achieved record sales of fixed indexed annuities, or FIAs in the fourth quarter, while maintaining our pricing discipline.
Total retail annuity sales of $1.3 billion in the fourth quarter were up 42% from the prior year, and core FIA sales were $947 million, up 19% from the prior year.
We continue to see significant growth ahead of us as we take further market share in our primary independent agent channel and gain traction in new channels.
As we previously shared, post the FNF acquisition, we successfully launched into the financial institutions channel in July.
Since then, we've generated over $500 million in new annuity sales in the channel to date, including $322 million in the fourth quarter alone.
These phenomenal sales results have surpassed our original expectations, and we continue to get very positive feedback from our new partners on our quality of service as well.
With these solid sales results, we grew average assets under management, or AAUM, to $28 billion, driven by approximately $900 million of net new business flows in the fourth quarter.
Now despite the decline in interest rates this year, our spread results have remained in line with historical trends, demonstrating our continued pricing discipline and active in-force management.
Total product net investment spread was 255 basis points in the fourth quarter, and FIA net investment spread was 302 basis points.
Adjusted net earnings for the fourth quarter were $128 million.
Strong earnings were driven by steady spread results and a favorable tax benefit recognized following the FNF acquisition.
Net favorable items in the period were $68 million, primarily as a result of this tax benefit.
Adjusted net earnings, excluding notable items, were $60 million, down from $64 million in the third quarter due to $4 million of higher strategic spend due to our faster-than-expected launch into new channels.
Next, I want to quickly touch on the topic of mortality, which many in the life and annuity industry are monitoring in the current pandemic.
In contrast to many of our peers, F&G has minimal exposure to traditional life products at only 6% of GAAP reserves after reinsurance.
In addition, mortality in our in-force life block has been within our pricing expectations despite the pandemic environment.
Most importantly, our investment portfolio continues to perform well, and credit impairments for the year were less than our product pricing assumptions.
In addition, as of year-end, the portfolio's net unrealized gain position grew to $2 billion, a sharp reversal from the net unrealized loss position experienced early in 2020 due to the pandemic.
Moreover, we came into 2020 with a strong balance sheet, which allowed us to effectively weather the volatility and economic impacts of the pandemic, while still growing the business.
As expected, we ended the year with an estimated RBC ratio of over 400% for our primary insurance operating subsidiary.
We also completed the sale of our offshore third-party reinsurance business, F&G Re, to Aspida Holdings in December.
Proceeds from the sale will be used to fund future growth opportunities for F&G.
And we also entered into a mutually beneficial flow reinsurance agreement with Aspida on our MYGA products beginning in the first quarter of 2021.
So in summary, our sales are growing nicely as we diversify into multiple channels following the FNF acquisition.
We continue to consistently generate stable net investment spread and earnings, and we remain confident in our investment portfolio.
We generated approximately $3.8 billion in total revenue in the fourth quarter, with the title segment producing approximately $3 billion, F&G producing $667 million and the corporate segment generating $60 million.
Fourth quarter net earnings were $801 million, which includes net recognized gains of $573 million versus net recognized gains of $131 million in the fourth quarter of 2019.
The net recognized gains in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continued to be held in our investment portfolio.
Excluding net recognized gains, our total revenue was $3.2 billion as compared with $2.2 billion in the fourth quarter of 2019.
Adjusted net earnings from continuing operations were $588 million or $2.01 per diluted share.
The title segment contributed $498 million.
F&G contributed $128 million, and the corporate and other segment had an adjusted net loss of $38 million.
Excluding net recognized gains of $290 million, our title segment generated $2.8 billion in total revenue for the fourth quarter compared with $2.2 billion in the fourth quarter of 2019.
Direct premiums increased by 29% versus the fourth quarter of 2019.
Agency revenue grew by 33%, and escrow title-related and other fees increased by 21% versus the prior year.
Personnel costs increased by 15%, and other operating expenses decreased by 7%.
All in, the title business generated a 22.7% adjusted pre-tax title margin, representing a 640 basis point increase versus the fourth quarter of 2019.
Interest income in the title and corporate segments of $32 million declined $23 million as compared with the prior year quarter due to the reduction of short-term interest rates on our corporate cash balances and our 1031 exchange business.
FNF debt outstanding was $2.7 billion on December 31 for a debt-to-total capital ratio of 24.2%.
Our title claims paid of $54 million were $33 million lower than our provision rate of $87 million for the fourth quarter.
The carried title reserve for claim losses is currently $62 million or 4.1% above the actuary central estimate.
We continued to provide for title claims at 4.5% of total title premiums.
Finally, our title and corporate investment portfolio totaled $5.7 billion at December 31.
Included in the $5.7 billion are fixed maturity and preferred securities of $2.5 billion with an average duration of three years and an average rating of A2, equity securities of $900 million, short-term and other investments of $500 million and cash of $1.8 billion.
We ended the quarter with just under $1 billion in cash and short-term liquid investments at the holding company level.
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compname reports q4 revenue $3.8 bln.
compname reports fourth quarter 2020 diluted earnings per share from continuing operations of $2.74 and adjusted diluted earnings per share from continuing operations of $2.01.
compname reports fourth quarter 2020 pre-tax title margin of 29.4% and adjusted pre-tax title margin of 22.7%.
q4 adjusted earnings per share $2.01 from continuing operations.
q4 revenue $3.8 billion versus $2.4 billion.
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On our call today, our CEO, Ron O'Hanley, will speak first.
Afterwards, we will be happy to take questions.
During the Q&A, please limit yourself to two questions and then requeue.
Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K.
I'm particularly pleased with our results as quarterly total fee revenue exceeded $2.5 billion for the first time in the Company's history.
We delivered a fourth consecutive quarter of servicing fee growth with servicing fees at the highest level in three years, propelled by both strong equity markets and the impact of our actions to strengthen relationship management and sales effectiveness.
We continue to differentiate State Street through our unique product and operational capabilities as well as through delivering enhanced client service quality.
Our pipeline continues to deliver as evidenced by another strong -- another quarter of strong servicing and Alpha client mandates, which I will discuss shortly.
Additionally, we continue to invest in our business and innovate across the franchise to drive growth and enduring shareholder value creation.
For example, we announced the formation of State Street Digital in the second quarter, a new division focused on addressing the industry's evolving shift to digital finance both as product offerings and as a business model.
This is just one example in a long history of innovation that State Street has and is continuing to drive within our industry.
We also continue to develop State Street Alpha, our front-to-back offering.
This unique capability has created an attractive value proposition that is resonating with both new and existing clients as well as contributing to client retention and growth opportunities, which I will also discuss shortly.
Turning to Slide 3, I will review our second quarter highlights before handing the call over to Eric, who will take you through the quarter in more detail.
Second quarter earnings per share was $2.07 or $1.97 excluding notable items.
Despite the impact of interest rates on our NII, earnings per share ex-notables reached the highest level since 4Q '19 when quarterly NII was notably higher more than 35% more than it was in 2Q '21.
Relative to the year-ago period, quarterly total fee revenue exceeded $2.5 billion for the first time, increasing 6% year-over-year, driven by solid servicing and management fee growth, which increased 10% and 14% year-over-year respectively, as well as better securities finance results.
This strong performance was partially offset by the year-over-year impact on total revenues from lower software and processing fees, continued moderation of FX market volatility and ongoing interest rate headwinds.
Even with record quarterly fee revenue, expenses were well controlled.
While second quarter total expenses were up 1% relative to the year-ago period, they were down almost 0.5 percentage point year-over-year, excluding notable items and currency translation as our productivity improvements continued to yield results.
We have created a culture of expense discipline over the last two-and-a-half years and we remain confident in our ability to effectively manage core operating costs over the remainder of 2021.
Our strong fee revenue performance coupled with continued cost discipline, delivered a 200 basis point improvement to our pre-tax margin year-over-year which reached nearly 30% in the second quarter excluding notable items.
Further, return on equity was 12.6% or 11.9% excluding notable items in the second quarter.
AUC/A increased to a record $42.6 trillion at quarter-end, supported by higher period-end equity market levels and new business onboardings.
New asset servicing wins increased to $1.2 trillion for the quarter, including the large Alpha mandate with Invesco announced in April.
We reported two new Alpha wins in the second quarter, taking the total number of Alpha clients to 15.
After the second-quarter close, we also entered into an Alpha mandate with Legal & General.
While Invesco is an example of how Alpha is helping to expand and deepen existing client relationships, the Legal & General win demonstrates how the Alpha strategy is also helping us forge new client relationships with the world's most sophisticated investors.
Our experience to date gives us confidence that Alpha relationships will drive stronger retention rates for existing clients, while also allowing us to broaden and deepen those relationships as we add additional products and services to these existing mandates.
Additionally, we are signing Alpha clients that are new to State Street demonstrating that Alpha is enabling us to reach new clients and deliver front, middle and back office services in a differentiated manner.
We also created new relationships to help drive revenue growth across client segments and regions.
For example, earlier this week, we announced a new strategic alliance with First Abu Dhabi Bank.
The alliance will create a full service enterprise offering for institutional investors in the Middle East and North Africa region.
It will provide investors with extensive reach into more than 100 markets around the world.
Clients will have access to State Street's full suite of front, middle and back office capabilities in addition to our extensive data management and analytic solutions, which seamlessly integrates with First Abu Dhabi Bank's regional suite of security services products, local expertise and regional direct custody network.
At CRD, annual recurring revenue increased 11% year-over-year to $230 million and we remain pleased with how the business is performing while also enabling and propelling our Alpha strategy.
Global Advisors continued to demonstrate strong performance.
AUM increased to $3.9 trillion and management fees increased to $504 million, both records, benefiting from strong second quarter flows of $83 billion across the ETF, institutional and cash businesses as we continue to leverage the strengths of our asset management franchise.
In ETFs, our low cost and sector funds as well as our ESG and commodity products, continue to enjoy good market share with low cost ETFs expanding share in the second quarter.
And in institutional, our sales force and relationship management realignment coupled with a strong product set led to good revenue growth.
Turning to our balance sheet and capital, we returned over $600 million of capital to our shareholders during the second quarter, inclusive of $425 million of common share repurchases, consistent with the limit set by the Federal Reserve.
I am pleased with yet another strong performance under this year's annual stress test.
The new SCB framework provides us with additional flexibility to manage our capital base.
As examples, yesterday, we announced that our Board of Directors has approved a 10% increase of our third quarter common dividend to $0.57 per share and authorized a common share repurchase program of up to $3 billion during the third quarter of 2021 through the fourth quarter of 2022.
To conclude, we had a very strong quarter.
Business momentum is building and we are demonstrating meaningful progress toward our medium-term financial targets.
As I look ahead, to support our strategic vision and help us achieve those targets, we are continuing to prioritize improvement in our fee revenue growth while controlling costs by transforming the way we work and building a higher performing organization for the future.
I'll begin my review of our second quarter results on Slide 4.
We reported earnings per share of $2.07, or $1.97 excluding the $0.10 positive impact of notable items which was driven by a previously announced sale of a majority stake in a legacy business.
On the left panel of the slide you can see strong results.
As we continue to drive fee revenue growth while controlling expenses, we delivered pre-tax margin expansion and solid earnings growth.
As a result of the weaker dollar relative to the year-ago period, we continue to show our year-on-year results excluding the impact of currency translation in the right column.
We also show results excluding notable items on the bottom of the slide.
Turning to Slide 5, you'll see our business volume growth.
Period end AUC/A increased 27% year-on-year and 6% quarter-on-quarter to a record $42.6 trillion.
Both the year-on-year and quarter-on-quarter increases were largely driven by higher period end market levels, net new business growth and client flows.
At Global Advisors, AUM increased 28% year-on-year and 9% quarter-on-quarter to $3.9 trillion, also a record.
The year-on-year and quarter-on-quarter increases were both primarily driven by higher period-end market levels, coupled with net inflows.
Turning to Slide 6, you can see another quarter of strong business momentum.
Second quarter servicing fees increased 10% year-on-year, including currency translation, which was worth approximately 3 percentage points year-on-year.
The increase reflects higher average market levels, positive net new business onboarded and client flows, only partially offset by normal pricing headwinds and the absence of elevated prior-year client activity.
AUC/A wins totaled $1.2 trillion in the second quarter, substantially up from recent quarters, primarily as a result of the large Alpha client mandate announced last April that Ron just mentioned.
AUC/A won, but yet to be installed also amounted to $1.2 trillion at quarter-end as we smoothly onboarded over $400 billion of client assets this past quarter.
We remain focused on reigniting business growth across both client segments and regions.
This quarter, we had strong growth in the EMEA region, aided by our intense coverage efforts, which now extend to approximately 350 overall of our top clients.
We continue to estimate that we need at least $1.5 trillion in gross AUC/A wins annually in order to offset typical client attrition and normal pricing headwinds and we've clearly exceeded that mark this year.
I will remind you that inflations typically occur in phases and over time and deals will vary by fee and product mix.
At this time, we expect the current won but yet to be installed AUC/A will be converted over the coming 12 to 24-month time period with the associated revenue benefits beginning in 2022 and the majority occurring in 2023.
As we said in June, we are pleased with our pipeline and our momentum.
Turning to Slide 7.
Second quarter management fees reached a record $504 million, up 14% year-on-year inclusive of a 2 percentage point impact from currency translation and were up 2% quarter-on-quarter resulting in an investment management pre-tax margin approaching 35%.
Both the year-on-year and quarter-on-quarter management fee performance benefited from higher average equity market levels and strong ETF flows.
These benefits were only partially offset by the run rate impact from the previously reported idiosyncratic institutional client asset reallocation, as well as about $25 million of money market fee waivers this quarter.
While we previously estimated that money market fee waivers on our management fees could be approximately $35 million per quarter, as a result of the recent improvement in short-end rates following the June FOMC meeting, we now expect that they will be about $20 million to $25 million per quarter for the rest of the year, which is about a third lower than we had previously expected.
Global Advisors recorded solid flows across institutional, ETFs and cash for the quarter with the total amount -- amounting to $83 billion.
We have taken a number of actions to deliver growth in our long-term institutional and ETF franchises, which are driving this momentum as you can see on the bottom right of the slide.
Turning to Slide 8, let me discuss the other important fee revenue lines in more detail.
Within FX trading services, we are pleased that we continue to generate strong client volumes which remain above pre-pandemic levels in the second quarter.
Relative to a strong second quarter in 2020, FX revenue fell 12% year-on-year as declining FX market volatility compared to the COVID environment last year more than offset higher client volumes.
FX revenue was down 17% quarter-on-quarter, driven by a moderation of client volumes from index rebalances experienced in the first quarter and lower market volatility.
Our securities finance business recorded strong revenue growth with fees increasing 18% year-on-year and 10% quarter-on-quarter, mainly as a result of higher enhanced custody and agency balances as client leverage rebounded.
Finally, second quarter software and processing fees were down 12% year-on-year, largely due to the absence of prior-year positive mark-to-market adjustments.
Software and processing fees increased 24% quarter-on-quarter, mainly as a result of higher CRD revenues.
Moving to Slide 9, I'd like to provide some further updates on our CRD and Alpha performance.
We delivered strong stand-alone CRD results in the quarter, primarily reflecting higher client renewals and episodic fee revenues.
The more durable SaaS and professional services revenues continued to grow nicely and were up 10% year-on-year resulting in an increase in stand-alone annualized recurring revenue to $230 million.
This quarter marks the three-year anniversary since announcing the CRD acquisition and we are very pleased with how the business has performed.
On the bottom right of the slide we show some of the second-quarter highlights from State Street Alpha mandates.
We reported two new Alpha mandates during the second quarter as the value proposition continues to resonate well with clients.
Notably, since inception through second quarter, we now have five Alpha client mandates that are live.
Although Alpha deals usually take somewhat longer to implement given the size and scope, the pay-off outweighs the longer implementation period as we are able to further expand share of wallet to generate attractive revenue growth rates and increase the contract lengths which can be up to 10 years in length for Alpha services that span the front and middle office.
Turning to Slide 10, second quarter NII declined 16% year-on-year, mainly as a result of the effects of lower interest rate environment on our investment portfolio yields and sponsored member repo product.
These impacts were partially offset by balance sheet expansion, driven by higher balances.
Relative to the first quarter however, NII was flat as lower investment portfolio yields and the impact of short-end rates were offset by further expansion of the investment portfolio and lending activity.
On the right side of the slide, we show the growth of our average balance sheet during the second quarter.
Total average deposits increased by $16 billion in the second quarter or an increase of 7% quarter-on-quarter, reflecting the continued impact of the Federal Reserve's expansionary monetary policy.
While we continue to remain mindful of OCI risk in the current rate environment, we tactically added about $5 billion quarter-on-quarter to our investment portfolio a few months ago, before the recent downdraft in rates.
We also increased our average loan balances by approximately 5% quarter-on-quarter to over $29 billion, driven by higher utilization by asset managers and private equity capital call client.
We also have a number of initiatives in play to reverse and reduce this recent deposit uptick that we saw during the quarter.
Turning to Slide 11.
Second quarter expenses, excluding notable items, increased 2% year-on-year, mainly driven by the weaker dollar.
Excluding the impact of notable items and currency translation, total expenses were down nearly 0.5 percentage point year-on-year as productivity savings for the quarter more than offset higher revenue related expenses and targeted investments in client onboarding costs.
Compared to 2Q '20 on a line-item basis and excluding notable items and the impact of currency translation, compensation employee benefit costs was flat as we reduced high-cost location headcount, which offset higher medical costs as claims began to normalize to pre-pandemic levels.
Information systems and communications were up 5% due to continued investment in our technology estate.
Transaction processing was up 10%, primarily driven by higher revenue related expenses for sub-custody balances and market data costs.
Occupancy was down 13% reflecting benefits from our footprint optimization efforts and some timing benefits.
And other expenses were down 11% primarily driven by lower-than-usual professional services fees.
Relative to the first quarter, expenses were primarily impacted by the absence of seasonal and deferred compensation reported in the first quarter.
So, overall, we are pleased with our continued ability to demonstrate expense discipline as we have effectively managed total expenses ex-notables and currency down year-on-year in the second quarter while driving strong total fee revenue growth.
Moving to Slide 12.
On the right of the slide, we show our capital highlights.
We are pleased with our performance under this year's CCAR with the calculated Stress Capital Buffer well below the 2.5% minimum, resulting in a preliminary SCB at that floor.
The new SCB framework provides us with additional flexibility to deploy our capital base in a number of different ways, including investment opportunities, dividends and buybacks.
For example, yesterday, we announced a 10% increase to our third quarter common dividend to $0.57 per share and our Board has authorized a common share repurchase program of up to $3 billion from the third quarter of 2021 through year-end 2022.
In addition, we are also pleased that the Federal Reserve has provided State Street with one additional year until January 1, 2024, to retain its current G-SIB surcharge of 1%.
To the left of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios.
As you can see, we continue to navigate the operating environment with strong capital levels in excess of the requirements.
As of quarter-end, our standardized CET1 ratio improved by 40 basis points quarter-on-quarter to 11.2% as we had expected and sits above the upper end of our 10% to 11% CET1 target range.
Our Tier 1 leverage ratio remains well above the regulatory minimum, but declined by 20 basis points quarter-on-quarter to 5.2%, primarily as a result of the further increase in average client balances as the Fed's quantitative easing continues.
We continue to think that a Tier 1 leverage ratio in the 5s as appropriate for our business model.
And we can operate the lower end of this range for a number of quarters while we consciously limit and reduce client deposits and offer them a range of liquidity alternatives.
Turning to Slide 13.
In summary, our quarterly performance demonstrates solid business momentum on our top line and the scale we are driving within our operating model.
Total fee revenue was up almost 6% year-on-year and exceeded $2.5 billion for the first time with double-digit growth in servicing and management fees, despite the year-on-year headwind from the strong FX trading services results we had in the second quarter of last year during COVID.
Our expenses remain well-controlled as a result of our productivity program.
As a result, we are able to drive pre-tax margin and ROE close to our medium-term targets, notwithstanding the low rate environment.
Next, I'd like to update you on our economic outlook for the remainder of the year and provide our current thinking regarding the third quarter outlook.
At a macro level, our rate view broadly aligns the current forward rate curve and assumes that short-end rates remain low and there is some modest steepening to the yield curve.
We are also assuming global equity markets will be relatively flat to quarter-end for the rest of the year as well as continuing normalization of FX market activity.
In terms of the third quarter of 2021, we expect overall fee revenue to be up 7% to 8% year-over-year with servicing and management fees each expected to be up 7% to 9% year-over-year.
This means full year fee guidance is likely to be better than the upper end of the full-year range we previously provided.
Regarding NII, despite the recent flattening in the yield curve, we have seen an increase in short-end market rates and we now expect a modestly improved quarterly NII range of $460 million to $470 million per quarter for the rest of the year, assuming rates do not deteriorate and premium amortization continues to attenuate.
Turning to expenses, we remain confident in our ability to effectively manage core operating costs.
We expect that third quarter expenses ex-notable items will be flattish, plus or minus 0.5 percentage point year-over-year in 3Q.
These fee and expense guides for 3Q include approximately 1 point of currency translation year-over-year.
On taxes, we expect that the 3Q '21 tax rate will be in the middle of our full-year range of 17% to 19%.
And with that, let me hand the call back to Ron.
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state street - q2 earnings per share $2.07.
announced common share repurchase program of up to $3 billion.
investment servicing auc/a as of quarter-end increased 27% to $42.6 trillion.
investment management aum as of quarter-end increased 28% to $3.9 trillion.
state street corp - q3 2021 cash dividend of $0.57 per share of common stock, an increase of 10% from $0.52 per share of common stock in prior quarter.
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As we all know, 2020 was a very trying year.
And I could not be more proud of the unwavering commitment of our team to serve our customers, communities and each other during this unprecedented time.
It has been truly remarkable.
When I assumed the role of Chairman in January, the fundamentals of the economy were strong.
And I was looking forward to working with our executive team to execute our relationship banking strategy.
Then in March, our focus shifted due to COVID.
Despite the many challenges the pandemic posed, we have proven our resilience and achieved many important accomplishments along the way.
This includes the Bank and the Comerica Charitable Foundation, together providing $11 million in assistance to local communities and businesses.
We funded $3.9 billion in PPP loans to small and medium-sized companies.
We were able to quickly enable the majority of our employees to work remotely and introduce programs to provide support, such as Promise Pay and Dependent Care Stipends.
As consumers' desire to utilize digital channels increased, we enhanced our online capabilities for deposit accounts as well as loan originations.
Also, we achieved our 2020 environmental goals set in 2012 to meaningfully reduce our water, waste, paper and GHG emissions.
Our commitment to corporate responsibility was recognized, including receiving high marks from Newsweek, DiversityInc.
, Civic 50, CDP and Corporate Nights.
The compassion and tireless efforts of our colleagues across the Bank has allowed Comerica to persevere and remain in a strong position as we move forward.
Slide 4 provides a review of our 2020 financial results, which included solid loan performance and a record level of deposits.
This growth, combined with prudent management of loan and deposit pricing and action we took to deploy excess liquidity, helped offset the pressure of rates dropping to ultra-low levels.
In light of the swift deterioration of the economy, we significantly increased our credit reserve and took a large provision in the first quarter.
While we saw some negative credit migration through the year, it has been manageable.
And our net charge-offs for the year were 38 basis points or 14 basis points excluding energy.
A true testament to our relationship banking strategy and deep credit experience.
Card fees and securities trading income were strong, while other fees such as deposit service charges and commercial lending fees were impacted by the slowdown in economic activity.
Expenses remained well controlled and included COVID-related cost.
We maintained our strong capital levels and booked -- our book value grew 7% to over $55 per share.
In summary, a solid performance, particularly considering the difficult environment.
Our fourth quarter performance is outlined on Slide 5.
We generated earnings of $215 million or $1.49 per share, a 3% increase over the third quarter, driven by an increase in revenue and strong credit quality.
Compared to the third quarter, loans essentially performed as we expected.
While lower on a quarter-over-quarter basis, average loans increased in December relative to November by nearly $300 million excluding PPP loan repayments.
Our loan pipeline continue to grow through the year to pre-COVID levels at year end.
Average deposits increased by nearly $1.5 billion to an all-time high with 55% of the growth derived from non-interest-bearing accounts.
Customers continue to prudently manage their cash, cutting costs and reducing leverage.
Yet, they remained cautiously optimistic that the economy will pick up in the back half of this year.
Net interest income increased $11 million benefiting from our continued careful management of loan-to-deposit pricing, combined with the contribution from fees related to PPP loan forgiveness.
This was partly offset by lower loan balances.
In addition, lower yields on our securities portfolio were mostly offset by actions we took in the third quarter to deploy a portion of excess liquidity by increasing the size of the portfolio.
As far as credit, our metrics remained strong and our provision was a credit of $17 million.
Criticized loans declined and net charge-offs were only 22 basis points.
Positive portfolio migration and the slight improvement in the economic forecast resulted in a reduction of the credit reserve to just under $1 billion or nearly three times non-performing assets.
Through the cycles, our credit performance relative to the industry has been a key differentiator.
And I believe we will continue to outperform.
Non-interest income increased $30 million or 5% as customer activity continued to rebound.
This included strong derivative income and commercial lending fees.
We continue to maintain our expense discipline as we invest for the future.
While expenses were higher in the fourth quarter, this was primarily driven by performance incentives as well as outside process related to our card platform.
Our capital levels remained strong.
Our CET1 ratio increased to 10.35%, above our target of 10%.
As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
Turning to Slide 6.
Average loans decreased approximately $600 million or 1%, which compared favorably to the industry HA data.
Loans in Corporate Banking and General Middle Market decreased as customers are performing well, prudently managing their business to increase cash flow and reduce debt.
For the fourth consecutive quarter, energy loans decreased and are at the lowest level since 2011.
The U.S. rig count is less than half of what it was a year ago.
However, it has been gradually increasing since late summer as oil prices began to recover.
Technology and Life Sciences loans declined about $180 million, mainly due to M&A and increased liquidity, driven by fundraising activity and companies reducing cash burn.
Equity Funds Services, which provides capital call lines to investment companies increased $244 million as activity has picked up with new fund formation.
National Dealer increased $190 million as inventory levels are rebuilding, yet remains $2 billion below fourth quarter 2019.
Mortgage Banker reached a new record with strong activity in both refi and home sales.
Period end loans were stable and included a decline in PPP balances of $298 million, primarily due to loan forgiveness.
Line utilization at year end for the total portfolio remained relatively low at 48%.
Loan yields increased seven basis points with accelerated fees from PPP forgiveness and continued pricing actions, particularly adding LIBOR floors when possible as loans renew.
Average deposits increased 2% or $1.5 billion to a new record of $70.2 billion, as shown on Slide 7.
The largest driver continues to be non-interest-bearing deposits and growth has been broad-based with increases in nearly every business line.
Customers continue to conserve and maintain excess cash balances.
Period end deposits increased over $4.4 billion.
Timing of monthly benefit activity in our government prepaid card business increased balances by $2.2 billion at quarter end.
However, this does not include the latest stimulus payments, which were received in early January.
With strong deposit growth, our loan-to-deposit ratio decreased to 72%.
The average cost from interest-bearing deposits reached an all-time low of 11 basis points, a decrease of six basis points from the third quarter and our total funding cost fell to only 10 basis points.
As you can see on Slide 8, the average balance of the securities portfolio increased.
This was due to the third quarter purchase of $2.25 billion in additional securities, primarily treasuries, as we took some action to put some of our excess liquidity to work.
The additional securities combined with lower rates on the replacement of prepays, which totaled about $1 billion, resulted in the yield on the portfolio declining to 1.95%.
We expect repayments of MBS to continue to be about $1 billion per quarter and yields on reinvestments to be in the low-to-mid 100 basis point range.
Turning to Slide 9.
Net interest income increased $11 million to $469 million and the net interest margin was up three basis points to 2.36%.
Interest income on loans increased $6 million, adding four basis points to the margin.
Higher fees, mostly related to PPP loan forgiveness and continued pricing actions as loans renew, together added $10 million and four basis points to the margin.
Other portfolio dynamics, including higher non-accrual income, added $1 million.
The decrease in loans had a $5 million unfavorable impact.
Lower securities yields had a $6 million or three basis point negative impact.
This was mostly offset by the higher balance, which added $5 million.
Average balances of the Fed increased over $500 million, impacting the margin by one basis point.
Our extraordinarily high Fed balances of $13 billion continue to weigh heavily on the margin with the gross impact of approximately 43 basis points.
Finally, prudent management of deposit pricing added $5 million and three basis points to the margin and lower rates on wholesale funding added $1 million.
Given the nature of our portfolio, our loans reprice very quickly as rates dropped earlier last year, so the bulk of the impact from lower rates has been absorbed.
Also, while deposit rates are at record lows, we continue to manage deposit pricing with a close eye in the competitive environment and our liquidity position.
Overall, credit quality was strong, as shown on Slide 10.
Gross charge-offs were only $39 million, a decrease of $14 million from the third quarter.
Net charge-offs were $29 million or 22 basis points.
Non-performing assets increased $24 million, yet remained below our historical norm at 69 basis points of total loans.
Inflows to non-accrual were about half of the amount of the third quarter and the lowest level of any quarter since the pandemic began.
Criticized loans declined $459 million and comprised 6% of the total portfolio.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through the pandemic conditions.
Positive migration in the portfolio combined with a modestly improved economic outlook resulted in a small decrease in our allowance for credit losses.
As the path to full economic recovery remains uncertain due to the unprecedented challenges of the COVID-19 pandemic, our reserve ratio remains elevated at 1.90% or 2.03%, excluding PPP loans.
We are well positioned with a relatively high credit reserve and overall improving credit quality.
Slide 11 provides detail on segments that we believe pose higher risk in the current environment.
Period end loans in the social distancing segment declined slightly.
Criticized loans were stable and non-accruals remain under 1%.
This segment has performed better than expected, but issues can be lumpy and sudden and resulted in net charge-offs of $21 million in the fourth quarter.
The new round of PPP will certainly be helpful for customers that are challenged by the current environment.
Energy loans decreased 13% to $1.6 billion at quarter end, representing 3% of our total loans.
Oil prices have increased and credit quality has improved with reductions in criticized, non-accruals and net charge-offs.
We have seen a little more capital markets activity and fall redeterminations resulted in only a slight decrease in borrowing basis due to lower reserves.
Additional information can be found in the appendix.
While we are pleased with the performance of these segments, we have applied a more severe economic forecast to them, and believe we are well reserved.
Non-interest income increased $13 million, as outlined on Slide 12, continuing the positive trend we've seen since post the shutdown of the economy earlier last year.
Fourth quarter includes increased customer activity in most categories.
Customer derivative income increased $8 million with higher volume due to interest rate swaps and energy hedges, combined with the change in the impact from the credit valuation adjustment.
Specifically, there was an unfavorable adjustment of $6 million in the third quarter and a favorable adjustment of less than $1 million in the fourth quarter.
Commercial lending fees increased $5 million with the seasonal pickup in syndication activity and higher unutilized line fees.
We had smaller increases in fiduciary, foreign exchange and letters of credit.
Also, card fees remained very strong due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment.
Securities trading income, which includes fair market adjustments for investments we hold related to our Technology and Life Sciences business, decreased $5 million from elevated levels generated over the last couple of quarters.
Note, deferred comp asset returns were $9 million, a $1 million increase from the third quarter and are offsetting non-interest expenses.
All in all, a strong quarter for fee income.
Turning to expenses on Slide 13.
Salaries and benefits increased $14 million with higher performance-based incentives, severance, staff insurance expense and technology-related labor.
Note that on a full year basis, salary and benefit expense was stable with a reduction in incentive compensation, offsetting annual merit, higher deferred comp and COVID-related costs.
We realized a $7 million increase in outside processing due to card activity, technology spend as well as PPP program costs.
Occupancy increased $2 million due to a catch-up in maintenance projects that were delayed due to COVID as well as seasonal expenses.
There is also a seasonal increase in advertising expense.
Our strong expense discipline is well ingrained and is assisting us in navigating this low rate environment as we invest for the future.
Our capital levels remained strong, as shown on Slide 14.
Our CET1 ratio increased to an estimated 10.35%, above our target of 10%.
As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
In this regard, we've maintained a very competitive dividend yield.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital generated to shareholders.
As we sit here today, a great deal of uncertainty remains about the ultimate pace of the economic recovery, whether it be faster or slower than economists forecast.
For that reason, we have paused for share repurchases and look forward to starting the program as soon as we deem it prudent to do so.
Slide 15 provides our outlook for the first quarter relative to the fourth quarter as well as some color in the year ahead.
In the first quarter, we expect National Dealer loans to continue to increase at a moderate pace as auto inventory rebuilds.
Also, middle market is expected to grow as a result of increased economic activity.
However, this will be more than offset by Mortgage Banker declining from its record high due to seasonally lower purchase and refi volumes.
Energy is expected to decrease due to higher oil prices driving improved cash flow and capital markets activity.
As far as PPP loans, we expect the pace of loan forgiveness could potentially exceed the second round of fundings.
Looking past the first quarter, excluding PPP loan activity and based on improving economic conditions, we expect loans to grow throughout the year.
We expect average deposits to remain strong in the first quarter as customers continue to carefully manage their liquidity.
As far as net interest income, continued management of loan and deposit pricing is expected to be accretive, albeit to a lesser degree than we've seen so far.
We are currently in the process of deploying some excess liquidity by repaying $2.8 billion of FHLB advances over an eight week period, which will provide a modest lift.
These benefits are expected to be more than offset by reduced loan balances, lower yields on securities, slightly lower LIBOR as well as two fewer days in the quarter.
As we move through the year, assuming there is no change from rates that we experienced in the fourth quarter, we expect quarterly pressure on securities yields and swap maturities to mostly -- to be mostly offset by loan growth, excluding PPP impacts.
We expect net charge-offs to increase from low levels we've seen recently.
However, with our credit reserve at year end at over 2% of loans, excluding PPP, we believe we are well positioned to manage through this period of economic uncertainty.
We expect non-interest income in the first quarter to benefit from higher deposit service charges, fiduciary and brokerage fees.
As deferred comp is difficult to predict, we assume it will not be repeated.
We expect a seasonal decline in syndication activity.
Also, card, warrants and securities trading income are expected to decline from elevated levels.
As we progress through the year, we believe that customer-driven fee categories in general should grow with improving economic conditions.
We expect expenses to be lower in the first quarter.
Our pension expense is expected to decline $9 million in the first quarter to get to the new run rate for 2021.
The decline is primarily due to strong investment performance in 2020.
As I mentioned, we do not forecast deferred comp of $9 million to repeat.
Also, marketing and occupancy expenses are expected to be seasonally lower, and there are two less days in the quarter.
Partly offsetting all of this, first quarter includes annual stock comp and associated higher payroll taxes.
We remain focused on maintaining our expense discipline while we invest in the future.
Therefore, on a full year basis, we expect higher salary expense related to normal merit and incentive comp as well as higher tech spend will be mostly offset by lower pension and deferred comp returns.
We expect a 22% tax rate, excluding discrete items.
Finally, as mentioned on the previous slide, we remain focused on maintaining our strong capital levels and providing an attractive return to shareholders.
While difficult and uncertain conditions persist, I am confident that our team will continue to adapt and thrive as we have over the past year.
We expect the economy will improve in 2021.
We believe firming trade and manufacturing conditions, increasing business and consumer confidence as well as pent-up demand will support solid economic growth, particularly in the back half of the year.
Comerica has a long history of successfully managing through challenging times.
We have demonstrated our resiliency and unwavering dedication to provide a high level of customer service as we navigate the COVID pandemic.
We maintain a culture that drives continuous efficiency improvement.
We believe this will assist us in preserving our cost base as the economy improves, and we continue to invest in our future.
Our discipline credit culture and strong capital base continues to serve us well.
Utilizing our deep expertise and experience to help our customers navigate these difficult times builds and solidifies long-term relationships.
These key strengths provide the foundation to continue to deliver long-term shareholder value.
This has been demonstrated by our ROE, which increased over 11% in the fourth quarter and our book value per share, which grew 7% over the past year as well as the current dividend yield, which remains above 4%.
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compname reports q4 net income of $1.49 per share.
q4 2020 net income $1.49 per share.
qtrly net interest income increased $11 million to $469 million.
q1 2021 average deposits to remain strong.
sees decline in net interest income with lower average loan balances, libor and security yields as well, in q1 2021 versus q4 2020.
qtrly provision for credit losses decreased $22 million to a benefit of $17 million versus q3.
q4 net interest income $469 million versus $544 million in q4 2019.
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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%.
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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.
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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.
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qtrly adjusted diluted earnings per share $0.46.
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We would like to allow as many of you to ask questions as possible in our allotted time.
So, we would appreciate you limiting your initial questions to one.
NIKE creates value through our relentless drive to serve the future of sport and as we saw again in Q1, our strategy is working with business results that reflect our deep connection to consumers around the world.
Q1 was another strong quarter for NIKE with revenue growth of 16%.
And even as we saw physical retail traffic return across much of the portfolio, digital continued its momentum with 25% currency-neutral growth led by North America at over 40%.
Our digital success is evident of the product innovation, brand strength and scale that drives our meaningful relationships with consumers as we continue to show momentum against our biggest growth priorities.
As has been the case since the start of pandemic, I'm proud of the way our entire NIKE team has delivered through macro volatility.
Over the past 18 months, we've demonstrated our ability to manage through turbulence to emerge even stronger and better positioned.
And that's what we'll continue to do as we navigate through these current supply chain issues.
We'll focus on what we can control, while leveraging the many levers.
You'll hear Matt walk through our mitigation efforts in a few minutes.
Today, we're in a stronger position relative to our competition than we were prior to the pandemic.
Because the changes happening in the market work in our favor.
Consumers shift to digital that might have taken five years, will now only take two.
That plays to NIKE's advantage and our consumer direct acceleration strategy is capitalizing on this marketplace transformation.
We know that when we get to the other side of this, we'll be in even stronger shape.
We'll be more agile, more direct and more digital.
So, we remain focused and confident in our long-term business outlook.
Our competitive advantages, including our innovative product, brand strength fueled by compelling storytelling, our roster of the world's best athletes and increasingly our industry-leading digital experiences at retail, will continue to create separation.
As we drive strong sustained consumer demand, our confidence remains undiminished.
We've just wrapped up an incredible summer of sport, highlighted of course by the Olympics and Paralympics.
And moments like these are exciting for our company because sport energizes our roughly 75,000 employees around the world.
You can just feel it.
And it's through that passion for sport that we continue to innovate and connect to the consumer.
In this summer in Tokyo, our leadership as the world's most innovative sports brand was demonstrated once again.
If NIKE were a country, we would have eclipsed the competition, capturing 226 medals, including 85 golds.
Here are a few examples of what excited us most this summer.
We saw the emergence of Gen Z as a powerful next generation of athletes led by a pair of 13-year-old skateboarders who showed us the joy in the expansion of the definition of sport.
We signed in key team sports including football where NIKE teams took home gold in both men's and women's, and basketball where NIKE and Jordan teams combined to take five of the six medals, including both golds.
And we continued our great legacy in track and field with NIKE athletes winning more individual medals in track and field events than all other brands combined.
And at the same time, the European championships brought incredible energy to football in Q1 with England making it to the final.
The film saw more than 800 million impressions across all channels as more than half of EMEA's Gen Z population viewed it at least once.
And the summer sport also saw Giannis in the Milwaukee Bucks win the NBA title after an electrifying finals against Chris Paul, Devin Booker in the Phoenix Suns.
Days later, we released Giannis' latest signature shoe, the Zoom Freak 3, which is built to support the dominant physicality that defines his style of play.
We continue to see strong response to the Zoom Freak and we're excited by what we're seeing with our growing Giannis business.
And speaking it Devin Booker, Q1 was a great reminder of how we're investing in the next generation of superstars as we continue to build our roster of athletes.
Jordan Brand signed the NFL's Dak Prescott in the quarter, joining emerging global icons in NIKE Inc's family, including U.S. Open winner Emma Raducanu and Manchester United's Jadon Sancho.
At the end of the quarter, the summer sport gave way to back-to-school season.
So far this fall, we've seen sell-through in our kids business up almost 30%, led by digital with growth of almost 70.
As we focus on the kids opportunity, our new consumer construct through that we are connecting with families more authentically than ever before.
We're creating kid-specific designs and leveraging new channel for us to connect with these consumers.
Take, for example, Playlist, which is a just for kid series on nike.com and YouTube.
It's filled with games, challenges and exclusive athlete content, all aligned to our mission of encouraging movement in play.
Its latest season began a few months back with a new video starring LeBron James and some of his co-stars from their movie Space Jam, a new legacy.
Playlist has been a hit with kids and parents alike with viewership numbers well above our expectations.
And our kids business remains an important connection point for us, an organic incubator of the brand across multiple generations as we look long term.
We're the largest kids' athletic footwear brand in the world, but we know that there is still so much potential ahead.
And as I've said before, at NIKE, everything starts with innovation.
Our culture of innovation is our most profound competitive advantage.
In this week, I toured our new LeBron James innovation center here at our world headquarters with LeBron.
At over 750,000 square feet, this new home for our innovation teams is five times the size of our previous lab and is continued proof of NIKE's leadership in sports science.
We expect this facility to act as an accelerant as it helps extend our advantage in innovation even further.
And looking at our innovation agenda, the two areas that I'd like to touch on today where our relentless pipeline of innovative product continues to create separation between us and our competition, apparel and sustainability.
First, let's take a look at apparel.
We're seeing strong over indexing growth of 16% in this key growth driver.
And the investments we're making in our new consumer construct are fueling higher parallel growth for women, led by our yoga business.
Our yoga collection today features multiple industry leading innovations, including Dri-FIT and Infinalon.
These innovations are resonating with consumers and have helped us nearly quadruple our yoga business over the past two years.
Another key apparel story for us in Q1 was our bras business.
This quarter, we maintained our number one market share in sports bras in North America and introduced the NIKE Dri-FIT ADV Swoosh bra.
Dri-FIT ADV combines the ultimate in cooling fabrics with highly engineered methods to make.
it's an innovation that's connected with consumers as we scale this technology across our line.
And now to take a look at sustainability, look at what we've done with Space Hippie.
Space Hippie as you may recall is quite literally made from trash and it was originally introduced at our 2020 Future Forum and debuted four separate sustainable material innovations for us including crater foam and space waste yarn.
Now since then we have strategically grown this franchise to global scale and what's more, we've also scaled these individual material innovations across our entire portfolio.
So today, one year after that initial launch, there are more than 43 styles using Space Hippie innovations across four sports, three brands and our full consumer construct.
For instance, you could see it come to life and iconic franchises such as the Air Force 1 Crater.
New performance innovation platforms like Cosmic Unity and even in our hands-free accessibility line with styles like Glide FlyEase.
By driving new dimensions across platforms, our work to scale Space Hippies innovations catalyze growth.
Consumers are clearly responding to sustainability as we're seeing very strong full price sell-through for this family of product, with vast opportunity to drive continued consumer and business value still ahead.
And this is just one example of how we lead with platforms and not just products.
Our deliberate franchise and innovation management create scalable and sustainable impacts on our business and I'm excited by the upcoming new innovation platforms we'll be introducing soon.
Next, let's discuss NIKE's increasing digital advantage.
We continue to lead the industry by creating a premium consistent and seamless experience that deepens relationships between consumers and our brand.
Our advantage comes to life at retail in both digital as well as at the intersection of digital and physical.
I'll discuss both here.
Even as physical retail revenue approach pre-pandemic levels, our digital business this quarter grew double-digits.
This is the result of an unwavering focus on our strategy and the investments we've made against our end-to-end digital transformation.
And so we continue to expect digital to be our leading channel for growth in fiscal '22.
Now one of the best agents for success in our digital business is how strongly we're connecting with members.
Our digital growth is led by outsized member buying, which has seen a penetration increase of 14 points since last year.
Our membership strategy is working as we increasingly use data and analytics to personalize member product offering and experiences.
And we're seeing this come to life as repeat buying members grew more than 70% in the quarter.
Now part of our success stems from our constant focus on expanding what it means to be a NIKE member.
We brought this to life in Q1 by introducing a new launch experience, exclusive to the SNKRS app that revolutionizes how we serve consumers.
The new experience debuted in one of the year's most highly anticipated launches the Off-White Dunk.
For the launch last month, we rolled out our new elevated SNKRS exclusive access.
This approach sends personalized purchase offers to members based on their engagement with SNKRS past purchase attempts and other criteria using data science to drive digital member targeting.
for example, 90% of the invitees for the Off-White Dunk went to members who have lost out on a prior Off-White collaboration over the past two years.
The result the Off-White Dunk end up in the hands of hundreds of thousands of our most deserving members creating what we call exclusivity at scale.
And this improved consumer experience has a positive impact on the entire business.
We've seen that those who benefit from exclusive access on SNKRS spend more across NIKE, fueled by the energy of their win.
So our increasingly personalized approach to launch, along with benefits like member days an exclusive NIKE By You access highlights how we continue to increase the value proposition of NIKE membership.
We're also leveraging our digital advantage by investing in our brick-and-mortar fleet to create a compelling retail footprint that super charges how we serve consumers across physical and digital.
A couple of weeks ago, I was in Los Angeles and toward some of our great retail there.
I got to see a wide variety of stores including our NIKE Live door in Long Beach, a community door in East LA and more.
And across each and every store what jumped out to me was our team.
Their love for their community and their passion for our product and bringing it to life for consumers was inspiring and just awesome to see.
I also enjoyed visiting a few strategic partner doors,including DICK's and Foot Locker.
What's clear across the marketplace, both owned and partnered is how online to offline is becoming second nature.
We know that higher level of the connectivity across physical and digital are driving better consumer experience and loyalty.
Other services such as buy-online-pick-up-in-store and ship-from-store, as well as the in-store shopping features of the NIKE app drive our premium and seamless consumer experience.
And we're starting to extend these innovative experiences globally.
In Q1, we brought our NIKE Rise, an immersive concept to Seoul.
NIKE Seoul introduces new features to Rise rather including inside track and interactive RFID enabled digital footwear table where shoppers can compare details for any two shoes simply by placing them on the table.
Our digitally connected retail experiences are clearly resonating with consumers.
This quarter our inline fleet grew over 70% in revenue approaching pre-pandemic levels.
We're seeing over index growth from members, not just in digital, but also in physical retail with member buying penetration up double digits since last year.
And so, we'll continue expanding these compelling experiences across our fleet in fiscal '22, driving that interplay between physical and digital retail.
In the end, NIKE is doing what we always do, staying on the offense.
The strength of our consumer demand around the world continues to give us confidence in our playbook and execution.
I said it earlier and I'll say it again, I am proud of our resilient and creative team across NIKE, Jordan and Converse and the work we continue to deliver for consumers.
Our confidence as we look long term has not changed one bit.
We've already gotten stronger through this pandemic and we're going to emerge from it even stronger yet.
NIKE's acceleration to a more direct member-centric business model continues to fuel deep connections between consumers and our portfolio of brands, drawing upon our culture of innovation, unmatched global scale and our industry-leading digital platform, we continue to serve the modern consumer as only NIKE can.
Our first quarter results proved again that our strategy is working and NIKE's Consumer Direct Acceleration is fueling the transformation of our long-term financial model.
Our relentless focus on serving the consumer translated into revenue growth of 16% and EBIT growth of 22% versus the prior year.
The NIKE brand remains distinctive and deeply connected in our key cities around the world from New York to Paris, Shanghai to Tokyo, NIKE continues to be consumers number one cool and favorite brand with a position that has gained strength as we've navigated through the pandemic.
Consumer demand for NIKE, Jordan and Converse remains incredibly high and our first quarter financial results would have been even stronger if not for supply chain congestion resulting in lack of available supply.
Despite these headwinds, retail sales still grew double digits versus the prior year, including a record-setting back-to-school season in North America.
Sneakers has increasingly become an indicator and barometer of brand heat, now being operational at scale in 50 countries around the world.
NIKE Digital is now 21% of total NIKE brand revenue, which is an increase of 2 points versus last year, with strong double-digit growth versus the prior year even with broad reopening of physical retail.
Digital is increasingly becoming a part of everyone's shopping journey and we are well positioned to reach our vision of a 40% owned digital business by fiscal '25.
And coming back to marketplace health for a moment, we delivered strong growth in average selling price this quarter with continued improvement in full price realization.
This performance reflects our intentional efforts to manage the health of our product franchises as demand surges to move available inventory to serve demand in the right channels and to drive a more premium experience for consumers.
This quarter, we exceeded our 65% full price sales realization goal, which reflects the expectations that we put forward at our last Investor Day.
As we accelerate our consumer led digital transformation, we are developing and refining new capabilities that are transforming our operating model, quickly becoming a competitive advantage for NIKE.
Central to these capabilities is scaling our digital first supply chain to enable NIKE's digital growth while optimizing service, cost, convenience and sustainability.
We are evolving our distribution network and forward deploying inventory closer to the consumer, leveraging data and advanced analytics.
These actions will improve service levels, reduce carbon impact and ultimately reduce cost to fulfill an order.
Our regional service center outside of Los Angeles opened one year ago and we're excited with the opening of two more centers in Q1, pne on the East Coast and one in Spain.
Our investments in Odoo services are putting our products in the path of more consumers and more efficiently optimizing our inventory.
Today, we have at least two Odoo services in each of our NIKE owned stores in the U.S. and we are aggressively scaling these services across the globe.
Our Express Lane offense is also creating more and more agility across our portfolio from creating locally relevant product on shorter lead times to leveraging a shared inventory pool across the marketplace.
We are better conserving consumers with more operational flexibility, yielding higher profitability.
This quarter Express Lane grew roughly 20% versus the prior year and it increased its share of overall business.
And last, the NIKE App continues to enable a convergence between physical and digital shopping journeys, eliminating friction for consumers.
From member driven personalization and localization to building an endless aisle through digital integration with our most important wholesale partners, Consumer Direct Acceleration is transforming NIKE's operating model to move at the speed of the consumer.
Now, let me turn to the details of our first quarter financial results and operating segment performance.
NIKE Inc revenue grew 16% and 12% on a currency neutral basis with growth across all marketplace channels.
NIKE Digital grew 25% and NIKE owned stores grew 24%.
Wholesale grew 5% in the quarter, negatively impacted by lower available inventory supply due to worsening transit times.
Gross margin increased 170 basis points versus the prior year, driven primarily by higher NIKE Direct margins and partially offset by increased ocean freight surcharges.
SG&A grew 20% versus the prior year.
This was due to higher wage related expenses, higher levels of brand activity connected to return to sport and strategic technology investments.
Our effective tax rate for the quarter was 11% compared to 11.5% for the same period last year.
This was due to increased benefits from stock-based compensation and discrete items, offset by a shift in our earnings mix.
First quarter diluted earnings per share was $1.16, up 22% versus the prior year.
Now, let's move to our operating segments.
In North America, Q1 revenue grew 15% and EBIT grew 10%.
Demand for NIKE remained incredibly strong for the fifth consecutive season, energized this quarter by back-to-school and the return to sport.
Retail sales for our Performance business grew strong double digits during the fall season, led by running, fitness and basketball, powered by excitement from the Olympics, the new WNBA season and the NBA finals.
NIKE Direct grew more than 45% with NIKE Digital now representing 26% share of business.
Digital continued its momentum and grew more than 40%, increasing market share by outperforming industry trends with strong growth in traffic and repeat buying member activity.
The return to physical retail accelerated NIKE owned store growth of over 50% as we served members with elevated experiences.
NIKE owned inventory increased 12% versus the prior year.
This was driven by highly elevated in-transit inventory levels as transit times in North America deteriorated during the last quarter, now almost twice as long as pre-pandemic levels.
This impacted product availability across the marketplace and our ability to serve strong levels of consumer demand, particularly in the wholesale channels.
Closeout inventory was down double digits versus the prior year.
In EMEA, Q1 revenue grew 8% on a currency neutral basis and EBIT grew 26% on a reported basis.
This region was energized by the EURO this summer, where NIKE players scored more goals than all other brands combined and more than half of those goals were with our Mercurial boots.
We saw a strong consumer response to both the Mercurial boot and replica jerseys during the tournament.
NIKE Direct grew 10% on a currency neutral basis, led by our NIKE owned stores.
Following a full reopening, we saw traffic increase by double digits versus the prior year, with better than expected conversion rates.
In EMEA, while NIKE Digital grew 2% in the quarter, demand for full-priced products grew nearly 30% as we compared to higher liquidation levels in the prior year.
NIKE owned inventory declined 14% on a reported basis with closeout inventory down double-digits.
Transit times to EMEA have also deteriorated over the past 90 days, causing higher levels of in-transit inventory and negatively impacting product availability to serve strong consumer demand.
In Greater China, Q1 revenue grew 1% on a currency neutral basis, EBIT grew 2% on a reported basis as the team delivered in line with our own recovery expectations.
Retail sales were impacted in late July and August due to regional closures and lower levels of foot traffic due to COVID containment.
Prior to late July, physical traffic had been approaching prior year levels.
In July, we engaged with consumers through the launch of our joy of sports local marketing campaign.
This campaign generated over $1 billion local views, demonstrating strong brand connection with Chinese consumers.
NIKE Direct declined 3% on a currency neutral basis, partially impacted by retail closures.
NIKE Digital declined 6% as we compare to higher liquidation in the prior year, partially offset by double-digit improvement in full price sales mix.
We experienced a strong 6.18 consumer moment where we grew nearly 10% versus the prior year and remained the number one sports brand on Tmall.
Demand in our SNKRS app grew more than 130% for the quarter.
Our experienced local team continues to navigate through marketplace dynamics.
we finished the quarter with healthy marketplace weeks of supply and inventory normalization is on plan.
Now moving to APLA.
First quarter revenue grew 31% on a currency neutral basis and EBIT grew 72% on a reported basis.
Revenue growth was led by SOKO, Japan, Mexico and Korea with more muted growth in Pacific and Southeast Asia and India due to COVID restrictions and government-mandated store closures.
NIKE Digital grew more than 60% on a currency neutral basis, highlighted by the expansion of our NIKE app.
in June, the app went live in Mexico and six additional countries across Southeast Asia generating 3 million local downloads during the quarter.
Earlier on the call, John spoke about the new NIKE Rise retail experience in Seoul.
To mark the opening of the store, our Express Lane, SNKRS and NIKE Rise teams created the NIKE Seoul [Phonetic] Dunk.
This collaboration drove more than half of day 1 sales and highlights how digital and physical experiences are converging in our own stores, leveraging local insights and a more agile supply model.
Now, I will turn to our financial outlook.
Consumer demand for NIKE remains at an all time high and we are confident that our deep consumer connections and brand momentum will continue.
However, we are not immune to the global supply chain headwinds that are challenging the manufacturer and movement of product around the world.
Previously, I had shared that we were planning for transit times to remain elevated for the balance of fiscal '22.
Unfortunately, the situation deteriorated even further in the first quarter with North America and EMEA seeing increases in transit times due primarily to port and rail congestion and labor shortages.
Additionally, several of our factory partners in Vietnam and Indonesia were required to abruptly cease operations in the first quarter.
As of today, Indonesia is now fully operational, but in Vietnam nearly all footwear factories remain closed by government mandate.
Our experience with COVID related factory closures suggests that reopening and ramping back to full production scale will take time.
Therefore, we're revising our short-term financial outlook to incorporate the following factors: 10 weeks of production already lost in Vietnam since mid July.
Factory reopening to occur in phases beginning in October with a ramp to full production over several months and elevated transit times consistent with where we are now operating today.
We now expect fiscal '22 revenue to grow mid single digits versus the prior year versus our prior guidance of low double-digit growth due solely to the supply chain impacts that I just described.
Specifically for Q2, we expect revenue growth to be flat to down low-single digits versus the prior year as factory closures have impacted production and delivery times for the holiday and spring seasons.
Lost weeks of production combined with longer transit times will lead to short-term inventory shortages in the marketplace for the next few quarters.
We expect all geographies to be impacted by these factors.
However, those geographies in Asia with less in-transit inventory at the end of the first quarter will experience a disproportionate impact beginning in Q2.
For the balance of fiscal '22, we expect strong marketplace demand to exceed available supply.
We are optimistic inventory supply availability will improve heading into fiscal '23 against the backdrop of a very strong brand and healthy pull market across all geographies.
Turning to the rest of the P&L.
We still expect gross margin to expand 125 basis points versus the prior year, at the low end of our prior guidance, reflecting stronger than expected full price realization, the ongoing shift to our more profitable NIKE Direct business and price increases in the second half.
This more than offsets roughly 100 basis points of additional transportation, logistics and airfreight costs to move inventory in this dynamic environment.
We also expect a lower foreign exchange benefit now estimated to be a tailwind of roughly 60 basis points.
And for the second quarter, we expect gross margin to expand at a rate lower than the full year due to higher planned airfreight investment for the holiday season.
We expect SG&A to grow mid-to-high teens.
We intend to maintain our position as the number one cool and favorite brand and to celebrate the return to sport as we inspire and engage consumers around the world.
We will also maintain pace on our multi-year investment plans in order to transform our business for the future as I've outlined in prior quarters.
NIKE's financial strength is a competitive advantage and it is in moments like these where our competitive strengths and strong balance sheet affords us the ability to remain focused on what's required to win and serve consumers for the long term.
In closing, our vision for NIKE's long-term future remains unchanged.
NIKE is a growth company with unlimited potential.
Despite new short term operational dynamics, our consumer-direct acceleration offense is driving our business forward and transforming our financial model toward the long-term fiscal '25 financial outlook I shared last quarter.
This quarter's impressive results are additional proof that our strategy is right, not only for the moment we find ourselves in, but also for the opportunity to serve the future of athlete and sport like only NIKE can.
I wouldn't trade our position with anyone.
And there is no better team to navigate through volatility and lead long-term transformational change.
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second-quarter fiscal 2021 nfe $1.77 per share.
increased nfe per share (nfeps) guidance to a range of $2.05 to $2.15 for fiscal 2021.
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These statements are based on our current beliefs as well as certain assumptions and information currently available to us and are discussed in more detail in our annual report on Form 10-K for the year ended December 31, 2021, which we expect to be filed this Friday, February 18.
I'll also refer to adjusted EBITDA and distributable cash flow, or DCF, both of which are non-GAAP financial measures.
You'll find a reconciliation of our non-GAAP measures on our website.
I'd like to start today by looking at some of our fourth quarter and full year 2021 highlights.
For the full year 2021, we generated adjusted EBITDA of $13 billion, which was a significant increase over 2020 and in line with our expectations.
DCF attributable to the partners of Energy Transfer, as adjusted, was $8.2 billion, which resulted in excess cash flow after distributions of approximately $6.4 billion.
On an incurred basis, we had excess DCF of approximately $5 billion after distributions of $1.8 billion and growth capital of approximately $1.4 billion.
On January 25, we announced a quarterly cash distribution of $0.175 per common unit or $0.70 on an annualized basis, which represents a 15% increase over the previous quarter and represents the first step in our plan to return additional value to unitholders.
Operationally, we moved record volumes through our NGL pipelines and NGL refined products terminals for the full year 2021, primarily driven by growth in volumes through our Nederland terminal and on our Mariner East pipeline system.
In addition, NGL fractionation volumes reached a new record during the fourth quarter, largely driven by growth in volumes leading our Mont Belvieu fractionators.
At our Nederland terminal, we completed expansions in early 2021 that brought our companywide total NGL export capacity to more than 1.1 million barrels per day which we believe is the largest in the world.
On December 2, 2021, we completed our acquisition of Enable Midstream Partners, which provides increased scale in the Mid-Continent and Ark-La-Tex regions and improved connectivity for our natural gas, crude oil, and NGL transportation customers.
The combination of Energy Transfer's and Enable's complementary assets will allow us to continue to provide flexible reliable and competitive services for our customers as we pursue additional commercial opportunities utilizing our improved connectivity and expanded footprint.
We continue to expect the combined company to generate more than $100 million of annual run rate cost savings synergies, of which we expect to achieve 75 million in 2022.
In addition, we are in the process of identifying and evaluating a number of commercial and operational synergies that are expected to enhance the operational capabilities of our systems by capitalizing on improved efficiencies and increasing utilization and profitability of our combined assets.
Before moving to a growth project update, I want to briefly touch on the recent winter weather conditions seen across many of our assets.
This bout of winter weather was less severe and significantly less disruptive than winter storm Uri last year, and commodity prices remained much more stable throughout as a result.
As we always do, we have procedures in place to provide layers of protection and risk mitigation, including engineering controls and winterization processes and preplanning and prepositioning of resources to assure, we are able to respond when needed.
Our extensive experience with operating pipelines, processing plants and storage facilities combined with a significant amount of preparation allows us to operate reliably throughout extreme weather conditions, and this is due to the consistent and extraordinary efforts of our employees.
I'll now walk you through recent developments on our growth projects.
Starting with Mariner East Pipeline system.
Construction of the final phase of the Mariner East pipeline is complete and commissioning is in progress which will bring our total NGL capacity on the Mariner East pipeline system to 350,000 to 375,000 barrels per day, including ethane.
Energy Transfer's Mariner East pipeline system now includes multiple pipelines across the state of Pennsylvania, connecting the prolific Marcellus and Utica shales to markets throughout the state and the broader region, including Energy Transfer's Marcus Hook terminal on the East Coast.
For full year 2021, NGL volumes through the Mariner East pipeline system and Marcus Hook terminal are up nearly 10% over 2020.
With our expanded network, we will see volumes continue to grow.
In our Pennsylvania Access project, which allows refined products to flow from the Midwest supply regions into Pennsylvania, New York, and other markets in the Northeast started flowing refined products in January.
At our expanded Nederland terminal, NGL volumes continued to increase during the fourth quarter, including export volumes under our Orbit ethane export joint venture, which have remained strong.
For the full year 2021, we loaded nearly 26 million barrels of ethane out of the facility.
For 2022, we expect to load a minimum of 40 million barrels of ethane and project this to increase to up to 60 million barrels for 2023.
We also expect our LPG export volumes at Nederland to continue to grow in 2022.
And in total, our percentage of worldwide NGL exports has doubled over the last two years, capturing nearly 20% of the world market, which was more than any other company or country exported during the fourth quarter of 2021.
At Mont Belvieu, we recently brought online a 3 million-barrel high-rate storage well, which increases our total wells to 24 and our NGL storage capabilities at Mont Belvieu to 53 million barrels.
Turning to our Cushing south pipeline.
In early June, we commenced service on the 65,000 barrels per day crude oil pipeline, providing transportation service from our Cushing terminal to our Nederland terminal, which also provides access for Powder River and DJ Basin barrels to our Nederland terminal via an upstream connection with our White Cliffs pipeline.
This pipe is already being fully utilized.
And as we mentioned on our last call, we are moving forward with phase 2, which will nearly double the pipeline's capacity to 120,000 barrels per day.
Phase 2 is expected to be in service by the end of the first quarter of 2022 and is underpinned by third-party commitments.
As a reminder, minimal capital spend was required for this phase.
Next, construction on the Ted Collins link is progressing and is now expected to be completed late in the first quarter of 2022.
The Ted Collins link will increase market connectivity for our Houston terminal.
It will also give us the ability to fully load and export WTI barrels as well as low gravity Bakken barrels out of the Houston market, demonstrating Energy Transfer's unique capability to provide a neat Bakken barrel to markets along the Gulf Coast.
Our Permian Bridge project, which connects our gathering and processing assets in the Delaware Basin with our G&P assets in the Midland Basin, was placed into service in October and continues to be significantly utilized.
This project allows us to move approximately 115,000 Mcf per day of rich gas out of the Midland Basin and to utilize available processing capacity more efficiently, while also providing access to additional takeaway options.
In addition, an expansion is underway, which will bring the top line's total capacity to over 200,000 Mcf per day in the first quarter of 2022.
And due to significantly increased producer demand, we now plan to build a new 200 MMcf per day cryogenic processing plant in the Delaware Basin.
The Grey Wolf plant is supported by new commitments and growth from existing customer contracts and is expected to be in service by the end of 2022.
In addition, to provide incremental revenue to our midstream segment, once in service, the volumes from the tailgate of the plant will utilize our gas and NGL pipelines for takeaway, providing three revenue streams.
Now in order to address the growing need for additional natural gas takeaway from the Permian Basin, we are diligently evaluating a takeaway project that would utilize existing Energy Transfer assets along with new build pipeline providing producers with firm capacity to the premier markets of Katy, Carthage, Gilles, and Henry Hubs.
This pipeline project would include the construction of a new approximately 260-mile pipeline from the Midland Basin to our existing 36-inch pipeline Southwest of Fort Worth, parallelly existing right of way.
From there, it would interconnect with our existing assets with available capacity for delivery through our vast pipeline network to markets at Carthage as well as the Katy, Beaumont, and the Houston Ship Channel and other markets along the Gulf Coast, including deliveries to the Gilles and Henry Hub.
We view this project as an ideal solution for natural gas growth out of the Permian Basin that we can complete much more quickly than our competitors' options at significantly less cost about following an existing right of way along the majority of the route.
In addition, it is aligned with our strategy of identifying and repurposing underutilized assets in order to maximize the value of our uniquely positioned existing asset base.
Customer discussions are underway as we pursue this project.
Given the proposed route and our ability to utilize existing assets, we believe we could complete construction of project in two years or less once we have reached FID.
Turning to the Gulf Run Pipeline, which will be a 42-inch interstate natural gas pipeline with 1.65 Bcf per day of capacity.
Gulf Run is backed by a 20-year commitment from Golden Pass LNG and will provide natural gas transportation between the Haynesville Shale and the Gulf Coast, connecting some of the most prolific natural gas-producing regions in the U.S. with the LNG export market.
Pipeline construction is underway and is expected to be completed by the end of 2022.
Lastly, in July of 2021, we announced the signing of a memorandum understanding with Republic of Panama to study the feasibility of jointly developing a proposed Trans-Panama Gateway Pipeline.
We anticipate working closely with Panama to successfully bring this project to fruition.
Panama's geographic location and favorable investment climate make this an attractive project.
We continue to believe this project will create the most liquid and attractive LPG supply hub in the world and are excited about the opportunity it presents.
Now for an update on our alternative energy activities.
In January of 2022, we announced that we expanded our Alternative Energy Group through the hiring of a vice president of alternative energy.
This role is responsible for developing alternative energy and carbon capture projects for Energy Transfer, along with various ESG initiatives, including the development of carbon capture offset programs that are accretive to our operations.
In addition to the two solar projects we announced in 2021, we are also continuing to explore several opportunities for solar, wind, and forestry carbon credit projects on our existing acreage in the Appalachian region.
We remain in discussions with other large renewable energy developers.
On the carbon capture front, we continue to pursue our carbon capture project at Marcus Hook that would involve capturing CO2 from the flue gas and delivering it to the customers for use in the food and beverage industries.
This project looks financially attractive based upon preliminary cost estimates and design feasibility studies.
We are also pursuing several carbon projects related to our assets, including projects involving the capture of CO2 from processing and treating plants for use in enhanced oil recovery for sequestration.
We continue to believe that our franchise will allow us to participate in a variety of projects involving carbon capture or other innovative uses as we continue to reduce our carbon footprint.
Lastly, we published our annual corporate responsibility report to our website in December.
Now let's take a closer look at our fourth quarter results.
Consolidated adjusted EBITDA was $2.8 billion, compared to $2.6 billion for the fourth quarter of 2020.
DCF attributable to the partners, as adjusted, was $1.6 billion for the fourth quarter, compared to $1.4 billion for the fourth quarter of 2020.
For the fourth quarter, we saw higher transportation volumes across all of our segments, including record volumes in the NGL and refined products segment as well as a $60 million adjusted EBITDA contribution from the acquisition of Enable for the month of December.
On January 25th, we announced a quarterly cash distribution of $0.175 per common unit or $0.70 on an annualized basis.
This distribution will be paid on February 18 to unitholders of record as of the close of business on February 8.
This distribution represents a 15% increase over the previous quarter and represents the first step in our plan to return additional value to unitholders while maintaining our leverage ratio target of four to four and a half times debt to EBITDA.
Future increases to the distribution level will be evaluated quarterly with the ultimate goal of returning distributions to the previous level of $0.305 per quarter or $1.22 on an annualized basis while balancing our leverage target, growth opportunities and unit buybacks.
Turning to our results by segment and starting with NGL and refined products.
Adjusted EBITDA was $739 million, compared to $703 million for the same period last year.
This was primarily due to higher transportation and terminal services margins related to increased throughput at our Nederland terminal in the fourth quarter of 2021 as well as increased fractionation in refinery services margin.
NGL transportation volumes on our wholly owned and joint venture pipelines increased to a record 1.9 million barrels per day, compared to 1.4 million barrels per day for the same period last year.
This increase was primarily due to increased export volumes feeding into our Nederland terminal from the initiation of service on our propane and ethane export projects, higher volumes from the Permian and Eagle Ford regions as well as increased volumes on our Mariner East pipeline system.
And our fractionators also reached another record for the quarter.
With average fractionated volumes of 895,000 barrels per day compared to 825,000 barrels per day for the fourth quarter of 2020.
For our crude oil segment, adjusted EBITDA was $533 million, compared to $517 million for the same period last year.
This was primarily due to higher crude oil transportation volumes out of the Permian Basin improved volumes through our Nederland terminal and improved performance on our Bakken and Bayou Bridge pipelines as a result of recovering volumes in the fourth quarter of 2021 and the addition of the Enable assets.
For midstream, adjusted EBITDA was $547 million, compared to $390 million for the fourth quarter of 2020.
This was primarily due to a $147 million increase related to favorable NGL and natural gas prices.
In addition, our midstream segment also benefited from growth in the Permian, South Texas, and Northeast, and the acquisition of the Enable assets in December 2021.
Gathered gas volumes were 14.8 million MMBtus per day, compared to 12.6 million MMBtus per day for the same period last year due to higher volumes in the Permian, South Texas, and Northeast regions as well as addition of the Enable assets in December of 2021.
Permian Basin volumes continue to be strong and Midland volumes remain at or near record highs.
As a result, we are expanding our Permian Bridge project and constructing our new Grey Wolf processing plant in the Delaware Basin.
In our interstate segment, adjusted EBITDA was $397 million, compared to $448 million in the fourth quarter of 2020.
While volumes are beginning to improve, we did experience contract expirations at the end of 2020 on Tiger and FEP.
And due to very mild temperatures throughout the Midwest, we experienced lower demand on our Panhandle and Trunkline systems during the fourth quarter.
However, these decreases were partially offset by increases on Rover and Tiger due to more favorable market conditions and to significant volume growth out of the Haynesville.
These results also include the Enable assets in December of 2021.
We have seen steady growth recently in the interstate segment with the fourth quarter up more than 10% over the third quarter of 2021 even without the impact of Enable.
For our Intrastate segment, adjusted EBITDA was $274 million, compared to $233 million in the fourth quarter of last year.
This was primarily due to increased firm transportation volumes from the Permian and South Texas, the recognition of certain revenues related to winter storm Uri and an increase in retained fuel revenues due to higher natural gas prices as well as the addition of the Enable assets in December of 2021.
Now turning to our 2022 adjusted EBITDA guidance.
With expectations for continued strong performance from our existing business as well as the addition of the Enable assets, we expect our full year 2022 adjusted EBITDA to be $11.8 billion to $12.2 billion.
And moving to our 2022 growth capital expenditures.
We expect growth capital expenditures, including expenditures related to the recently acquired Enable assets to be between 1.6 billion and $1.9 billion, balanced primarily across the midstream NGL refined products and interstate segments.
This number includes approximately $200 million of 2021 planned capital that has been deferred into 2022 as well as growth capital related to the recently acquired Enable assets, in particular, Gulf Run pipeline.
In addition, this includes newly approved projects in the Permian Basin that support growing natural gas production through new gathering and processing capacity, improved efficiencies and reduced emissions.
These projects include construction of a new processing plant optimization of the Oasis pipeline and modernization and debottlenecking of the existing system.
The majority of these new projects are expected to provide strong returns and be completed at a six times multiple on average.
Now looking briefly at our liquidity position.
As of December 31, 2021, total available liquidity under our revolving credit facility was slightly over $2 billion, and our leverage ratio was 3.07% for the credit facility.
During the fourth quarter, we utilized cash from operations to reduce our outstanding debt for approximately $400 million.
And for full year 2021, we reduced our long-term debt by approximately $6.3 billion.
We expect to generate a significant amount of cash flow in 2022, which will be strategically allocated in a manner that best positions us to continue to improve our leverage, invest in the growth of the partnership and return value to our unitholders.
As we approach our leverage target range, we have taken our first steps toward returning additional capital to our equity holders through distribution growth, which we will continue to evaluate on a quarterly basis.
In addition, we have increased our growth capital spend, as I mentioned earlier on the call, with this capital focused on strong returning projects that will be in service in less than 12 months.
And we expect to continue to pay down debt throughout the year with excess cash flow from operations.
During the fourth quarter, we continue to see volumes recover across many of our systems, including another record quarter for volumes in our NGL and refined products segment.
Looking ahead, we are excited about the opportunities in front of us.
We will continue to explore and implement commercial synergies around the recently acquired Enable assets.
And we continue to see growth across our NGL business segment, driven by increasing demand, both domestically and internationally.
We have entered 2022 with a much stronger balance sheet than 2021, and we'll continue to place emphasis on financial flexibility and pay down debt in 2022 while continuing to position ourselves to return value to our unitholders.
Given the volume growth expected out of the Permian Basin, we have some attractive new projects underway that will address new demand, enhance the efficiency and flexibility of our existing asset base, and generate attractive returns above our target threshold.
We also continue to make progress on the alternative energy front, which can further enhance and effectively grow our Energy franchise.
Operator, please open the line up for our first question.
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outlook for 2022 adjusted ebitda which is expected to range between $11.8 billion and $12.2 billion.
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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.
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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.
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I'm here with Arvind Krishna, IBM's chairman and chief executive officer; and Jim Kavanaugh, IBM's senior vice president and chief financial officer.
I'll remind you the separation of our managed infrastructure services business, Kyndryl, was completed on November 3.
As a result, our income statement is presented on a continuing operations basis.
Our results also reflect the incremental revenue from the new commercial relationship with Kyndryl.
Because this provides a one-time lift to our growth, we will provide the contribution to our revenue growth for the next year.
For example, all of our references to revenue and signings growth are at constant currency.
These statements involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
Our fourth-quarter results reinforce our confidence in our strategy and model.
With solid revenue growth, we are on track to the mid-single-digit trajectory we had laid out in our investor briefing last October.
The trend we see is clear.
Across industries, clients see technology has a major source of competitive advantage.
They realize that powerful technologies embedded at the heart of their business can lead to seismic shifts in the way they create value.
This reality of technology being about a lot more than cost will persist and explains why clients are eager to leverage hybrid cloud and artificial intelligence to move their business forward.
Our fourth-quarter results illustrates the strong client demand we see in the marketplace for our technology and consulting.
IBM Consulting again had double-digit revenue growth as our ecosystem play continues to gain momentum.
Software revenue growth reflects strength in Red Hat and our automation offerings.
Infrastructure had a good quarter, especially with regards to IBM Z and storage.
Over the last year and a half, we have taken a series of actions to execute our hybrid cloud and AI strategy and improve our revenue profile, optimizing our portfolio, increasing investments, expanding our ecosystem, and simplifying our go-to market.
As we start to yield benefits from these actions, our constant-currency performance improved through 2021.
Our most significant portfolio action was the separation of Kyndryl.
You will remember we had initially expected the spin by the end of the year, and we completed it in early November.
As we discuss our results, we'll focus on the new basis and structure that encompasses today's IBM.
As we look to 2022, we expect mid-single-digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year.
Both of these are consistent with our medium-term model.
Let me now spend a few minutes on what we are seeing in the market, how we address it, and the progress we are making.
We are seeing high demand for our capabilities in several areas.
Clients are eager to automate as many business class as possible, especially given the new employee demographics.
This dynamic is likely to play out over the long term.
They are also using AI and predictive capabilities to mitigate friction in their supply chains.
Cybersecurity remains a major area of concern as the cost of cybercrime, already in the billions of dollars, rises each year.
As clients deal with these challenges and opportunities, they are looking for a partner they can trust and who has a proven track record in bringing about strategic transformation projects.
This is why our strategy is focused on helping our clients leverage the power of hybrid cloud and AI.
Hybrid cloud is about providing a platform that can straddle multiple public clouds, private cloud, and as-a-service properties that our clients typically have.
Our approach is platform-centric, and the platform we have built is open, secure, and flexible and it provides a solid base of the multiplier effect across software and services for IBM and our ecosystem partners.
It starts with Red Hat, which offers clients unique software capabilities based on open-source innovation.
Our software, which has been optimized for that platform, helps our clients apply AI, automation, and security to transform and improve their business workflows.
Our consultants deliver deep business expertise and they co-create with our clients to advance their digital transformation journeys.
And our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.
This strategy, along with the differentiated capabilities we bring to bear to our clients, have led to an increase in platform adoption and new business opportunities across the stack.
We now have more than 3,800 hybrid cloud platform clients, which is up 1,000 clients from this time last year.
IBM Consulting continues to help drive platform adoption, with about 700 Red Hat engagements for the year.
Clients like Dun & Bradstreet, National Grid, AIB, and Volkswagen have all recently chosen IBM's broad hybrid cloud and AI capabilities to transform their processes and move their business forward.
As I look back on the year, we had good success in broadening our ecosystem to drive platform adoption and to better respond to client needs.
During our investor briefing, we talked about strategic partnerships that will yield billion-dollar businesses within IBM Consulting.
As we move toward that, we had more than 50% revenue growth this year in partnerships with AWS, Azure, and Salesforce.
This adds to the strong strategic partnerships we have with others such as SAP, Oracle, and Adobe.
We're continuing to broaden our ecosystem reach.
In the fourth quarter, we announced an expansion of our strategic partnership with Salesforce to run MuleSoft integration software on Red Hat OpenShift.
We also created a host of new consulting services with SAP to help clients accelerate their journey to S/4HANA.
Together with Deloitte, we announced DAPPER, an AI-enabled, managed analytics solution.
And we have expanded our partnership with EY to help organizations leverage hybrid cloud, AI, and automation capabilities to transform HR operations.
We have also recently announced a host of new strategic partnerships with Cisco, Palo Alto Networks, and TELUS, all focused on the deployment of 5G, edge, and network automation capabilities.
During 2021, we have been making changes to increase our focus and agility and build a stronger client-centric culture.
This includes putting experiential selling, client engineering, and co-creation at the heart of our client engagement model.
We have completed thousands of IBM Garage engagements.
And today, we have nearly 3,000 active engagements.
We've invested in hundreds of customer success managers to help clients capture more value from our solutions.
And we have upgraded our skills with fewer generalists and more technical specialists.
This is resonating well with our clients, and it's starting to contribute to our performance.
The most important metric, of course, is revenue growth, but we are also pleased to see our client renewal rates increasing and our recurring revenue base growing.
We are starting to see signs of sales productivity improvements, with average productivity per technology seller increasing from the first to the second half.
At the same time, innovations that matter to our clients remain a constant focus, and our teams have worked hard to deliver a series of important innovations in the past quarter.
Starting with AI, we added new natural language processing enhancements to Watson Discovery.
We're also combining and integrating products such as Turbonomic, Instana, and Watson AIOps to offer a complete set of AI-powered automation software to address the significant demand.
This quarter, Red Hat announced that the Ansible automation platform is now available on Microsoft Azure, bringing more flexibility to clients and how they adopt automation.
In partnership with Samsung Electronics, IBM announced a breakthrough that reorients how transistors are built upon the surface of a chip to enable tremendous increases in energy density.
In Quantum, we unveiled Eagle, 127-qubit quantum processor.
This is the first quantum chip that breaks the 100-cubic barrier and represents a key milestone on our path toward building a 1,000-cubit processor in 2023.
While organic innovations are important, we continue to acquire companies that complement and strengthen our portfolio.
We made five acquisitions in the fourth quarter and a total of 15 acquisitions in 2021.
Two weeks ago, we announced the acquisition of Envizi.
Many consumers are willing to pay more for products that are made by companies that are more environmentally sustainable.
As the world continues to move toward a more circular economy, our clients' need is the ability to manage and measure their progress.
Envizi's capabilities complement our own and help us respond to that client demand.
Sustainability is important across a number of stakeholder groups, including clients, employees, and investors.
We are continuing to make good progress and are particularly proud of our diversity and inclusion scores, and our ability to attract and retain talent.
Our efforts were recently recognized by JUST Capital who named IBM as one of America's most just companies.
Let me now close by emphasizing once again our fourth-quarter results strengthen the conviction that we have in our ability to deliver our model of mid-single-digit revenue growth.
Jim will take you through the fourth quarter and then provide more color on 2022.
Jim, over to you.
Let me start out with a few of the headline numbers.
We delivered $16.7 billion in revenue, 58% operating gross margin, operating pre-tax income of $3.5 billion, and operating earnings per share of $3.35 for continuing operations.
Last January, we said we expected performance to improve over the course of 2021 as we start to benefit from the actions we've taken.
We have seen progress in our constant-currency revenue growth rate every quarter and now again in the fourth.
This is the first view of IBM post-separation.
We had solid revenue performance, up nearly 9%.
I'll remind you, this includes the incremental revenue from the new commercial relationship with Kyndryl, and we said we would be transparent on the contribution to our revenue growth for the first year.
This quarter, our revenue growth includes about 3.5 points from the new relationship.
Excluding this, IBM's revenue was up 5%.
We have aligned our operating model and segment structure to our platform-centric approach.
In the fourth quarter, Software was up 10%, and Consulting was up 16%.
These are our two growth vectors and together represent over 70% of our annual revenue.
Infrastructure, more of a value vector, tends to follow product cycles and was up 2%.
The Software and Infrastructure growth each include nearly 5 points from the new Kyndryl relationship while there is no contribution to Consulting's growth.
Our platform-centric model has attractive economics.
For every dollar of hybrid platform revenue, IBM and our ecosystem partners can generate $3 to $5 of software, $6 to $8 of services, and $1 to $2 of infrastructure revenue.
This drives IBM's hybrid cloud revenue, which is up 19% for the year.
Post-separation, revenue from our full-stack cloud capabilities from Infrastructure up through Consulting now represents $20 billion of revenue or 35% of our total.
Looking at our P&L metrics.
Our operating gross profit was up 3%, and the $3.5 billion of operating pre-tax profit was up over 100%.
Operating net income and earnings per share also grew.
Let me highlight a couple of items within our profit performance.
First, the year-to-year pre-tax profit reflects $1.5 billion charge to SG&A last year for structural actions to simplify and optimize our operating model and improve our go-forward position.
We're continuing to invest to drive growth.
Throughout the year, we have been aggressively hiring, with about 60% of our hires in Consulting.
We're scaling resources in Garages, sign engineering centers, and customer success managers, all to better serve our clients.
We're increasing investments in R&D to deliver innovation in AI, hybrid cloud, and emerging areas like Quantum.
We're ramping investment in our ecosystem, and we acquired 15 companies in 2021 to provide skills and technologies aligned to our strategy, including capabilities to help win client architecture decisions.
Regarding tax, our fourth-quarter operating tax rate was 14%.
This was up significantly from last year but roughly 2 to 3 points lower than what we estimated in October due to a number of factors, including the actual product and geographic mix of our income in the quarter.
Let me spend a minute on our free cash flow and balance sheet position.
Our full-year consolidated cash from operations was $12.8 billion, and free cash flow was $6.5 billion.
These are all-in consolidated results and include 10 months of Kyndryl and the cash paid for the 2020 structural actions and spin charges.
IBM's stand-alone or baseline free cash flow for the year was $7.9 billion, which is aligned to our go-forward business.
This excludes Kyndryl charges and pre-separation activity but includes the IBM portion of the structural actions.
Payments for these IBM-related structural actions and deferred cash tax paid in 2021 contributed to the year-to-year decline in the stand-alone results.
In terms of uses of cash for the year, we invested over $3 billion in acquisitions.
We continue to delever, with debt down nearly $10 billion for the year and over $21 billion since closing the Red Hat acquisition.
And we returned nearly $6 billion to shareholders in the form of dividends.
This results in a year-end cash position of $7.6 billion, including marketable securities and debt of just under $52 billion.
Our balance sheet remains strong, and I'd say the same for our retirement-related plans.
You'll remember that over the last years, we've shifted our asset base to a lower risk profile.
In 2021, the combination of modest returns and higher discount rates improved the funded status of our plans.
In aggregate, our worldwide tax-qualified plans are funded at 107%, with the U.S. at 112%.
Now, I'll turn to the details by segment, and I'll remind you we have put in place a simplified management system and segment structure aligned to our platform-centric model.
And within the segments, we're now providing new revenue categories and metrics that will provide greater transparency into business trends and drivers.
IBM Software delivered double-digit revenue growth in the quarter.
This was driven by good revenue performance in both hybrid platform and solutions and transaction processing, the latter benefiting significantly from the new Kyndryl content.
Software is important to our hybrid cloud strategy and our financial model.
Our hybrid cloud revenue in software is up 25% for the year to more than $8.5 billion.
And subscription and support renewal rates continue to grow again this quarter, contributing to a $700 million increase in the software deferred income balance over the last year.
Hybrid platform and solutions revenue was up 9%.
This performance is an indication of the strength across the software growth areas focused on hybrid cloud and AI.
It's worth mentioning this includes only a point of help from the new Kyndryl commercial relationship.
Let me highlight some of the trends by business area.
Red Hat revenue, all in, was up 21%.
Both infrastructure and app dev and emerging tech grew double digits as RHEL and OpenShift address enterprise's critical hybrid cloud requirements.
With this performance, we're continuing to take share with our Red Hat offerings.
Automation delivered strong revenue growth, up 15%.
As Arvind mentioned, there is strong market demand for automation.
We had good performance in AIOps and management this quarter as we address resource management and observability.
Clients are realizing rapid time to value from Instana and Turbonomic, two of our automation acquisitions.
And integration grew with continued traction in Cloud Pak for Integration.
Data and AI revenue grew 3%.
We have particular strength in data fabric, which enables clients to connect siloed data distributed across the hybrid cloud landscape without moving it.
You'll recall, we talked about the data fabric opportunity back in October.
We also had strong performance in business analytics and weather.
Within these solutions, clients are leveraging our AI to ensure AI models are governed to operate in a fair and transparent manner.
Security revenue declined modestly in the quarter driven by lower performance in data security, while revenue grew 5% for the year.
As we called out in our recent investor briefing, security innovation is an integral part of our strategy.
In December, we launched a new data security solution, Guardium Insights, with further plans to modernize the broader portfolio throughout the year.
This quarter, we also completed the acquisition of ReaQta, which leverages AI and machine learning to automatically identify and block threats at the endpoint.
Putting this all together, our annual recurring revenue, or ARR, is now over $13 billion, which is up 8% this quarter.
This demonstrates the momentum in our hybrid platform and AI strategy, including Red Hat and our suite of Cloud Paks.
Moving to transaction processing.
Revenue was up 14%.
This is above our model driven by a few underlying dynamics.
First, all of the growth in transaction processing came from the new Kyndryl commercial relationship, which contributed more than 16 points of growth.
Second, I'll remind you that we're wrapping on a very weak performance in the fourth quarter of last year, which was down 26%.
And lastly, we had some large perpetual license transactions given the good expansion in the IBM Z capacity we've seen this cycle.
While the new capacity is important, what's just as important is the continued strong renewal rates this quarter.
These are both good proof points of our clients' commitment to our infrastructure platform and these high-value software offerings.
Looking at software profit.
We expanded pre-tax margin by 12 points, including nearly 10 points of improvement from last year's structural actions.
Revenue grew 16% with acceleration across all three revenue categories.
Complementing this strong revenue performance, our book-to-bill was 1.2.
Clients are accelerating their business transformations powered by hybrid cloud and AI to drive innovation, increase agility and productivity, and capture new growth opportunities.
Enterprises are turning to IBM Consulting as their trusted partner on this journey.
They are choosing us for our deep client, industry, and technical expertise, which drives adoption of our hybrid cloud platform and pulls through key technologies.
Consulting's hybrid cloud revenue grew 34% in the quarter.
For the year, cloud revenue is up 32% to $8 billion.
Offerings and application modernization, which are centered on Red Hat, contributed to this growth.
The Red Hat-related signings more than doubled this year and are now over $4 billion since inception.
This quarter, we added over 150 client engagements, bringing the total since inception to over 1,000.
Our strategic partnerships also drove our performance.
Revenue from these partnerships accelerated as the year progressed and was up solid double digits in the fourth quarter led by Salesforce, SAP, AWS, and Azure.
Turning to our business areas.
Our Consulting's growth was led by business transformation, which was up 20%.
Business transformation brings together technology and strategic consulting to transform critical workflows at scale.
To enable this, we leverage skills and capabilities in IBM technologies and with strategic ecosystem partners such as SAP, Salesforce, and Adobe.
Our practices are centered on areas such as finance and supply chain, talent, industry-specific solutions, and digital design.
This quarter, we had broad-based growth, reflecting strong demand for these solutions.
In technology consulting, revenue was up 19%.
Technology consulting architects and implements cloud platforms and strategies.
We leverage hybrid cloud with Red Hat OpenShift and work with providers, such as AWS and Azure, in addition to IBM Cloud.
This quarter, we continue to see good performance in application modernization offerings that build cloud-native applications and that modernize existing applications for the cloud.
Finally, application operations revenue grew 8%.
This business line focuses on application and cloud platform services required to operationalize and run in both cloud and on-premise environments.
Revenue growth was driven by offerings, which provide end-to-end management of custom applications in cloud environments.
Moving to consulting profit.
Our pre-tax income margin expanded about 8 points, including just over 9 points from last year's structural actions.
We're in a competitive labor market, and we continue to have increased pressure on labor costs due to higher acquisition, retention, and wages.
While we still expect to capture this value in our engagements, it will take a few quarters to appear in our profit profile.
So, now, turning to the new Infrastructure segment.
Revenue was up 2%.
The Kyndryl commercial relationship contributed about 5 points of growth, which is higher than we expected in October.
In this segment, we brought together hybrid infrastructure with infrastructure support, which was formerly technology support services.
This allows us to better manage the life cycle of our hardware platforms and to provide end-to-end value for our clients.
Hybrid infrastructure and infrastructure support revenue were up 2% and 1%, respectively, with pretty consistent contribution from the new Kyndryl relationship.
Hybrid infrastructure includes IBM Z and distributed infrastructure.
IBM Z revenue performance, now inclusive of both hardware and operating system, is down 4% this quarter.
This is the 10th quarter of z15 availability and the combination of security, scalability, and reliability continues to resonate with clients.
This program continues to outpace the strong z14 program, and we ship more MIPS in the z15 program than any program in our history.
Our clients are leveraging IBM Z as an essential part of their hybrid cloud infrastructure.
And then in distributed infrastructure, revenue was up 7% driven by pervasive strength across our storage portfolio.
Looking at infrastructure profit.
The pre-tax margin was up over 9 points but essentially flat, normalizing for last year's structural action.
Now, I'll wrap up with a discussion of how our investments and actions position us for 2022 and the longer term.
We've been laser-focused on our hybrid cloud and AI strategy.
Our portfolio, our capital allocation, and the moves we've been making are all designed to create value through focus for our clients, our partners, our employees, and our shareholders.
We took significant steps during 2021.
The most impactful portfolio action was, of course, the separation of Kyndryl.
We've also been allocating capital to higher-growth areas, investing in skills and innovation, and expanding our ecosystem.
We've aligned our business to a more platform-centric business model.
And we're simplifying and redesigning our go-to-market to better meet client needs and execute on our growth agenda.
Bottom line, we're exiting 2021 a different company.
We have a higher-growth, higher-value business mix, with over 70% of our revenue in software and services and a significant recurring revenue base dominated by software.
This will result in improving revenue growth profile, higher operating margin, strong and growing free cash flow, and lower capital intensity, leading to a higher return on invested capital business.
We also continue to have attractive shareholder returns through dividends.
In October, we laid out a model for IBM's performance over the medium term defined as 2022 through 2024.
The model is focused on our two most important measures of success: revenue growth and free cash flow.
As we enter the new year, I'll talk about our expectations for 2022 performance along those dimensions.
We expect to grow revenue at mid-single-digit rate at constant currency.
That's consistent with the model.
On top of that, in 2022, the new commercial relationship with Kyndryl will contribute an additional 3 points of growth spread across the first three quarters.
Currency dynamics, unfortunately, will be a headwind.
At current spot rates, currency is roughly a 2-point headwind to reported revenue growth for the year and 3 points in the first quarter.
For free cash flow, we expect to generate $10 billion to $10.5 billion in 2022.
To be clear, this is an all-in free cash flow definition.
The adjusted free cash flow view we provided in 2021 was useful given the significant cash impact associated with the separation and structural actions.
Now in 2022, despite the fact we still have nearly $0.5 billion of impact from the charges, we're focusing on a traditional free cash flow definition.
The $10 billion to $10.5 billion reflects a year-to-year improvement driven by lower payments for the structural actions, a modest tailwind from cash taxes, working capital improvements, and profit growth resulting from our higher growth and higher value business mix.
With this performance, we're on track to our model.
So, now, let me provide some color on our expectations for segment performance.
Because this is a new segment structure, I'm going to spend a little more time and provide perspective on constant-currency revenue growth and pre-tax margin in the context of our segment models.
In Software, as we benefit from the investments in innovation and our go-to-market changes, we're seeing progress in our Software growth rate.
In 2022, we expect growth at the low end of the mid-single-digit model and then another 5 to 6 points of revenue growth from our external sales to Kyndryl.
We expect Software pre-tax margin in the mid-20s range for the year.
We have solid momentum in IBM Consulting revenue and expect this to continue into 2022 as we help clients with their digital transformations.
This momentum and our book-to-bill ratio support revenue at the high end of our high single-digit model for the year, with double-digit growth in the first half.
We expect low double-digit pre-tax margin for the full year with improving performance through the year as we make progress on price realization.
Infrastructure revenue performance will vary with product cycle.
In 2022, with a new IBM Z introduction late in the first half, we expect performance above the model and a slight contribution to IBM's overall growth.
On top of that, we're planning for about 2 to 3 points from the external sales to Kyndryl in 2022.
This supports a high-teens pre-tax margin rate for the full year.
These segment revenue and margin dynamics will yield about a 4-point year-to-year improvement in IBM's pre-tax operating margin for the full year and 2 to 3 points in the first quarter.
In terms of tax, we expect a mid- to high-teens tax rate, which is a headwind to our profit growth.
Bringing this all together, we expect mid-single-digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year, both in line with our midterm model.
Patricia, let's go to the Q&A.
Before we begin the Q&A, I'd like to mention a couple of items.
In addition to our regular materials, we've included a summary of our new segments for your reference and historical data on segment pre-tax income.
And then, second, as always, I'd ask you to refrain from multi-part questions.
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compname posts qtrly revenue of $16.7 billion, up 6.5%.
ibm - qtrly gaap earnings per share from continuing operations $2.72; qtrly operating (non-gaap) earnings per share $3.35.
ibm - qtrly revenue of $16.7 billion, up 6.5%, up 8.6% at constant currency (including about 3.5 points from incremental external sales to kyndryl).
ibm - q4 results give us confidence in ability to deliver objectives of sustained mid-single digit revenue growth & strong free cash flow in 2022.
ibm - qtrly operating (non-gaap) gross profit margin of 58% versus 60%.
ibm - unless otherwise specified, q4 results are on continuing operations basis.
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Speaking on the call will be Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO.
Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission.
I'm excited to discuss quarterly results with you today and the positive developments that we are driving in our pursuing Vision 2025.
We are delivering for customers and providing packaging solutions that are resonating with consumers in the marketplace.
New innovative packaging introductions continue as our teams expand the new product pipeline and fuel our organic growth strategy.
We are executing strategic M&A with transactions that are strengthening our capabilities, expanding our geographic reach and positioning us in growing markets and importantly, we are delivering on our commitments to stockholders.
Notably these swiftly address the heightened inflationary environment with multiple price initiatives in the quarter that will play out in the second half of 2021 and 2022 in order to limit the impact of the current price cost dislocation and ensure is short-lived.
Turning to second quarter highlights on Slide 3.
We delivered a meaningful 5% net organic sales growth in the quarter across all our markets.
We continue to see significant demand for more sustainable packaging solutions.
Our focus on innovation and our design for the environmental approach, which is an integral part of our new product development process are providing continued opportunities to satisfy this demand.
We are ahead of our 100 to 200 basis point organic sales growth goal for the first half of 2021, expect to be at or above the high end of that range for the full-year.
Adjusted EBITDA in the second quarter was $248 million.
Importantly, EBITDA was positively impacted by $15 million of improved volume mix related to net organic sales growth and $36 million of favorable net performance.
Our teams did an excellent job of navigating the challenging operating environment to meet customer demand and deliver sales growth.
The solid execution was however offset by $67 million of accelerated inflation across the broad basket of commodities.
We address the inflationary environment head on during the quarter successfully implementing multiple pricing initiatives.
This included Paperboard price increases across all 3 substrates as well as positive modification of other business terms.
One example is our move to shift freight recovery and contracts where we are responsible for product delivery costs to 4 openers per year.
A second example is the date specific implementation of price increases for paperboard purchases in the open market, replacing the linkage of price increases to industry trade obligations.
We committed to stockholders that we would shorten the time period for price to offset commodity input cost inflation and we demonstrated commitment in the second quarter.
We have changed the pricing dynamics in our business since the last period of dislocation between 2016 and 2018 and this will be on full display as we progress through the second half of 2021.
I will talk more about this shortly.
While navigating the challenges supply chain environment, our teams worked tirelessly to meet strong customer demand.
Our foodservice business increased sales by 22% year-over-year as consumer mobility picked up well food, beverage and consumer sales improved a healthy 4% year-over-year.
I'm excited to see the growing global interest for fiber-based consumer packaging solutions.
Growth in fiber-based packaging is now being realized as we projected at our Investor Day in September of 2019.
Since that time, we've continue to position the company to meet increased demand through our ongoing investments in our leading paperboard platform, our teams and through strategic acquisitions.
In May, we announced the acquisition of payer packaging and more recently, we successfully completed the acquisition Americraft Carton.
These transactions are aligned with our growth ambitions and have us on a path to achieving our Vision 2025 goals.
On Slide 4, let me recap the compelling strategic rationale there packaging combination and provide an update on timing.
The transaction brings together 2 highly innovative workforces serving diverse a complementary customer sets.
The acquisition expands our global scale and strengthens our presence in Europe, which is driving the world and a push toward a more circular economy.
We see significant opportunities to expand and grow with global customers as the premier fiber based consumer packaging leader, we are encouraged that the regulatory approval processes are proceeding as expected and anticipated close by the end of the year.
Recognizing the impact to leverage from the announced day, our Packaging transaction.
It is important to reiterate that we are fully committed to utilizing our significant cash flow generation to reduce leverage back to our targeted 2.5 to 3 times range.
We intend to be back to targeted levels within 24 months following the close of the acquisition.
Turning to Slide five.
Innovation and new product development continue across our 3 growth platforms as we rollout packaging solutions designed to address retailer and producer calls for fiber-based packaging alternatives.
Last quarter, I discussed the rapid acceptance we are seeing for our PaperSeal line the food trade Packaging in Europe and Australia and the excitement over the new Punnet tray line introduced from [Indecipherable] snacking size vegetables.
Last week, we introduced a new product line OptiCycle to grow in our foodservice markets.
Our OptiCycle line includes an innovative non-polyethylene coating alternative to traditional PE and PLA coated products.
On Slide six, you can see the details of this latest innovation in the foodservice packaging.
OptiCycle uses a water-based coating instead of polyethylene.
The foodservice cup and containers feature should require less coating material versus traditional options and are designed to be more easily recyclable.
When we pull 98% of the fiber, can be recovered and used to make other recycled products.
We continue to push forward with our sustainability journey and OptiCycle fits squarely with our ESG commitment to decrease our LDPE usage by 40% by 2025.
With this non-PE packaging solution, we are providing a new option for customers to evaluate as they pursue their own sustainability goals and meet the needs of today's consumer.
We expect the line to be commercialized in North America in the next few months.
As we enter the second half of 2021, I'm pleased with the path we are on.
Employees have produced exceptional results and demonstrated commitment to customers as an essential supplier.
We have rolled out new product innovations provided outstanding customer service and captured additional demand.
In addition, in support of our investments for growth and expansion.
We have prudently and effectively raised in deploying capital.
We continue to differentiate ourselves by the investments we are making in our paperboard infrastructure.
On Slide eight, you will see details of our transformational Kalamazoo recycled paperboard investment.
This project is a pivotal case in point.
We expect our new world-class coated recycled board machine to be producing paperboard in a few short months.
With it, we will serve existing and new customers, delivering the highest quality product in the marketplace at the lowest cost to produce.
Furthermore, the investment provides environmental and sustainability benefits through the reduction of greenhouse gases, purchased energy and water usage in the paperboard production process.
We remain confident in $100 million of incremental EBITDA for this investment once it's fully implemented and expect to capture the first $50 million of additional EBITDA in 2022.
Another area where we are redefining leadership in the industry is through our solid track record of execution and integration of strategic acquisitions.
The announced acquisitions we have touched on today and our capabilities position us and new growing markets and allow us to further integrate our paperboard platform.
Vertical integration is a strategic priority, and we expect meaningful increases in our integration rate in the quarters ahead.
As we grow organically internalize more paperboard from recent acquisitions and unwind existing supply agreement.
Our vertically integrated model price increase operating efficiencies that benefit both stakeholders and customers.
The final point I will make on Slide seven is something I noted earlier, I would like to spend a bit more time discussing with you today.
Over the past couple of years, we have successfully implemented numerous pricing model revisions that are now flowing through the business during this time of accelerated inflation.
Realization of our pricing initiatives will be on full display over the next 2 quarters and then into 2022.
This is the primary reason we expect to generate significantly stronger EBITDA in the second half of the year.
Moving to slide 9.
I will talk through material price cost spread of recovery that we expect will occur in the second half of the year and in the 2022.
The on the left hand of the slide reflects the heightened inflationary environment we experienced in the first half of 2021 and our expectations for inflation during the second half.
The right hand of the slide shows pricing that has been successfully implemented and recognized and it's flowing through our contracts over the coming 6 months.
We expect approximately $120 million of pricing in the second half of 2021, which is intended to address the negative price cost spread experienced in the first half of 2021.
The recovery occurring in just 6 months clearly demonstrates more constructive pricing dynamics inherent in our model.
Implemented and recognized pricing will yield a cumulative $400 million over the 2021 and 2022 time horizon, as we actively address commodity input cost inflation.
Overall, we are confident in the actions we are taking to address inflationary headwinds and more broadly, we remain confident in the fundamental drivers of our business and our ability to capitalize on the opportunities ahead.
Simply put, we are running a different race.
We are executing for customers driving our growth strategy forward and strategically positioning the company to capture global demand opportunities in the fiber based consumer packaging.
We are on track to achieve our Vision 2025 growth goals.
Moving to Slide 10, focused on key financial highlights in the second quarter of 2021, net sales increased 8% from the prior year to $1.7 million driven by 5% net organic sales growth.
Adjusted EBITDA declined from the prior year due to the accelerated inflationary environment.
Importantly, we are known organic volume growth, which positively impacted EBITDA performance by $15 million and we generated, of a favorable $36 million in net performance.
I'd like just discussed, we have implemented multiple pricing initiatives to offset the current inflationary environment and we expect our adjusted EBITDA dollars and margins will improve in the second half of 2021 and 2022, all consistent with our Vision 2025 financial goals.
Additional financial and market detail can be found on slide 11.
AF&PA industry operating rates increased sequentially with SBS and CRB at 95% and 98% respectively at the end of the second quarter.
Our CUK operating rate was over 95%, reflective of the continued strong demand environment.
AF&PA Second quarter data also reflected continued declines and industry inventory levels with balances at multi-year logs, backlogs increased from the previous quarter and all three substrates we're an 8 plus weeks at quarter end.
On Slide 12 and 13, you will see our year-over-year revenue and EBITDA waterfalls.
Net sales increased $126 million very solid 8% in the second quarter of 2021.
Strong growth was driven by $76 million of higher volume mix resulting from 5% organic sales growth of $14 million in pricing and $36 million of favorable foreign exchange.
Adjusted EBITDA decreased $12 million to $248 million in the second quarter versus the prior year period.
Adjusted EBITDA benefited from $14 million in price $15 million in volume mix, $36 million in improved net productivity and $4 million from favorable foreign exchange.
Adjusted EBITDA was unfavorably impacted by $67 million of commodity input cost inflation and $14 million of labor benefits and other inflation.
We ended the quarter with net leverage of 3.7 times.
As we previously shared, leverage is currently above our long-term target of 2.5 to 3 times as we execute on critical investments to achieve our Vision 2025 goals.
We have clear line of sight to the cash flow generation required to drive leverage down to our targeted levels of 2.5 to 3 times within 24 months following the close of the AR Packaging transaction.
We have a substantial total liquidity with $1.9 billion available as of the end of the second quarter.
In July, we raised approximately $530 million to support our acquisition activity at very effective interest rates below 2%, $250 million was raised in a 7-year floating rate term loan from the farm credit system in a similar structure to the farm credit loan we raised earlier this year.
In addition, we raised Euro based debt when the EUR210 million delayed-draw term loan along with a EUR25 million increase in our European line of credit.
We funded the farm credit loan last week.
While we anticipate drawing the euro term loan in connection with the close of the AR Packaging transaction.
Turning now to guidance on slide 14 and 15.
We are updating our full-year EBITDA guidance to incorporate recent price actions expected commodity input cost inflation and the close of the Americraft Carton acquisition.
2021 adjusted EBITDA is projected to be in a range of 1.0-8 to $1.2 billion.
Components of EBITDA have changed modestly as higher contribution from volume mix and net performance are being offset by the transitory negative price cost spread that occurred in the first half of the year.
Notably on Slide 15, you'll see the significant increase in EBITDA, we are projecting in the second half of 2021.
Implemented price initiatives are expected to yield a material price cost recovery benefit to EBITDA in the second half of the year in a range of $80 to $120 million compared to the first half.
The Americraft acquisition closed on July 1 and is expected to provide an incremental $15 million to the second half adjusted EBITDA.
Turning back to the cash flow guidance on slide 14, we anticipate a range of $175 to $225 million for the year.
Guidance for capital expenditures in 2021 has been adjusted, modestly higher, as we are experiencing similar inflationary environment from materials and labor as we complete critical capital projects on time in 2021.
Interest and working capital components to cash flow have improved related to the attractive refinancing from our debt completed this year at very low interest rates and the positive impact on working capital as we have worked down inventories on stronger demand.
As we look through 2022, we remain committed to capital expenditures, returning to a more normalized range of $450 million and look forward to generating significant cash flow as we earn on the investments we've made to materially improve the profitability of the company.
For reference, $450 million in capital expenditures, estimated in 2022 includes both the AR Packaging and Americraft acquisitions.
Wrapping up my comments on Slide 16 and the conclusion of our successful partnership with International Paper during the quarter.
Partnership was foundational to building the highly integrated fiber-based consumer packaging business we are today and it created value for stakeholders.
Conclusion of the partnership with IP, return ownership interest of the partnership back to 100%.
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q1 adjusted earnings per share $0.23.
q1 sales rose 3 percent to $1.649 billion.
intends to acquire americraft carton, inc. for approximately $280 million.
graphic packaging holding - transaction with americraft carton includes seven well-capitalized converting facilities, team of employees.
graphic packaging - proposed acquisition of americraft carton is expected to add about $200 million in sales, $30 million in adjusted ebitda upon completion.
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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.
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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.
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On the call today are William Eccleshare, Chief Executive Officer of Clear Channel Outdoor Holdings, Inc.; and Brian Coleman, Chief Financial Officer of Clear Channel Outdoor Holdings, Inc., who will provide an overview of the fourth quarter and full year 2020 operating performance of Clear Channel Outdoor Holdings, Inc., and Clear Channel International BV.
These statements include management's expectations, beliefs, and projections about performance and represents management's current beliefs, there could be no assurance that management's expectations, beliefs or projections will be achieved or that actual results will not differ from expectations.
During today's call, we will provide certain performance measures that do not conform to Generally Accepted Accounting Principles.
They provide a detailed breakdown of foreign exchange and non-cash compensation expense items, as well as segment revenue, adjusted EBITDA, among other important information.
For that reason, we ask that you view each slide as William and Brian comments on them.
Despite the unprecedented challenges brought on by the pandemic and the sporadic nature of the global recovery, we are heartened by the progress being made with regards to development and distribution of vaccine, and we remain confident that our business will return to growth in 2021.
It's worth noting that the out-of-home industry has consistently accounted for 5% to 6% of global advertising spend, and was one of the only growing traditional mediums pre-COVID.
Our industry has proven to be very resilient coming out a previous downturn, and we fully expect this will once again be the case as we emerge from the pandemic.
Longer term, the digital out-of-home sector is projected to grow at 13% compound annual growth rate from 2022 to 2025, according to data published by MAGNA Global in December 2020.
We hope to capture a significant share of this growth, and we believe the actions we've taken during the past 12 months from strengthening our liquidity and implementing cost restructuring efforts, to the adjustments we've made to our sales approaches, to the continued expansion of our digital platform and data analytics product, put us in a stronger position to return to revenue growth as the recovery ultimately takes hold.
As we previously noted, while we continue to focus on carefully managing our expenses, we have begun to play offence.
Throughout the pandemic, we have focused on strengthening our relationships with our advertising partners, with an emphasis on collaborating more closely with them as they tap into the flexibility and immediacy of our platform.
We have increasingly utilized our RADAR tweaked solutions to help our customers understand how that target customers have changed their movement patterns.
In turn, we have still to demonstrate our ability to deliver real-time content changes depending on audience traffic, as well as weather, day-part and other relevant variables.
Overall, we are united across our organization in executing a clear strategic plan, and fully capitalizing on the fundamental strength and growth drivers of our global asset base, in order to unlock shareholder value.
There are four key components that will continue to define our success now and well into the future.
And we have continued to deliver progress across all of them.
These imperatives include, first and foremost, we are continuing to invest in our business, including secure in premier contracts and integrating the right technology to strengthen and expand the effectiveness of our assets.
We continue to grow our digital footprint and demonstrated effectiveness in dynamically targeting, influencing and delivering audiences on the move.
Complementing our digital portfolio, we've added to our data analytics capabilities and further strengthened our RADAR tweak of tools through key partnerships in both the US and Europe, and we continue to expand our integration with programmatic buying platform.
All of these investments around monetizing our portfolio by delivering the data, targeting and ease of ad placement that our customers increasingly appreciate.
We also finalized our new contract with the Port Authority of New York and New Jersey during the fourth quarter.
This venture is aimed at capturing the incredible potential of our platform and technology in a very big way as we emerged in the pandemic and audience travel begins to normalize.
Second, we are focused on maximizing revenues by doing what we do best, partnering politely with our customers to deliver compelling advertising solutions, strengthening long-term relationships and remaining agile and flexible.
In the US, we're doubling down on our client direct selling initiatives and emphasizing selling creative ideas rather than specific billable locations.
Similarly in Europe, we are working with advertisers and agencies to develop unique network solution, which exploit the flexibility of our medium.
These approaches along with the integration of RADAR's broadening suite of related data analytics tool are supporting deeper conversations with brands, who are selling the unique strength of our platform.
Third, we have remained diligent in prudently managing our cost structure and cash flow.
These initiatives have included negotiating reductions in site leases, temporary reductions in compensation and reductions in certain discretionary spending, as well as deferring capital expenditures.
We've also moved forward with the restructuring plans to reduce headcount throughout our organization.
And fourth, we are committed to maintaining ample liquidity and continuingly -- continually reviewing parts to strengthen our balance sheet over the long term.
This includes the recent refinancing of a portion of our debt through the issuance of $1 billion senior notes, which extended our maturity profile and reduced our cash interest expense going forward.
And Brian will provide more details following my remarks.
The strength of our assets and our focus on remaining agile in terms of maximizing our inventory in a difficult environment was evident in the fourth quarter as we continued to post sequential improvement in our performance.
We delivered consolidated revenue of $541 million, down 27% compared to the prior year.
Excluding China and FX, the decline would have been 25% in the fourth quarter, an improvement over the third quarter.
In Americas, we delivered results ahead of our expectations in both sequential revenue and adjusted EBITDA margin.
Our performance in Europe reflected the impact of the increased mobility restriction as government thought to contain the second wave of the virus.
These results were also ahead of our expectations as we work diligently to adjust our selling approaches and maximize our asset in an unprecedented and volatile climate.
Similar to the third quarter, we saw promising signs regarding the resilience of our platform in select markets, particularly in the UK where our business significantly outperformed the roadside market.
We believe this reflects both the premium locations of our roadside inventory, as well as the success of our digital screens which generated close to 70% of our fourth quarter revenue in the UK.
These results, as well as our progress in continuing to drive operating efficiencies are certainly encouraging given the pandemic related circumstances we have faced globally.
I'd like to call out all of our employees for their outstanding commitment to our mission and their contributions to our business during this extraordinary operating period.
We truly have a first rate talented team laying the groundwork to deliver improved results this year and beyond.
Our people have adjusted brilliantly to new ways of working and their productivity and commitment through the crisis have been outstanding.
There are many steps they are taking to further strengthen our operations while adjusting our approach to serving our clients during the pandemic will pay dividends well into the future.
Looking ahead, we will be facing a very tough comparable first quarter given our strong performance in the first three months of 2020, and the continued impact of COVID 19.
This is also traditionally our smallest quarter in terms of revenue.
Based on the information we have as of today, we expect Americas segment revenue to be down in the high 20 percentage range as compared to the prior year.
The recent mobility restrictions in European countries, following mutations of the virus have continued to cause significant volatility in our European segment booking activity.
Due to this, for the first quarter of 2021, with the Europe segment revenue to be down in the mid 30% range, as compared to prior year.
Latin American bookings continue to be severely constrained as the pandemics' impact continues in all four of our markets in the region.
Turning to our fourth quarter performance.
In the Americas segment, while year-over-year revenue was down 25%, we continue to show a sequential improvement, which was better than expected.
Local continues to show recovery and we're seeing national rebounding, it is not only the number of sales RFPs increasing, but we're also seeing an increase in the size of those RFPs, which is certainly a good sign.
As a reminder, in 2019 National revenue was up 9%.
We've begun to gain traction with the large agencies and brands on the ability of the out-of-home medium to deliver results.
They were however the first to pullback as the pandemic hit.
So we're now beginning to rebuild interest with them, which bodes well as we exit the pandemic.
In the US, programmatic purchasing grew encouraging the year-over-year during the fourth quarter, although off a small base.
And we believe programmatic could grow substantially over time.
We've built a robust set of SSP partners and a rich network of more than 20 DSPs, providing avenues to sell our inventory alongside other digital media.
Our early entry into programmatic relative to the rest of the out-of-home industry positions us well as we work to introduce our platform and capabilities to a greater number of brands across the larger media buying universe.
Europe's fourth quarter revenue, adjusted for foreign exchange, was down 23%.
While our performance was ahead of our internal expectations due to the second wave of COVID and associated travel restrictions, specifically in our largest market, France, we did not deliver sequential improvement.
During the quarter, we continued to benefit from our strategic focus on roadside locations, which accounted for about two-thirds of our total European revenue and are far less affected by COVID-19 driven restriction than the transit environment which has historically accounted for just over 10% of our European revenues.
Similar to the Americas, one encouraging outcome of the pandemic is that in Europe, we have witnessed increased opportunities to demonstrate the flexibility, immediacy and creativity of our platform from multiple standpoint, including messaging context, contract flexibility and the ability to use mobile data to better target specific audiences.
Moving on now to our outlook for the Americas business.
As I mentioned, we expect the Americas to be down in the high 20 percentage range as compared to the prior year.
This is slightly weaker than the fourth quarter, due in part to the tough comps of 2020, as well as increased pressure on airports.
As a reminder, in last year's first quarter, Americas segment revenue was up 8.5% on 2019.
We are heartened by the increased audience movement with trends that we're seeing.
Our data is showing that travel has actually remained close to normal with some weeks even exceeding the same week in the prior year.
So audiences are back on the highways and we have no doubt advertisers will ultimately come back to the market.
The encouraging news is that, similar to the fourth quarter, we are continuing to see an improvement in the volume and the size of RFPs, and it appears that advertisers are getting more confident and starting to plan for the future in a more structured manner.
The beverage vertical continues to improve with the restaurant up versus prior year.
But it's also clear that advertisers are continuing to delay decision making and booking campaign later reducing our visibility.
We're continuing to leverage our RADAR platform, an expanded portfolio of partner tool to adjust to evolving travel patent to maximize our inventory for our customers, and this is helping to strengthen our relationships and demonstrate the unique attributes of our platform.
Turning to a review of the Americas technology initiatives and new contracts.
During the quarter we continued to invest in the right technology, including increasing our digital footprint, strengthening our data analytic capabilities and expanding in the programmatic space.
We added seventeen new digital billboards in the fourth quarter for a total of 74 new digital billboards in 2020, giving us a total of more than 1,400 digital billboards across the United States.
We also continue to strengthen our RADAR platform through partnerships aimed at further improving our data analytics and directly addressing our customers' needs.
We entered into a partnership with Bombora, a leading provider of B2B intent data.
An out-of-home industry first, we are integrating Bombora data with RADAR viewed audience insights, demographics, and location targeting.
So advertisers can now understand how each of our display impacts more than 100 B2B audience segment, making targeting the B2B customer more accessible and measurable.
Our partnership with Bambora followed the recent addition, the partnerships with Tremor Video and Geopath, which we've also added to the integrated suite of solutions we deliver through RADAR.
As an example of the benefits of our technology investment, we leveraged our billable presence in Florida and our RADAR-Connect mobile retargeting capabilities to deliver a campaign for Game Day vodka.
The brand reported that the campaign was responsible for 65% of website traffic and achieved a take through rate that was twice the industry average.
As repeated case studies have shown, combining billboard ads with mobile is far more effective than just using one or the other.
The success was such that Game Day Vodka was subsequently selected as an official committee sponsor by the Tampa Bay Super Bowl Host Committee.
This relationship is a very powerful example of RADAR-Connect's ability to take our out-of-home footprint to another level through smart targeting of the right audiences at the right time.
As I noted, we are continuing to expand in the programmatic space.
Our programmatic platform introduces ease and efficiency to the out-of-home sales process by enabling marketers to buy our out-of-home inventory in audience based packages, giving them a level of flexibility closest to the online platforms relative to other traditional ad medium.
As I've noticed -- as I've noted on previous calls, it's my firm belief that if you make something easier to buy, you inevitably grow your business and our growth in programmatic presence would certainly ensure that we continue to capture advertising dollars from other media and grow our share of the pie.
Finally, we are off to a good start with our Port Authority contracts.
We have the inventory up and running on our platform and have begun selling at it.
As we noted last quarter, the 12 year deal is the largest airport advertising contracts in the US, panning JFK, LaGuardia in Europe, and Stewart Airports.
With the addition of these tremendous airport assets, brands will have the unique ability to execute campaigns that reach a vast array of consumers as they drive local site throughout a vast metro area.
Despite the short-term challenges related to pandemic, we remain confident in the growth potential of these contracts.
Looking ahead in Europe where we're seeing a range of performances within our markets due to the resurgence of COVID 19 cases, new variants in the virus and related government restrictions, particularly in France and the UK.
As I noted earlier, we expect Europe revenues to be down in the mid 30 percentage range as compared to 2020.
Visibility into the remainder of the quarter continued to be impacted as some advertisers pause their activity pending greater clarity on the pace of the vaccination and timing of market reopening.
In addition, advertisers are making buying decisions later in the buying cycle which can delay bookings and impact our visibility.
Having said that, it is important to note that the impact of current government restrictions remains well below impact that we saw in March and April of last year.
And longer term, as we've continued to emphasize, the resilience of the business is clear and when audiences returned to the streets, our out-of-home business will rebound soundly.
At this point, we believe restrictions across our European market will begin to lift the spring, and we're working closely with our advertisers to develop campaign targeting audiences as they return.
For example, in the UK, where the roadmap to lifting lockdowns was reviewed earlier this week, the expected rebound is being marketed as a renaissance moment, highlighting why out-of-home is better positioned than ever to help brands reach and engage audiences as they emerge from their restrictive stay at home orders.
Turning now to our European technology investments, we continue to make progress in utilizing smart data to help advertisers plan and adjust their campaigns.
Our sales team has integrated the RADAR technology in Spain and the UK, and advertiser interest has been very positive, particularly as we demonstrate the agility of our platform in using aggregated anonymous data to target audiences, as they return to the street.
In Spain, we recently launched RADAR driven campaign, centered on driving consumer interest for Disney Plus and CaixaBank.
The Disney Plus campaign is for the many theories one division and targeted in 18 to 45-year-old demographics with interest in comic, cinema and video games.
And the CaixaBank campaign was for their Young ID products and targeted 14 to 30-year-old with interest in music, museums and other cultural locations in Barcelona.
We're also rolling out a programmatic offering in Europe, similar to the Americas, our programmatic offering will build over time, simplifying the buying process, providing us with additional revenue stream and a growing avenue to leverage our scale and technology to target new advertising partners.
Our digital footprint continues to expand in Europe.
We added 545 digital displays in the fourth quarter and 1,244 in 2020 for a total of over 16,000 screens now live.
Overall, we have a broad asset base in Europe, which is enabling us to develop and market scale digital networks with a focus on road side, which can be sold flexibly by time of day and day of week.
This aligns well with rising advertiser expectations regarding our scale and the strength of our technology in targeting the right audiences on the move.
I should also note that we recently secured several key contracts in Europe, including winning the bid to renew the rain contract, covering bus shelters, pull banners and stopping points across the city and we've secured a renewal in Spain for the Madrid outskirts on January 1st of this year.
As you would expect, the past year was not particularly active for big tenders given COVID and several were pushed out to this year.
Nevertheless, we were successful in securing these major contracts.
So, in summary, we are intently focused on executing on our strategy, which is centered on strengthening our technology with the aim of fully monetizing our digital board and expanding our customer base.
Notwithstanding the challenges we have faced, the pandemic has also presented us with a number of opportunities to demonstrate the flexibility and immediacy of our platform with a broad range of advertisers as we look to deepen our relationships and accelerate our digital conversion.
It remains early in the recovery and as our market gradually open up, we will continue to take steps to preserve our liquidity, including balancing the need to defer capital expenditures, and reduce costs while still investing in strengthening our platform.
Overall, we believe we remain in a strong position to capitalize as audience ability increases, given the steps we have taken and continue to take throughout the global crisis.
As William mentioned, the past year was challenging, but we moved quickly to address our cost base, strengthen our liquidity and improve our financial flexibility.
As we look to build a stronger company, we have also continued to make strategic investments in critical areas aimed at strengthening and expanding the effectiveness of our assets, while also refining our sales approach.
Taking together these initiatives and our improved cost structure place us in a solid position to benefit as the worldwide economy recovers.
Moving on to the results on Slide 4.
Before discussing our results, I want to remind everyone that during our GAAP results discussions, I'll also talk about our results adjusted for foreign exchange, which is a non-GAAP measure.
We believe this provides greater comparability when evaluating our performance.
Additionally, as you know, we tendered our shares in Clear Media in April of last year, and therefore our Q4 results in 2020 do not include Clear Media.
However, our results in Q4 and full year 2019 did include Clear Media's results.
In the fourth quarter, consolidated revenue decreased 27.4% to $541 million.
Adjusting for foreign exchange, revenue was down 29.3%.
If you exclude China and adjust for currency, the decline in revenue was 24.5%.
The finish was better than our internal expectations due to stronger-than-expected performance in United States and certain markets in Europe.
As William mentioned, this was sequentially better than the third quarter.
Consolidated net loss in the fourth quarter was $33 million compared to net income of $32 million in the fourth quarter of 2019.
Consolidated adjusted EBITDA was $101 million, down 51.1%.
Excluding FX, consolidated adjusted EBITDA was down 52.1% compared to the fourth quarter of 2019.
For the full year consolidated revenue decreased 30.9% to $1.9 billion, excluding foreign currency exchange impact, consolidated revenue for 2020 declined 31.4%.
Consolidated net loss for the full year was $600 million compared to $362 million in 2019.
And consolidated adjusted EBITDA for 2020 was $120 million, down 80.8% compared to 2019.
Excluding FX, adjusted EBITDA was down 82% for the full year.
These are certainly not the results we anticipated delivering when we started 2020.
But we do believe the team did an exceptional job responding to the pandemic and taking the necessary steps to adapt to the dynamics in the marketplace.
Normally during the fourth quarter earnings call I review both the fourth quarter and full year results for each of our business segments.
But this year for efficiency, I will focus only on the fourth quarter.
The Americas segment revenue was $258 million in the fourth quarter, down 25.3% compared to $345 million last year.
As William noted, this marked further sequential improvement compared to the previous two quarters.
Total digital revenue which accounted for 32% of total revenue was down 29.6%.
Digital revenue from billboards and street furniture was down 15.4%.
Digital revenue as compared to the prior year improved sequentially over the third quarter, which was down 34.8% and print continues to perform a bit better than digital due to our [indecipherable] inventory.
National was down 27% and accounted for 37% of total revenue, with local down slightly less at 24%, accounting for 63% of revenue.
Both national and local improved over the third quarter.
Our top-performing categories in the quarter included business services, our largest category, as well as beverages.
Regionally, we are still seeing strength in our small markets and weakness in the largest cities.
Direct operating and SG&A expenses were down 16.8%, due in part to lower site lease expenses related to lower revenue and renegotiated fixed-site lease expense, as well as lower compensation costs from lower revenue and operating cost savings initiatives.
Adjusted EBITDA was $94 million, down 34 -- 35.4% compared to the fourth quarter of last year with an adjusted EBITDA margin of 36.5%.
Europe revenue of $268 million was down 17.9% and excluded -- excluding foreign exchange, revenue was down 23% in the fourth quarter.
This was a bit weaker than the performance in the third quarter as the stricter lockdowns in key European countries, including France impacted our results.
However, our results for the quarter finished ahead of our expectations, which speaks to the execution of our team, as well as the strength of our assets.
The level of restrictions varied by country, with seven of our top 10 European markets posting sequential revenue improvements in the quarter, with the majority showing topline declines, less than half of what we saw at the outset of the pandemic and last year's second quarter.
Digital accounted for 34% of total revenue and was down 18.8% excluding the impact of foreign exchange.
Adjusted direct operating and SG&A expenses were down 17% compared to the fourth quarter of last year, excluding the impact of foreign exchange.
The decline was driven primarily by lower direct operating expenses in large part due to our success in renegotiating fixed lease expenses.
Additionally, SG&A expense was down slightly due to lower compensation due to lower revenue, operating cost savings initiatives and government support and wage subsidies.
And adjusted EBITDA was $35 million, down 46.9% from $65 million in the year ago period, excluding the impact of foreign exchange.
This was driven by lower revenues in the period.
In August, as you know, we issued senior secured notes through our indirect wholly owned subsidiary, Clear Channel International BV, which we refer to as CCIBV.
Net proceeds from the note offering provides incremental liquidity for our operations.
Our European segment consists of the business is operated by CCIBV and its consolidated subsidiaries.
Accordingly, the revenue for our Europe segment is the revenue for CCIBV.
Europe segment adjusted EBITDA does not include an allocation of CCIBV's corporate expenses, are deducted from CCIBV's operating income and adjusted EBITDA.
As discussed above, Europe and CCIBV revenue decreased $59 million during the fourth quarter of 2020 compared to the same period of 2019 of $268 million.
After adjusting for $16.5 million impact from movements in foreign exchange rates, Europe and CCIBV revenue decreased $75 million during the fourth quarter of 2020 compared to the same period of 2019.
CCIBV operating income was $0.8 million in the fourth quarter of 2020 compared to operating income of $38 million in the same period of 2019.
Now let's move to Slide 7 and a quick review of other, which includes Latin America.
As a reminder, the prior year results include Clear Media, which was divested in April of 2020.
Latin American revenue was $15 million in the fourth quarter, down $11 million compared to the same period last year.
Revenue was down due to widespread impact of COVID 19.
Direct operating expense and SG&A from our Latin American business were $15 million, down $4 million compared to the fourth quarter in the prior year due in part to lower revenue, as well as cost savings initiatives.
Latin America adjusted EBITDA was $1 million, down $6 million compared to the fourth quarter in the prior year due to the impact on revenue from COVID 19, partially offset by cost savings initiatives.
Now moving to Slide 8, and review of capital expenditures.
CapEx totaled $31 million in the fourth quarter, a decline of $62 million compared to the prior year period as we continued to focus on preserving liquidity, given the current operating conditions.
CapEx was also lower due to the sale of Clear Media, which as I mentioned, occurred in April of 2020, although fourth quarter CapEx did include a small amount related to the port authority contract.
For the full year, total CapEx was $124 million, down $108 million compared to the full year 2019.
Again the reduced CapEx for the full year was primarily due to our liquidity preservation measures and the divestiture of Clear Media.
Now on to Slide 9.
Clear Channel Outdoor's consolidated cash and cash equivalents totaled $785 million as of December 31st, 2020.
Our debt was $5.6 billion, an increase of just over $500 million during the year as a result of our drawing on the cash flow revolver at the end of March and issuing the CCIBV notes in August.
Cash paid for interest on debt was $22 million during the fourth quarter and $324 million during the full year ended December 31st, 2020.
This was in line with our expectation and up slightly compared to the prior year due to the timing of interest payments, which was partially offset by lower interest rates.
Our weighted average cost of debt was reduced from 6.8% in 2019 to 6.1% in 2020.
Moving on to Slide 10.
As mentioned, we continue to focus on managing our cost base and strengthening our liquidity and financial flexibility.
In September we announced restructuring plans throughout our organizations.
In our Americas segments we completed our restructuring plans in the fourth quarter and we expect annualized pre-tax cost savings of approximately $7 million to begin in 2021.
However, our plans for Europe have been delayed due to the evolving nature of COVID 19 impacts and the complexity of executing the plans.
We now expect to substantially complete the plan by the first half of 2022.
In conjunction with and in addition to these plans, we expect an additional annualized pre-tax cost savings of approximately $5 million in our corporate operations.
Additionally, as I mentioned in my remarks on both the Americas and Europe segments, we continue to work on negotiating fixed-site lease savings and have achieved $28 million in rent abatements in the fourth quarter for a total of $78 million year-to-date.
Also, we received European government support in wage subsidies in response to COVID 19 of $1 million in the fourth quarter and $16 million year-to-date.
The duration and severity of COVID 19's impacts continue to evolve and remain unknown, as such, we will consider expanding, refining or implementing further changes to our existing restructuring plans and short-term cost savings initiatives as circumstances warrant.
Moving onto our financial flexibility initiatives, earlier this month we successfully completed an offering of $1 billion of 7.75% senior notes due 2028.
Proceeds from the offering will be used to redeem $940 million of our 9.25% senior notes due 2024, as well as to pay transaction fees and expenses including associated call premium and accrued interest.
The timing was right for this offering, giving the strength in the high-yield credit market, as well as our improving outlook.
In addition, we've de-risked our maturity profile by refinancing approximately half of our 9.25% notes which were unsecured and represent our next nearest material maturity.
Our weighted average maturity is now 5.6 years, up from 4.9 years with a run rate cash interest savings of approximately $10 million per year, due to lower coupon rate.
All-in-all, the offering speaks to the continued support the financial markets half for Clear Channel Outdoor and reflect our improving outlook, strong global assets and leading market position.
Turning to Slide 11 and our outlook for the first quarter of 2021.
As William mentioned, Americas first quarter 2021 segment revenue is expected to be down in the high 20% range as compared to the prior year.
This is slightly weaker than the fourth quarter, due in part to the tough comps.
With the first quarter of 2020 when revenue increased 8.5% over the prior year, as well as the continued impact of COVID 19.
In our Europe segment we expect revenue to be down in the mid 30% range in the first quarter, historically the first quarter of the year is the smallest quarter for revenue.
The weakness is due to the resurgence of COVID 19 cases, new variants of the virus and related government restrictions, particularly in France and the UK.
Latin America bookings continued to be severely constrained.
Additionally, we expect cash interest payments in 2021 of $362 million and $335 million in 2022.
The increase in 2021 is primarily due to the interest payments on the CCIBV notes issued in 2020, as well as various timing differences.
So, to reiterate, despite the near-term challenges we continue to face and the uncertainty regarding the pace of the worldwide recovery, we are encouraged by the resilience of our business and the fact that infection rates are in decline in the majority of our markets, which together with the vaccination programs gathered pace is leading to a real sense of optimism.
Our national and local businesses in the US continue to recover.
And in Europe we are confident that the restrictions of starting to lift and our pipeline is strengthening.
As we exit the first quarter and the environment continues to improve, we remain committed to executing against our growth strategy and delivering year-on-year growth in 2021.
We believe are focused on working closely with our customers to give them real time audience insight they need, including our effort to expand our technology initiatives spanning our digital platform, data analytics capabilities and programmatic capability put us in an even stronger position to return to revenue growth and benefit from our operating leverage as the recovery takes hold in the second quarter and beyond.
We are now a stronger and more efficient company in the way that we operate, both in terms of the unique value proposition we deliver and the manner in which we run our business.
Our people have shown that creativity and commitment and we are poised to maximize the opportunities ahead.
I look forward to providing updates regarding our progress in the months ahead.
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clear channel outdoor holdings q3 revenue rose 33.3% to $596.4 million.
q3 revenue rose 33.3% to $596.4 million .
sees q4 revenue $715 million to $740 million.
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I'm Dave Martin of Harsco.
For a discussion of such risks and uncertainties to the Risk Factors section in our most recent 10-K and 10-Q.
The third quarter developed largely as we anticipated on a consolidated basis with our environmental businesses improving sequentially, while our rail business, which did not see a significant impact from COVID through Q2, was affected by weak demand and an unfavorable product mix.
Overall, EBITDA was consistent with our expectations, while cash flow was better.
Revenues in our environmental businesses, which represent more than 80% of total Harsco revenue, were up 15% versus the second quarter.
Volumes were up in all waste categories, led by hazardous medical waste.
Retail and industrial waste volumes were also up by double digits, while steel waste or LST, was up high single digits.
Revenue was also up in the contaminated materials segment with strength in the dredge business, offsetting weakness in our high-margin soils business, which has been affected by softness in large nonresidential construction projects in the Mid-Atlantic and Northeast regions.
Our key priorities have remained consistent for most of 2020: Keeping our people safe during the pandemic, preserving liquidity, capturing the value of the ESOL acquisition and executing our operational recovery plan in rail.
I'm very pleased with the execution on each of these critical initiatives during the third quarter.
The number of COVID cases across our employee population has remained steady at modest levels for several months.
And we have not experienced any significant disruption to our operations related to employee health.
The degree of employee compliance with our global COVID-related principles is quite high, and has served to counter the worrisome trends across the general populations of the more than 30 countries in which we operate.
Pete will comment on our liquidity position in a moment, but I would like to recognize Pete and his finance organization for their outstanding management of our cash flow and liquidity position over the last several months.
Cash flow continues to be strong and is well above the 2019 level despite the impact of COVID on cash earnings.
The integration and value capture of the ESOL acquisition continues at a brisk pace.
The vast majority of our value actions have been launched and the corresponding benefits for the year will be ahead of our original plan.
These actions range from logistics and disposal optimization to various SG&A and commercial initiatives.
This past week, David Stanton, the Clean Earth President and I visited a number of our sites across the U.S. was energizing to again see firsthand, the tremendous opportunities we have to grow the business and improve the efficiency of its operations.
The operational recovery program at Rail is on track to deliver against its objectives by the end of the year.
The backlog in Rail remains at record high levels, so the SCOR program is oriented toward ensuring we have the appropriate capacity, competency and governance principles in place, to deliver high-quality products to our customers on time.
In terms of next steps, we plan to establish and sustain the lean based operating model required for a best-in-class supply chain and fulfillment capability.
Looking ahead, we expect our end markets to continue to improve throughout the quarter and into 2021, with recovery in our environmental businesses leading that of our Rail business.
Our Q4 outlook reflects these positive trends in both Harsco Environmental and in Clean Earth.
We are not yet comfortable providing more specific guidance for next year given the current economic situation, and the potential impacts on our planning process.
In terms of management focus, we will continue to execute our current programs and strengthen our balance sheet.
Together with the expected improvements in our end markets, these actions should build on our foundation and enable us to take the meaningful next steps in our portfolio transformation.
In the third quarter, Harsco's revenues totaled $509 million, and adjusted EBITDA totaled $59 million.
Our revenues increased 14% over the second quarter of this year with each of our businesses realizing a nice improvement in revenues from the second quarter when we believe the impacts of the pandemic peaked for most of our end markets.
The sequential improvement in revenue ranged from a 20% increase at Clean Earth, to a 9% increase at Harsco Environmental.
Our third quarter adjusted EBITDA of $59 million is consistent with our expectations in August and is comparable to our adjusted EBITDA result in Q2, despite the unfavorable timing impact of certain expenditures we discussed on our earnings call last quarter.
These incremental items consisting largely of the timing of insurance and compensation related amounts, negatively affected the quarter-on-quarter comps by approximately $10 million.
Otherwise, underlying performance improved compared with Q2 as a result of volume growth driven by the ongoing economic recovery, and strong underlying operating performance within our businesses.
Including at ESOL, where margins improved considerably as our integration and operational improvement actions began to take hold.
And as you may recall, Q3 was our first full quarter of owning ESOL after we acquired it in April.
Relative to our expectations at the beginning of the quarter, our results were aided by better top line and margin performance in Harsco Environmental and lower corporate spending as a result of our ongoing focus on managing costs.
Our EBITDA in the third quarter of 2019 totaled $87 million.
The change year-on-year clearly reflects the ongoing impact of the pandemic on end market demand as well as the fact that the prior year quarter was particularly strong due to a favorable mix in both Rail and Clean Earth.
Harsco's adjusted earnings per share from continuing operations for the third quarter was $0.08.
And lastly, our free cash flow totaled $18 million in Q3, a strong performance considering that this figure is net of approximately $14 million of tax-related outflows that we had deferred from the second quarter.
This figure compares with free cash flow of $5 million in the third quarter of 2019.
And year-to-date, our free cash flow is now $10 million positive, significantly improved from 2019.
Capital spending discipline and improved working capital performance have been the main drivers of the improvement this year and should continue to be so for the foreseeable future.
Generating positive free cash flow is clearly an important focus for us and we expect to generate positive free cash flow in Q4 as well.
Revenues totaled $223 million and adjusted EBITDA was $40 million, translating to a margin of 18%.
This EBITDA figure compares to $60 million in the prior year with the change driven by pandemic effects on the demand for services and applied products as well as related impacts on new site ramp-ups.
Steel output at our customer sites declined approximately 6% on a continuing site basis compared with the prior year quarter.
Relative to the second quarter of this year, Harsco Environmental's revenues rose 9% on a similar improvement in steel volumes.
Adjusted EBITDA was unchanged quarter-on-quarter.
However, as I mentioned earlier, the comp to Q2 was negatively impacted by the timing of expenses, which totaled approximately $5 million for HE.
So I believe these results again illustrate strong performance by our Harsco Environmental team and their ongoing focus on operational excellence and financial discipline in controlling operating expenses.
Harsco Environmental's free cash flow totaled $32 million in the quarter and now totaled $64 million for the year.
This year-to-date figure compares with free cash flow of $10 million in the prior year.
The improvement during 2020 has largely been driven by lower capital spending and cash generated from working capital, as I mentioned earlier.
For the quarter, revenues were $194 million, and adjusted EBITDA totaled $20 million.
Compared to the third quarter of 2019, our dredged material processing business had a strong quarter.
And the inclusion of ESOL offset the volume pressures linked to the pandemic in our legacy Clean Earth has waste business.
Our soils business was impacted by less favorable mix and delays in nonresidential construction projects, again due to the pandemic.
Relative to the second quarter of 2020, revenues increased roughly 20% with ESOL and legacy Clean Earth experiencing similar improvements.
By line of business, the sequential revenue growth was most significant in medical and dredge material processing, followed by industrial and retail hazardous waste.
ESOL contributed nearly $130 million of revenue in the quarter.
And it's great to see the ESOL business bounce back from Q2 when many medical facilities and industrial plants as well as a good number of retail stores were closed.
And I believe this illustrates the recurring and essential nature of its revenues and its resilience during atypical business cycles.
Further, ESOL's margin performance improvement was also very positive in the quarter.
Additional volume helped in the quarter, but I believe this result is more importantly, a direct positive reflection on the improvement initiatives that we've only begun to implement.
ESOL's run rate EBITDA as a result is now above pre-acquisition levels despite the pandemic.
Last quarter, I mentioned that we expect to realize approximately $5 million of benefits in 2020 from our initiatives.
Today, I'm confident we will exceed this target.
And as a reminder, the major improvement levers we're pursuing are our disposal optimization, site productivity, inbound and outbound logistics, procurement and commercial initiatives.
Although we still have some work to do in order to achieve our goal of doubling ESOL's EBITDA within three years, we're off to a great start.
Lastly, on the Clean Earth segment, free cash flow and cash conversion remains impressive.
The segment's free cash flow totaled $17 million in the quarter and year-to-date, it now stands at $38 million versus adjusted EBITDA of $42 million.
Rail revenues increased to $93 million, while the segment's adjusted EBITDA declined to $5 million in the third quarter.
The change in EBITDA relative to the prior year quarter can be principally attributed to a less favorable mix across all product categories and lower aftermarket and pro train volumes due to the pandemic headwinds affecting our customers, which became more pronounced during the quarter.
These impacts were partially offset by lower SG&A spending.
While economic conditions related to the pandemic clearly hit the low point in Q2 for Clean Earth and Environmental, that wasn't the case for Rail, as the end markets continue to feel pressures from pandemic-related headwinds on freight and passenger rail demand.
As we started to see early this quarter, this has created some deferrals of our customers' capital spending versus their original plans.
And accordingly, the demand for short-cycle products across all business lines in Rail was soft.
While Rail traffic and ridership has started to improve, the outlook is still fairly volatile given the pandemic headwinds.
Furthermore, our business generally lags leading indicators such as traffic and ridership by a few quarters.
We have some important customer discussions in the coming weeks about their forthcoming capital spending plans and are cautiously optimistic that we will see some further improvements late in the year and early 2021.
Now bright spot continues to be business development in our backlog, where we continue to see opportunities to bid on larger, longer-term contracts despite softness in the short-cycle market, and we've had a number of notable sizable wins during the quarter.
These wins included a follow-on option contract with the New York City Transit Authority to supply them with additional vehicles and a new contract with the Chicago Transit Authority to supply them with snow removal vehicles.
As a result, Rail's backlog remains robust, totaling more than $450 million at the end of the quarter.
So before moving to our outlook on slide eight, let me comment on our balance sheet.
Our financial flexibility remains strong.
Our leverage, as expected stood at 4.5 times and our liquidity totaled $325 million at the end of the quarter.
Reducing our leverage is a top priority for us and our goal remains to reduce our leverage to below 2.5 times within a couple of years.
Now let me turn to the outlook on slide eight With the exception of our Rail business, our visibility and confidence has continued to improve in recent months.
And as a result, we believe we're in a position to provide some quantitative guidance for the fourth quarter.
As you all know, the current economic environment continues to be fluid, and recent COVID infection trends are not favorable.
However, with this in mind and based on the current market environment, we see fourth quarter total Harsco adjusted EBITDA ranging from $58 million to $63 million.
Business conditions are expected to improve modestly for Clean Earth and Harsco Environmental during Q4 relative to the third quarter.
For these two segments, Q4 margins are projected to be stable versus the third quarter.
Rail results in the fourth quarter are currently expected to be similar to the third quarter performance, and corporate costs are expected to be modestly above Q3 levels.
Also, we expect our free cash flow to be between $20 million and $25 million in the fourth quarter.
And this outcome would place our free cash flow for the full year north of $30 million.
Now as I mentioned earlier, this outlook does not contemplate any meaningful impact to our business from any new lockdowns or restrictions, which may be implemented by state or national governments as a result of negative COVID developments.
Nonetheless, despite the unusual conditions we've all experienced these past few months, I'm very pleased with the performance, discipline and focus on execution by each of our businesses and keeping our people safe while delivering our strong results to date.
And I expect this to continue into the fourth quarter and into 2021.
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compname says q3 adjusted earnings per share $0.08 from continuing operations.
q3 adjusted earnings per share $0.08 from continuing operations.
q3 revenue $509 million versus refinitiv ibes estimate of $474.1 million.
expects its q4 ebitda to be within a range of $58 million to $63 million.
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Before I hand it over to Gary to discuss the second-quarter financials, I'll make a few comments on the current state of the company as well as our outlook for the future in light of the COVID-19 crisis.
Given how much the world has changed since our last earnings call three months ago, I think it's important to share with you the details of how we're managing the business through this unprecedented time.
As the pandemic spread across the globe during February and March, and as economic impacts started being felt in some of our businesses, we did what we do best: we took decisive action.
The actions we've taken have a clear and precise focus, which is protect our strong financial condition, to secure the financial well-being of the company and to support business continuity.
These measures will allow us to weather the storm while continuing to support our long-term strategy for profitable growth.
In the past, we've shown our operational excellence and our ability to effectively manage costs to meet challenging market demands.
This challenging time will be no different as we're actively addressing today's business pressures by using all the tools at our disposal.
The beauty of these current cost reduction initiatives is they're being done and implemented with minimal cost to achieve, thereby maintaining our flexibility to ramp up quickly should demand increase as customers, communities, and countries reopen their economies.
Bottom line is we're controlling what is within our control and focusing on the near term without losing our vision for the future.
I hope our comments today will leave investors with three clear messages about ESCO going forward: our diverse portfolio of strong, global businesses serving a wide range of nondiscretionary end markets provides us with the strength and resilience to continue to support our long-term growth outlook.
Number two, our strong balance sheet and significant financial liquidity will allow us to effectively manage through this crisis and maintain the company's financial health and well-being.
And finally, our deep and experienced leadership team has managed through and overcome many challenges in our 30-year history.
And I'm confident that we will emerge from this extraordinary time as an even stronger company.
Today, we have a very clearly defined priorities.
First and foremost is the health and safety of our employees and our families, followed by a commitment to meet the needs of our customers and suppliers.
Both of these will help support the business today and secure our future during this uncertain time.
ESCO will benefit from the fact that we have developed leading positions in various niche markets with a set of unique and highly technical products and solutions specifically designed to meet our customers' needs, which makes it difficult to be replaced by alternative sources.
Our continued investment in new products across all three segments and our staff of highly skilled engineering talent will continue to create new opportunities to provide value to our customers, which will drive our long-term growth.
I firmly believe that our future will rise as our customers' communities recover and spending returns to more normal levels.
To close out my comments before I hand it over to Gary, as we face the immediate and ensuing economic fallout of COVID-19, I believe we're well-positioned to navigate the short-term challenges in front of us.
I'm confident that our fundamental approach to operating our business and our solid liquidity will be the cornerstone of our continued long-term success.
Our employees are our most important asset.
And Vic will close out today's call with his current view related to our future and our end markets.
As Vic noted in his comments, our liquidity position is of the utmost importance to us during this challenging time.
I'm extremely pleased with where we stand today by having nearly $700 million of dry powder at our disposal between cash on hand and available credit capacity, while carrying a modest leverage ratio of 0.92.
I wish I could tell you that we saw this economic prices coming late in 2019 when we extended our five-year credit facility out to the year 2024 and we increased our debt capacity by an additional $50 million at lower rates, or when we sold the Technical Packaging business and generated over $190 million of gross proceeds to significantly improve our cash and debt positions, but we didn't see it coming.
We did not anticipate a pandemic as we executed both of these liquidity enhancements as these were part of our normal financial strategy.
But I'm sure glad we did these things as they have bolstered our current financial position.
I'll touch on a few Q2 highlights from the release.
Sales increased 5%, led by our Aerospace & Defense segment growing $16 million or 20% driven by the addition of Globe's submarine businesses, coupled with strong aerospace sales at PTI and Crissair, and higher space sales at VACCO.
Q2 A&D sales came in approximately $3 million ahead of plan.
Test sales were relatively flat as a result of a three-week shutdown of our Chinese manufacturing facility in February, coupled with the timing delays as several installation sites where personnel access was restricted due to COVID.
Domestic chamber sales were relatively strong and on-plan during the quarter, which nearly offset the installation site issues.
USG sales were down due to the timing of various project deliverables as several large utility customers, both domestic and international, realigned their short-term maintenance and spending protocols to focus on uninterrupted power delivery during the global crisis.
Entered orders clearly were a bright spot in both Q2 and year-to-date, where we booked $466 million of new business and ended March with a record backlog of $565 million, which is up 25% from the start of the year.
Our DoD business, led by our participation on the Block V contract for additional Virginia Class submarines, was the clear winner.
During Q2, we generated $34 million of cash from continuing operations with free cash flow of $23 million, which is 127% free cash flow conversion to net earnings during the quarter.
Q2 and year-to-date adjusted EBITDA improved from prior year, with Q2 reflecting a 17.4% margin despite the lower contribution from USG, which is our highest margin segment.
And finally, Q2 adjusted earnings per share was $0.68 a share, down slightly from the $0.71 a share delivered in Q2 of 2019, which resulted from the noted COVID impact.
To set the table for the balance of 2020, the COVID-19 global pandemic has introduced considerable uncertainty around the extent and duration of today's economic circumstances, which makes it difficult to predict how our future operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty, we're withdrawing our previously issued full-year guidance and will not provide guidance for Q3 at this time.
To add some color to Vic's comments on our cost savings actions, we are clearly focused on the right things, and we are pulling on all reasonable cost levers to maintain and optimize our cash flow and liquidity.
Our focus is to prudently cut our deferred costs in the short term and focus on those costs which do not have a negative outcome, impacting our ability to meet increasing demand or growth in the future.
I will offer some qualitative comments about our end markets, but I will emphasize that today's situation is very fluid, and there are many unknowns so my comments today may change materially in the future.
We recently completed a thorough review of our individual businesses as part of our April planning meetings to better frame our expectations of the impact of COVID-19 across and within our various operating units.
Starting with the Aerospace & Defense segment, we expect to see a slowdown in commercial aerospace deliveries over the balance of the year.
And it's too early in the cycle to determine the sales and EBIT impact from the current industry downturn as it relates to future build rates and airline passenger miles.
We are working with all of our aerospace customers to get a better picture of their demand and requirements over the coming quarters, but the situation continues to evolve daily.
Our defense contract within Aerospace & Defense, both military aerospace and navy products, is expected to remain strong given its current backlog and the urgency of expected platform deliveries.
Our aerospace supply chain partners continue to deliver necessary parts and services to us.
And in some cases where we see some weakness, we are working on bringing some of these products and services back in-house, such as machining and other capabilities we can replicate as a safety net.
We also did see this weakness in the aerospace market as an opportunity for ESCO.
So we find suppliers or competitors experiencing financial or operational stress during this crisis, we may be able to provide assistance about your partnering or through an acquisition at a reasonable price.
Our Test business is expected to remain relatively solid over the balance of the year given the strength of its backlog and the strength of its served markets, including medical shielding and 5G and its related communications technologies.
We expect USG's customer spending softness to continue through the next few months as they come out of their summer testing protocols and return to their more normal buying patterns.
Once some of the social distancing guidelines get sorted out and utility service personnel can return to their normal site visit routines, we expect our service business to return to normal as it has been essentially on hold for the past few months.
Utilities have money spend, and I'm certain that spending will return in the near future as maintenance spending cannot be delayed indefinitely without creating significant risk to grid safety, efficiency, or regulatory compliance.
The critical need to maintain, repair and improve the utilities' aging infrastructure is not reduced by this pandemic crisis.
On a positive note, I'm really pleased with USG's pipeline of new products and solutions, especially related to the software security and the related asset hardening solutions.
We introduced several new solutions at the Doble conference in March.
And from customer feedback, both there and after the show, these products are being enthusiastically received.
Moving on to M&A.
Prior to COVID, we had a couple of actionable opportunities well down a path to completion, and we'll continue to evaluate several other -- and we're continuing to evaluate several other actionable deals in the pipeline.
When the time is right, we will take action on these opportunities to grow our businesses than we have in the past.
Our Board is supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing portfolio.
In summary, we delivered a strong first half of the year.
And for the balance of the year, our plan is to hunker down while dust settles, work hard to control our costs while maintaining our critical workforce, develop contingency plans for multiple scenarios, and look for opportunities to leverage our infrastructure.
We will survive and prosper.
I'll now be glad to answer any questions you have.
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esco suspends previously issued fiscal year 2020 guidance.
q2 adjusted earnings per share $0.68.
from a liquidity perspective, we are in a really solid position.
not changing its dividend payment plan.
suspending its previously issued fiscal year 2020 guidance.
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I'd like to take a few minutes to make some high-level comments about our business and how we performed last year.
We came into 2020 with great momentum and this continued into the first quarter, delivering 5.6% organic growth, then COVID-19 hit the US economy and things changed dramatically.
While there was significant uncertainty, we knew we had a great team and resilient responses and innovative with a focus on providing solutions to our customers.
In addition, we were able to move -- we were able to quickly transition over 10,000 teammates to a no working environment in less than a week.
So they could pivot and effectively serve our customers.
As you may remember, we didn't grow as quickly in the second quarter due to the impact of the pandemic on our new business and the recording of revenue adjustments for general liability policies, but we still expanded our margins.
And in the third quarter, we delivered outstanding results with strong organic growth and margin expansion.
The results of the fourth quarter were similar to the third quarter as we finished the year strong and with good momentum going into '21.
Based on what we were seeing, if you ask me, if it was likely that we would deliver full-year results with good organic growth and meaningful margin expansion, I would have said it was possible but unlikely that if you would ask me that in, let's say, April.
We are very pleased with our results for 2020.
We were able to deliver these results through the hard work of our teammates and their dedication to our customers.
2020 was a testament to our laser focus on delivering innovative risk solutions.
We also thought the M&A landscape would cool off for several quarters until there was some sort of economic stability.
The slowdown only occurred for about one quarter and the industrywide activity is now rebounded a pre-COVID-19 levels.
Even with the uncertainty this year, we're very pleased that completed 25 acquisitions and $197 million of acquired annual revenue.
I'd like to highlight two strategic acquisitions, CoverHound that we completed in the fourth quarter, and O'Leary Insurances that we announced in the fourth quarter and closed on the 14th of January.
Regarding CoverHound, this acquisition will help us in many ways.
First, it will help us further our investment in technology, drive our innovation agenda and improve our carrier connectivity.
Second, it enables us to more effectively and efficiently provide quotes and bond coverage for our National Programs segment.
Third, it enables us to better serve smaller customers within our retail segment.
Ultimately, these items are focused on enhancing the customer buying experience by delivering curated quotes that best meet the needs of our customers.
We believe these new capabilities are unique in the marketplace.
We started 2020 with the acquisition Special Risk in British Columbia and finished the year with our acquisition of O'Leary Insurances in Ireland.
O'Leary was the largest independently owned retail brokers serving the Irish marketplace.
This acquisition strengthens our European operations, which we look forward to further developing in the years ahead.
Our new teammates and capability to deliver many opportunities over the coming years.
We're extremely proud of our results in 2020 in the delivery of total shareholder returns in excess of 20%.
And Steve Boyd will become our President of Wholesale.
Steve's background in National Programs as an operator and in technology brings critical skills to the leadership team in Wholesale as we continue to grow this important business through innovative solutions.
I'm excited that Tony and Steve will be working together to further drive this growth in the future.
Now, let's transition to the results of the quarter and the full-year.
I'm on Slide number 3.
We delivered strong results again this quarter, total revenue of $642 million, growing 10.9% in total and 4.7% organically.
Again into more detail in a few minutes about the performance of our segments.
Our EBITDAC margin was 27.1%, which is up 10 basis points from the fourth quarter of 2019.
Please remember that the fourth quarter of '19 included a gain on sale of business that benefited the prior year margin by approximately 100 basis points.
Our net income per share for the fourth quarter was $0.34, increasing 25% on an as-reported basis.
On an adjusted basis, which excludes the change in estimated acquisition earn-out payables, our net income per share was $0.32, an increase of 14.3% over the prior year.
Our team did an outstanding job of continuing to profitably grow our revenue, as well as manage our expenses in response to the dynamics associated with COVID-19.
During the quarter, we completed another nine acquisitions with annual revenues of approximately $80 million.
For the year, we grew total revenues of 9.2% and delivered organic revenue growth of 3.8%.
This is an outstanding performance given the economic headwinds experienced for most of the year.
We improved our EBITDAC margin for -- by 110 basis points to 31.1%, compared to 2019 as we leverage the growth in organic revenue and managed our expenses in response to the pandemic.
Our net income per share for the full-year of '20 increased 20.7% to $1.69 from $1.40 in 2019.
On an adjusted basis, which excludes the change in acquisition earn-outs, net income per share increased 19.3%.
Lastly, we had another strong year of M&A activity, as I said earlier, closing 25 acquisitions with approximately $197 million of annual revenue, adding many excellent businesses and teammates.
Now, on Slide 5.
In prior calls, we talked about factors that would impact the economic recovery, which included the elections, the approval of the vaccine and the timing of the rollout, as well as how much additional stimulus will be approved.
The timing of the vaccine rollout and the approval of additional stimulus will have the largest impact upon the recovery of the economy will influence business leaders confidence about rehiring and investing in their businesses.
During the fourth quarter, we continue to see companies doing well and other struggling mightily.
We've seen improving new business and our retention remains good.
However, we continue to believe it will be choppy -- a choppy recovery through at least the end of 2021 and maybe into early 2022.
From a rate standpoint, the fourth quarter was very similar to the third quarter, most standard rates were up 3% to 7% with E&S rates up 10% to 25% as compared to the prior year.
As we've talked about before, the main driver of rate increases continues to be loss experience.
Commercial auto rates remain up 10% or more and workers' compensation rates are not declining as fast as they were in previous quarters, but they are still negative.
There has been a lot of talk over the past few quarters that workers' compensation rates are turning positive.
However, we're still not seeing it across the board yet.
For an E&S perspective, coastal property, both wind and quake are up 15% to 25%.
Professional liability is generally up 10% to 25%, depending on the coverage in the industry.
We continue to see outliers to be wanted to coverage.
Personal lines in California, Florida and the Gulf Coast states remain under intense pressure as carriers are seeking to reduce their exposure due to fires and tropical activity during 2020.
We expect the reduction in personal lines capacity continue throughout '21.
Placing coverage for many lines, certain industries or customers with significant losses continues to be challenging.
This includes excess or umbrella coverage, where a carrier or carriers will seek a combination of lower limit and higher premium rates.
We don't expect this trend to materially change in '21.
Now, on Slide number 6.
Let's discuss the performance of our four segments.
Our Retail segment, organic revenue growth grew by 1.5% for the fourth quarter.
As we mentioned in our third quarter earnings call, we had about a 100 basis points of timing items that benefited the growth in the third quarter and negatively impacted the growth in the fourth quarter.
Our fourth quarter performance was driven by new business, better customer retention and premium rate increases, but was impacted by lower exposure units resulting from the pandemic.
We view the performance for the fourth quarter as good, considering we delivered 7% organic growth in the fourth quarter of last year and taking into consideration the timing headwind mentioned earlier.
Organic revenue growth for the full-year was 2.4%, which we consider a good performance in light of the tough economic environment.
Our National Programs segment grew 14.1% organically, delivering another stellar quarter.
Our growth was driven by strong new business, retention and rate increases.
Some of the top performing programs were our lender place, commercial and residential earthquake, wind and personal property, just to name a few.
For the full-year, our National Programs segment grew organically, an impressive 12.3%.
Our Wholesale Brokerage segment grew 5.8% organically for the quarter.
We realized strong new business and continued rate increases for most lines of coverage.
Brokerage was the fastest-growing again this quarter, while we continue to experience headwinds in our binding authority and personal lines businesses due to the economy and carrier appetite we mentioned previously.
For the full-year, our Wholesale Brokerage segment grew 5.5% organically, delivering another good year.
The organic revenue for our Services segment decreased 50 basis points for the fourth quarter, representing good improvement from the last few quarters.
The main drivers depressing growth continue to be lower claims volume for our Social Security and Medicare Set-aside advocacy businesses.
The decline was substantially offset by revenue generated by processing claims for weather-related events that occurred in the third and fourth quarters.
For the full-year, organic revenue decreased by 10.9%, driven by lower claims for our Social Security Advocacy business, certain terminated customer contracts and the impact of the pandemic.
While not back in positive territory, we believe the fourth quarter was a turning point, and we anticipate delivering modest organic growth for 2021.
I'm moving on to Slide number 7.
Like previous quarters, I'm going to discuss our GAAP results, certain non-GAAP financial highlights, as well as our adjusted results, excluding the impact of the change in acquisition earn-out payables.
For the fourth quarter, we delivered total revenue growth of 61 -- $63.1 million, or 10.9% and organic revenue growth of 4.7%.
Our EBITDAC increased by 11.3%, growing slightly faster than revenues as we are able to leverage our expense base and further manage our expenses in response to COVID-19.
These both offset the headwinds associated with the gain on disposal recorded in the fourth quarter of 2019, an increase in non-cash stock-based compensation.
Our income before income taxes increased by 28.3%, outpacing EBITDAC growth.
This is primarily driven by the $15 million year-over-year decrease in the change of estimated acquisition earn-out payables.
On the next slide, we'll discuss our results excluding this adjustment.
Our net income increased by $20.8 million or 27.2% and our diluted net income per share increased by 25.9% to $0.34.
Our effective tax rate for the fourth quarter was 25.7%, substantially in line with the 25% we realized in the fourth quarter of 2019.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.093 or 9.4% compared to the fourth quarter of 2019.
Over on to Slide number 8.
This slide presents our results after removing the change in estimated acquisition earn-out payables for both years.
During the fourth quarter of 2020, the change in estimated acquisition earn-out payables was a credit of $9.5 million as compared to a $5.5 million charge in the fourth quarter of 2019.
The credit was primarily driven by the reduction in estimated earn-out payables for an acquisition within the National Programs segment.
Excluding the change in acquisition earn-outs in the fourth quarter of both years, our income before income tax grew $13.9 million or 12.9%.
Our net income on an adjusted basis increased by $9.7 million or 12% and our adjusted diluted net income per share was $0.32, an increase of 14.3%.
Overall, it was a great quarter.
We're moving over to Slide number 9.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 10.9% and our contingent commissions and GSCs was slightly down for the quarter.
Our organic revenues was exclude the net impact of M&A activity, increased by 4.7% for the fourth quarter.
Over to Slide number 10.
Our Retail segment delivered total revenue growth of 7.2%, driven by acquisition activity and organic revenue growth of 1.5%.
The timing discussed above negatively impacted organic revenue by 100 basis points for the quarter.
EBITDAC grew 5.3% due to leveraging organic revenue and cost savings achieved in response to the pandemic.
This growth was slower than the growth in total revenues, primarily due to a prior year gain on disposal that represented a negative year-over-year impact of approximately 150 basis points.
Our income before income tax margin increased 130 basis points and grew faster than EBITDAC, due primarily to the change in estimated acquisition earn-outs.
Moving on to Slide number 11.
Our National Programs segment increased total revenues by $25.3 million or 18.9% and organic revenue by 14.1%.
The increase in total revenue was driven by recent acquisitions and strong organic growth across many programs.
Due to that growth of 19% was in line with total revenue growth.
The leveraging of strong organic revenue in the management of variable cost was offset by higher intercompany IT charges and lower contingent commissions.
Income before income taxes increased by $20.3 million or 54% growing faster than EBITDAC due to decreased acquisition earn-out payables that was partially offset by higher intercompany interest expense.
Over to Slide number 12.
Our Wholesale Brokerage segment delivered total revenue growth of 19.2% and organic revenue growth of 5.8%.
Total revenues grew faster than organic revenue due to recent acquisitions with contingent commissions substantially flat year-over-year.
EBITDAC grew by 17.1% with a margin decline of 40 basis points as compared to the prior year, while we delivered good organic growth and reduced variable expenses in response to COVID-19.
These were more than offset due to changes in foreign exchange rates and to a lesser extent higher intercompany IT charges.
Our income before income taxes, grew by 6.2%, which was lower than total revenue growth, primarily due to higher intercompany interest expense.
Over to Slide number 13.
Total revenues and organic revenues for the Services segment both declined by about 50 basis points, driven by the items Powell mentioned earlier.
For the quarter, EBITDAC increased by 9.7% due to increased weather-related claims and was partially offset by higher intercompany IT expenses.
Income before income taxes decreased 23.6% due to a credit of $2.5 million in the quarters in the fourth quarter of 2019 for the change in estimated acquisition earn-out payables that did not recur or occurred in 2020.
Over to Slide number 14.
This slide presents our GAAP results for the full-year of 2020 and 2019.
For 2020, we delivered revenues of $2.6 billion, growing 9.2% and earnings per share of $1.69, growing 20.7%.
Our EBITDAC increased by 13.5% and our EBITDAC margin grew by 110 basis points.
For the year, our share count increased slightly as compared to the prior year and our dividends paid during 2020 as compared to 2019 increased by 7.1%.
Over to Slide number 15.
This slide presents our results excluding the change in estimated acquisition earn-out payables for both years.
For the full-year of 2020, on an adjusted basis, our income before income taxes grew 18.1%, which outpaced EBITDAC growth due to lower interest expense and our adjusted net income per share grew by 19.3%.
In addition to the strong income performance metrics, we also had another strong year for cash conversion due to the strength of our operating model and diversity of our businesses.
We delivered $721.6 million of cash flow from operations, representing a continued strong conversion rate of 27.6% as a percentage of revenue.
We also finished the year in a strong liquidity position, with $817 million of cash and cash equivalents, as well as $800 million of accessible capital on our revolver.
With this capital and the cash we will generate in 2021, we are in a good position to fund continued investment in our Company.
We got a few other comments regarding outlook for 2021.
During the third quarter, we were asked the question about our potential margins for 2021 in relation to the COVID-19 savings we had in 2020.
Now, with the year completed and a bit more visibility in 2021, we expect EBITDAC margins could be flat to up slightly considering our variable cost will more than likely increase as we're able to travel and see customers face-to-face.
As we've done in the past, our leaders will be focused on growing profitability.
Regarding contingents, we are anticipating them to be relatively flat or maybe down slightly in 2021.
As it pertains to taxes, we expect our effective tax rate for 2021 to be in the range of 23% to 24%.
This does not take into consideration any potential changes in the federal tax rates that are being discussed by the new administration.
For interest expense, we're anticipating a $7 million to $9 million increase as compared to 2020 driven by the new bonds we issued in September of 2020.
From a capital perspective, we are expecting our capex to decrease in 2021 to approximately $40 million to $45 million as we have substantially completed the development of our new Daytona Beach campus.
In my opening comments, I mentioned there are still a few items that need to be resolved over the coming quarters.
We will watch closely the successful rollout of the vaccine and additional stimulus to help those in need.
Both of these items will influence the pace of economic recovery over the coming quarters.
From a rate perspective, we expect increases for the first six months of '21 to be similar to those seen in '20.
Ultimately, the rating -- the rate of increases will be driven by losses sustained in 2020 from the record setting number of tropical storms in the millions of acres that were burned.
The question remains for how much longer and at what pace the rates need to achieve the targeted returns.
We think the market is getting near an inflection point over the coming year for certain lines and will drive some rate moderation.
The acquisition pace seems to be active as ever and competition between private equity and long-term strategics remains.
We continue to believe the aggressive pricing for deals by PE will not abate any time soon.
However, we're well positioned with our low leverage and the capital on our balance sheet, as well as access to additional capital to fund our M&A activity.
Our pipeline remains good and we will keep our disciplined approach to M&A as it's proven to be very successful.
But as you know, we don't count anything until it's closed.
Finally, technology innovation continue to be at the forefront regarding creation of new products and enhancing the experience of our customers.
We will continue to digitize our data, automate and prioritize technology investments around the following: optimizing and enhancing our data and analytics program; expanding our digital delivery capabilities around products and services; and engaging in initiatives designed to drive greater efficiency and velocity through our underlying processes.
As we deliver on these goals, we will see new opportunities for growth that will serve our customers even better.
We had a great 2020 on many fronts and have good momentum heading into '21.
I am extremely proud of how our team has served our customers through extremely challenging times.
We have a great team and a highly diversified business, both that performed very well in the past and we expect they will in the future.
Ultimately, our financial performance is only possible through the combined efforts of our nearly 11,000 teammates and our commitment to serve our customers.
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compname announces quarterly revenues of $642.1 million, up 10.9%.
compname announces quarterly revenues of $642.1 million, an increase of 10.9%, and diluted net income per share of $0.34.
q4 earnings per share $0.34.
qtrly adjusted earnings per share $0.32.
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As we have done on our past calls, we'll be taking questions at end of Craig's comments.
There are also outlined in our related 8-K filings.
We will start on Page 3, with recent highlights from the second quarter and as you can imagine, I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn.
We've done a good job of keeping our employees safe, have delivered for our customers and certainly generated exceptional cash flow, all while flexing our costs at record rates.
Our results, while also of last year, certainly, in absolute terms, were better than expectations and we continue to make an important investments for the future.
Q2 earnings on a per share basis were $0.13 on a GAAP basis and $0.70 on adjusted basis, which excludes $0.20 of charges related to acquisitions and divestitures and $0.37 related to the multi-year restructuring program that we just announced.
Our Q2 revenues were $3.9 billion, down 22% organically.
As we noted on our Q1 earnings call, April was down approximately 30%, this was followed by slightly better volumes in May and then relatively strong finish in June, which was down, let's call it low double-digits.
And in fact, I mean, this has a point of maybe amplification, our Electrical business in the Americas, in Europe and Asia, all posted low-single digit organic growth in revenue in the month of June.
And so once again, our Electrical businesses are remaining very resilient in the face of this pandemic an economic downturn.
Segment margins were 14.7%, down 110 basis points from Q1 and our detrimental margins were at 25%, 5 points better than our guidance of 30%.
Once again a good indication of how well our teams have done in controlling the elements that are really within our control.
However, recognizing that some of our businesses could be looking at a slow and certainly what you could call it, prolong recovery, we announced a multi-year restructuring program of $280 million, including $187 million charge in Q2.
These actions will reduce structural cost for sure and are targeted in those end markets, including commercial aerospace, oil and gas, NAFTA Class 8 truck and North America and European light vehicle markets, where these markets have been certainly highly impacted.
The other clear highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of $667 million.
Both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of $2.3 billion to $2.7 billion and a midpoint of $2.5 billion.
So teams continue to do great in converting on cash as well.
Finally, as most of you know, we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals.
I thought it'd be helpful just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on Page 4.
I think, simply stated at Eaton, sustainability really is at the core of our mission.
We talk about our mission being to improve the quality of life in the environment.
And certainly, that means, sustainability.
In fact, if you think about all of our value propositions with customers, they're built around creating safe, reliable and efficient solutions, let's call them sustainable solutions and so as we oftentimes say, what's good for the environment is good for Eaton.
We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it certainly plays where we think Eaton should play a leadership role.
Sustainability, as we think about it, really presents growth opportunities to help our customers solve their business goals and to this extent and have been so subjective, we've laid out 10-year plans that include investing $3 billion in R&D to create sustainable products over this period of time.
This will also include reducing our emissions from our installed base of products and upstream sources by some 15%.
Just to maybe give you an example of where we think this really fits with our overall strategy, sustainability really is about capitalizing for Eaton on secular growth trends, around electrification for sure, across all of our businesses and also in energy transition.
Sustainability, I'd tell you is also an important part of how we run the company on a day-to-day basis.
Since 2015, we reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets.
By 2030, we now have committed to achieve science-based targets of 50% reduction of greenhouse gas emissions from 2018 levels.
And finally, to achieve these goals, we obviously have to continue to work on building a workforce that's engaged and passionate about making a difference.
So this will continue to be a large project for the company overall.
So hopefully, that's provided just a little context in terms of why we think sustainability is such an important initiative for Eaton and how we're going to convert on that and turn it into accelerated growth for the company.
Now turning to Page 5, we summarize our Q2 financial results and I noticed a couple of things on this page.
First, acquisitions increased sales by 2%, this was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%.
I'd also remind you that we now recognize all charges related to acquisitions, divestitures and restructuring at corporate rather than at the segment level.
And we did it because we would hope would make it easier for you to do your forecast by quarter, by segment without the volatility that comes with these types of one-time charges.
Next on Page 6, we show our results for Electrical Americas.
Revenues down 29%, 9% decline organic revenue,19% impact from M&A and this was primarily the divestiture of the Lighting business and a small impact from negative currency as well of 1%.
Operating margins increased 130 basis points to 20.7% and these margins were certainly favorably impacted by the divestiture of Lighting, but also our teams did a great job of controlling costs to really counter the impact of the economic impact of COVID-19.
This combination resulted in a very strong decremental margin performance, up 16%.
So this segment continues to prove to be highly resilient when you look at margins, but also when you look at orders and backlog.
Orders increased 2.1% on a rolling 12-month basis with strength in residential and utility in data centers.
And of note here, our data center orders actually were up some 7% on a rolling 12-month basis.
And lastly, our bookings remain strong.
They were up 11% versus last year.
Turning to Page 7, we have our results for the Electrical Global segment.
Revenues were down 16% with 14% decline in organic revenues and 2% headwind from currency.
Operating margins here declined some 160 basis points, but to a very respectable 16% and decremental margins here were also very well managed, coming in at 26%.
Orders declined 4.6% on a rolling 12-month basis, but with most of the significant declines coming, as you would expect in global oil and gas markets and in industrial markets.
So, not an unexpected result with respect to where we saw strength and weakness.
And lastly, our backlog for Electrical Global increased 2% on a year-over-year basis.
On Page 8, we summarized our Hydraulics segment.
For Q2, revenues were down 32%, with a 30% decline organically and a 2% currency impact.
Operating margins were 9% and orders for the quarter were down 33.7% year-over-year and this was driven really by weakness in both OEMs and the distributor channel both.
We continue to work closely with Danfoss in completing the customary closing conditions and regulatory approvals and I would tell you that Danfoss organization remains excited about owning the business.
We do however now expect the transaction to close at the end of Q1 next year.
The delay as you can imagine, due to the COVID-19 impact, which has impacted the pace of some of the regulatory approvals that we expect.
On Page 9, we summarize results for the Aerospace segment.
Revenues declined 27% with a negative 35% in organic growth offset by 8% increase from the acquisition of Souriau.
Operating margins declined to 14.8% and really this is due to lower sales, but also the acquisition of Souriau also had a dilutive impact on margins.
Orders declined 12.8% on a rolling 12-month basis with particular weakness in the quarter, as you would expect in commercial OEM and aftermarket, it is worth noting, I would tell you though that orders for the military aftermarket were up 13% on a rolling 12-month basis.
Backlog was down 5% year-over-year overall.
Certainly, as everyone here understands the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.
Next on Page 10, we summarize the results for the Vehicle segment.
Revenues declined 59%, 52% of which was organic in addition to the divestiture of the Automotive Fluid Conveyance business which impacted revenues by 4%, we had 3% negative impact of currency.
The decrease in organic sales was really driven by I'd say, widespread customer plant shutdowns due to COVID-19, which really resulted in lower Class 8 OEM production as well as continued weakness in light vehicle production.
Just once again, it's a little bit more color on this one, during Q2, most of light and commercial OEMs had shutdowns at range between six and eight weeks.
These shut downs, which really began, let's say in late March, occurred throughout the month of April and extended into mid-May and so many of our customers were shut down for almost half the second quarter.
But production is now certainly beginning to come back online.
Global light vehicle market production was down 55% in Q2 and Class 8 OEM build was down from 70% in Q2.
We now project NAFTA Class 8 production to be 175,000 units for the year, which is down slightly from our prior forecast 189,000 units.
But still down some 49% from 2019.
This steep reduction and certainly -- this sudden reduction in OEM production led to operating margins of a negative 6.4%, but I would add, this business has once again done a great job managing decrementals and despite this tremendous reduction in revenue delivered a respectable decremental margin of 33%.
Not surprisingly, and much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.
Moving to Page 11, we have our eMobility segment.
Revenues were down 33%, all of which was organic.
Organic margins of negative 3.6% -- excuse me, operating margins of negative 3.6% primarily due to lower volumes and a particular weakness in the legacy internal combustion engine platforms.
And once again, the ongoing increase in R&D expenditure.
We continue to be enthused by the way, about the long-term potential of the business and and quite frankly, have seen nothing but upward revisions in the expectation for the penetration of electric vehicles.
And so a market that we still think will be very attractive long-term.
We're very well positioned once again with the common technology platforms that we're creating, leveraging the strength in our core Electrical business.
A good example of this idea of everything becoming more Electric is one of the recent wins that we've had with the truck OEM, a $21 million program for export power inverter where major commercial truck customer and so, in almost every aspect of our business there is more electrical content and we're well positioned once again through this particular segment to participate in that growth.
Overall, we've won programs with a value of approximately $500 million of mature-year revenue.
On Page 12, we show the details of our plans to accelerate and I'd say, expand our restructuring actions.
And I say accelerate because for the most part, we're pulling forward a number of the restructuring ideas that we would have done anyway.
Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects.
We announced the $280 million multi-year restructuring program, as I noted, designed to eliminate structural costs and we've taken charges of $187 million in Q2 and then we expect to see additional cost of $93 million realized through 2022.
Just to characterize those additional dollars, we'd expect to deliver over the next three years some $33 million of charges in the second half of this year, $55 million in 2021 and $5 million in 2022.
We would expect to realize $200 million of mature-year benefits from these actions once they are fully implemented and we think full year implementation is 2023.
Approximately two-thirds of these costs are in our Industrial businesses, principally, Vehicle and Aerospace and the remaining one-third is with our Electrical sector, particularly with an emphasis on our oil and gas business that will report through our Electrical Global segment.
Naturally, we're focused on those businesses serving in the end markets that are more severely impacted by the pandemic.
And then, turning to Page 13, we do our best to provide Q3 outlook on revenues versus last year and while you can imagine that all these markets will be stronger than what we realized in Q2, this is really a year-over-year growth for Q3 versus last year.
For Electrical Americas, we expect organic revenues to be between down 2% and up 2%, so essentially flat.
With strength in residential, utility, data centers offsetting weakness in industrial markets.
For Electrical Global, our current view is organic revenues will decline between 10% and 14% with strength in Asia-Pacific.
And data center markets offset by declines in Europe and once again, in the oil and gas market.
For Aerospace, we expect organic revenues will be down between 28% and 32% with continued strength in Military offset by really significant declines in all of the commercial markets.
And Vehicle, we project revenues will decline between 30% and 34%.
Some markets are still very weak in absolute terms, but these markets will be up significantly from Q2.
And for eMobility, we expect declines of between 13% and 17%, once again pressured from legacy internal combustion engine platforms.
And lastly, for Hydraulics, we think market will be down between 23% and 27%.
Freight in overall, we're estimating Q3 revenues to be down between 13% and 17%, and so an improvement versus Q2, which was down some 20%, but still on absolute terms, where markets are still in decline.
Moving to Page 14, here we provide our best look at guidance for Q3 and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13% and 17% and this really does include what we know about July, where we saw low double-digit declines.
We've elected not to provide full year revenue guidance given the kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4.
As many of you aware, we are still dealing with the pandemic in various regions, the U.S. and around the world, we're still seeing a growth in the number of cases and so we're still living in this period of uncertainty.
We do think Q2 will be the trough for organic revenue declines and barring second wave of the pandemic, Q4 should be better than Q3.
For Q3 and full year, we expect decremental margins of between 25% and 30% and for Q3, we expect our tax rate on adjusted earnings to be between 15% and 16%.
We're maintaining our free -- 2020 free cash flow guidance, the range of $2.3 billion to $2.7 billion and I would note that this range does in fact, include now the impact related to the multi-year restructuring program that we announced, and that was not in our prior guidance.
As a point of reference, in the first half, just to give you some comfort around our ability to deliver this number, we generated some 35% of our $2.5 billion midpoint, that's in our free cash flow guidance and this number is very consistent with our performance over the last five years.
And so we do tend to be a bit back half loaded.
We're providing new guidance for share buybacks and we're seeing between $1.7 billion and $1.9 billion for the year.
And recall that we repurchase $3 billion of shares in Q1 with the proceeds in the lighting sales.
We continued to deliver free strong -- strong free cash flow and we now plan to buyback between $400 million and $600 million of our share is half of the year.
Number one, ensuring that we continue to move the company in the direction of becoming what we see as an intelligent power management company, that takes advantage of important secular growth trends and we talked about them being electrification, energy transition, LTE connectivity and blended power.
So these trends are continuing and despite whatever temporary hiccups we're experiencing, we think long-term it's the right place to be.
By doing so, we're working on creating a company that's going to deliver better secular growth and better growth through various cycles, higher margins and with much better earnings consistency.
Our long-term goals have not changed, it include 2% to 3% organic growth, 20% segment margins, 8% to 9% earnings per share growth and $3 billion a year of free cash flow, and with our strong cash flow we'll continue to be focused and disciplined in how we deploy it.
By investing in organic growth as a top priority, delivering top quartile dividends and ongoing program of share buyback and then actively managing our portfolio, while being a disciplined acquirer.
So we continue to remain excited by the Eaton's story, I hope you are as well.
Before we start our Q&A of our call today, I do see that we have a number of individuals in the queue with questions, so I appreciate if you can limit your opportunity just to one question and a follow-up.
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eaton corp q1 operating profit rose 8% to $332 mln.
q1 operating profit rose 8 percent to 332 million usd.
quarterly adjusted earnings per share $1.44.
compname says raising adjusted earnings per share guidance for 2021 to $6.10 at midpoint, up 24 percent over 2020.
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But before we start, I'd just like to go through a couple of comments here.
These risks and uncertainties may cause actual company results to differ materially.
We delivered another year of solid operating performance in 2021 and positioned our business for continued growth in 2022.
We are executing our strategy, which is to grow the business today and into the future, maintain excellent performance and reduce costs to deliver strong margin rate and deploy our capital to create value.
We made significant progress in executing this strategy again in 2021.
Our organic sales growth for the year was 3%.
Our segment operating margin was an exceptionally strong 11.8%, which increased 40 basis points compared to 2020 with performance more than offsetting mix and COVID-related headwinds.
We grew our transaction adjusted earnings per share by 8% and generated a $3.1 billion of transaction adjusted free cash flow.
Regarding capital deployment, we returned a record $4.7 billion to shareholders through dividends and share repurchases, including a $500 million accelerated share repurchase that we announced in November of 2021.
We strengthened our balance sheet, retiring over $2.2 billion of debt during the year and achieving an increased credit rating in the process.
And we continue to invest in our business with over $1.4 billion in capital expenditures to create new technologies and support franchise programs.
We also continue to add to our portfolio of franchise programs, with competitive wins on programs like the Integrated Battle Command System, or IBCS, as well as Hypersonic and Ballistic Tracking Space Sensor and Next Generation Interceptor.
As we look forward to '22 and beyond, we expect our organic growth will continue as we win new business and convert the robust backlog we've built over the past several years into sales growth.
And while we'll know more about the President's budget request in the coming weeks, we continue to believe that our portfolio is strongly aligned with the threat environment and the key investment priorities of our customers.
Further, we expect strong margin performance, as well as double-digit free cash flow growth from 2022 through 2024.
2022 guidance reflects our confidence in our strategy, our broad portfolio and our ability to deliver continued growth and strong performance.
As reported, the COVID pandemic continued to present challenges to labor availability, parts supply and shipping delays across the economy, particularly in the second half of last year.
We have felt these effects and the challenges at both our supply chain and our own labor availability.
We will continue to take proactive steps to address such COVID risks, both to our employees and our business.
And looking forward, our current guidance reflect the factors we know today and our best estimate for the remainder of the year.
Dave is going to provide more details on the quarter, the full year and our guidance in just a few minutes.
But turning now to the budget environment.
The federal government continues to operate under a continuing resolution that currently run through February 18.
Negotiations on the fiscal year 2022 appropriations bills are continuing.
And we remain optimistic that Congress will reach an agreement by the end of the first quarter.
The National Defense Authorization Act contained a $25 billion increase to the defense budget that represents 5% growth compared to fiscal year 2021, which we expect to also be supported in the appropriations bill.
In the NDAA, there is continued support for our major programs, and several of our programs received incremental funding above the President's budget request, including Triton, E-2D F-35, F-18 and G/ATR, among others.
And finally, we expect the FY '23 President's budget to be delivered to Congress in March of this year, reflecting this administration's priorities in areas such as mission systems, space, missile defense, advanced weapons and deterrents.
Focusing now on highlights in the quarter, one of our proudest moments was the launch of the Webb Space Telescope on December 25.
Northrop Grumman is the prime contractor for NASA on Webb, and we're honored to have partnered with NASA to provide the world with this revolutionary technology.
Webb will peer more than 13.5 billion years into the past when the first stars and galaxies were formed, ushering in an exciting new era of space observation and expanding our understanding of the universe.
In addition to Webb, we're also supporting NASA's Artemis mission by producing the largest solid rocket motors ever built for the space launch vehicle system, which is being developed to send the first woman and next man to the moon.
In the fourth quarter, the space sector received a $3.2 billion award to support Artemis missions IV through VIII.
Another important milestone in the quarter was the competitively awarded IBCS in our Defense Systems sector.
This program is a centerpiece of the U.S. Army's modernization strategy for air and missile defense and all-domain command and control.
It's a prime example of our capabilities to integrate assets in the battle space regardless of source, service or domain.
This is one of many examples of how we are helping our customers share data between systems and improve command and control in support of their JADC2 vision.
In the area of missile defense, we had several milestones in the quarter, which position us to help our customers track and defend against hypersonic and ballistic missile threats.
In the fourth quarter, we announced that HBTSS had passed its critical design review.
These satellites are planned to be part of a multilayered network of spacecraft that will detect and track hypersonic missiles.
Also in the quarter, we were selected by the Missile Defense Agency to design a glide phase interceptor for regional hypersonic missile defense.
In our Mission Systems sector, we continue to see our customers prioritizing development of capabilities that will increase the effectiveness and survivability of legacy systems, as well as new technologies for next-generation systems.
In the fourth quarter, MS received an accelerated award for F-16 SABR for approximately $200 million, and full year awards of approximately $700 million.
We have now received total contract awards for near 1,000 radars for this program in support of the U.S. Air Force and National Guard, as well as several international customers.
In addition, our network information systems business area within Mission Systems received approximately $1 billion in awards for advanced processing solutions.
This portfolio delivers strategic microelectronics focused on high-performance computing and security, which helps our customers with connectivity and processing solutions.
We anticipate additional awards in this segment of the portfolio for the next few years, and we expect it will be a significant growth driver for MS in 2022.
The military aircraft market is undergoing a transition as our customers focus their investments in next-generation programs while divesting some legacy platforms.
As we've discussed, certain programs in our portfolio at Aeronautics Systems are maturing and experiencing headwinds.
But there are also a number of exciting new opportunities that are emerging.
This includes next-generation manned aircraft, as well as new unmanned opportunities, which U.S. Air Force Secretary Kendall recently announced.
In addition to pursuing these longer-term opportunities, we remain focused on executing our programs and delivering for our customers.
Another important aspect of our company's future is our strategy for sustainability.
We strongly believe that our environmental, social and governance programs play an important role in sustainable, profitable growth and in long-term value creation for our shareholders, customers and employees.
Northrop Grumman is a leader in conservation activity with a 44% reduction in greenhouse gas emissions since 2010.
In the fourth quarter, S&P released its Global Corporate Sustainability Assessment scores, and we ranked in the 96 percentile.
We were included on the Dow Jones Sustainability Index North America for the sixth consecutive year, and we were included in the Dow Jones Sustainability World Index for the first time.
Our ESG strategy also includes portfolio management actions.
As we've discussed on earnings calls last year, we committed to transition out of the small aging and surveillance contracts that we have for cluster munitions, and that contract is complete.
And while we continue to be an ammunitions supplier as both a prime and a merchant supplier, we have made the decision to transition our prime role in depleted-uranium ammunition to another provider, following one final single production year contract.
We are currently working to establish our next set of sustainability goals and priorities, specifically as they relate to greenhouse gas emissions, water conservation and solid waste diversion with a stronger emphasis on renewable energy.
Overall, we're making substantial progress in our ESG journey, and we look forward to sharing more in our upcoming sustainability and TCFD reports.
And then I have a few additional comments before we move on to Q&A.
2021 was another strong year of performance for the company.
Before going through the details of our results and guidance, I'd like to note a few items to keep in mind when comparing Q4 to the same period last year.
As we previewed in prior quarters, the divested IT services business, the equipment sale at AS and four more working days in Q4 2020 represented over $1.6 billion of sales when compared to Q4 2021.
With that said, sales per working day in 2021 were at their highest level in Q4.
Moving to sector results.
We continued to see certain COVID-related effects on our labor and supply chain in Q4, and these effects were most significant in our aeronautics sector.
The Q4 decline in AS sales was partially driven by fewer working days and the 2020 equipment sale, and it also included a $93 million unfavorable EAC adjustment on F-35.
Turning to Defense Systems.
Sales declined in Q4 in 2021, primarily due to the IT services divestiture.
Organic sales were down 9% in Q4 and 4% for the full year, driven by the completion of our contract at the Lake City ammunition plant, which generated almost $400 million of sales in 2020.
Mission Systems organic sales were down 3% in the fourth quarter, primarily due to the reduction in working days and up 6% for the full year.
Higher 2021 sales were driven by increased volume on G/ATR, GBSD, SABR, JCREW and restricted programs, among others.
And lastly, Space Systems Q4 and full year organic sales rose by 6% and 24%, respectively.
We continued to ramp significantly on franchise programs, including a $1.1 billion increase on GBSD in 2021.
Growth was also driven by restricted space programs, as well as NGI and Artemis.
Moving to segment operating income and margin rate.
AS operating margin rate decreased to 8.4% in the quarter and 9.7% for the full year due to the unfavorable EAC adjustment on F-35.
In our other three sectors, segment operating margin rates met or exceeded the high end of our prior 2021 guidance ranges.
Defense Systems operating margin rate increased 90 basis points to 12.1% in the quarter and 80 basis points to 12% for the full year.
Higher operating margin rate was largely due to improved performance, as well as recent contract completions.
At Mission Systems, operating income and rate grew in both periods.
As a result of higher EAC adjustments and business mix changes, operating margin rate grew to 15.9% in the fourth quarter and 15.6% for the full year.
And at Space Systems, operating margin rate was 9.6% in the quarter and 10.6% for the full year.
Favorable EAC adjustments from strong performance on commercial space programs helped offset mix pressures for the year.
And keep in mind that space, along with AS and MS, benefited from the pension-related overhead benefits that we recognized in the first quarter of 2021.
At the total company level, segment operating margin rate in the fourth quarter was the same as Q4 2020, even with the F-35 charge in 2021.
And it increased 40 basis points for the full year to 11.8%.
Our transaction adjusted earnings per share declined 9% from Q4 2020 to Q4 2021, primarily due to lower sales volume from the factors I described earlier.
For the full year EPS, we exceeded the high end of the earnings per share guidance range we provided in October.
Transaction-adjusted earnings per share grew 8% in 2021 due to strong segment performance and lower corporate unallocated costs.
Lower corporate unallocated was driven by two items we've discussed in prior quarters: the $60 million benefit from an insurance settlement related to the former Orbital ATK business, and lower state taxes.
Regarding our pension plans, asset performance was strong again in 2021 at nearly 11%, the third year in a row of double-digit asset returns.
Our FAS discount rate increased 30 basis points to 2.98%.
These factors resulted in a mark-to-market benefit of roughly $2.4 billion in 2021.
In addition, our net pension funding status has improved by over $3 billion and on a PBO basis, is now over 93% funded.
We continue to project minimal cash pension contributions over the next several years.
Also summarized are our pension cost estimates for the years 2022 through 2024.
CAS recoveries are projected to continue declining over the planning period.
And while this causes an earnings per share headwind, particularly in 2022, it makes our rates more competitive and our products more affordable.
Our CAS prepayment credit is approximately $1.7 billion as of January 1 of this year.
Now turning to cash.
We generated nearly $3.6 billion of operating cash flow and $3.1 billion of transaction-adjusted free cash flow in 2021, in line with our expectations.
In the fourth quarter, we made our final federal and state tax payments associated with the IT services divestiture of almost $200 million.
We also made our first payment of roughly $200 million of deferred payroll taxes from the CARES Act legislation.
The remaining payment of the same amount will occur this December.
Looking ahead to 2022, our sector guidance is shown on Slide 9.
This outlook assumes that appropriations bills are passed by the end of Q1, and it assumes a relatively consistent level of impact from the effects of COVID that we experienced in 2021.
At aeronautics, we expect sales in the mid- to high $10 billion range.
As we noted last quarter, we're projecting headwinds in our HALE portfolio, as well as lower sales on JSTARS, F-18 and our restricted business.
Sales on F-35 are expected to be slightly higher in 2021 due to the EAC adjustment we booked in Q4.
We expect an AS margin rate of approximately 10%, which is up 30 basis points year over year.
For Defense Systems, we expect sales to be in the high $5 billion range as this business returns to modest organic growth following the IT services divestiture and the completion of our Lake City contract.
Operating margin rate is expected to remain very strong in the high 11% range.
Mission Systems sales are projected to be in the mid-$10 billion range, up from $10.1 billion of organic sales in 2021, reflecting continued strength in demand for our products.
Operating margin rate is expected in the low 15% range.
Space Systems is expected to remain our fastest-growing business and to become our largest segment in 2022.
Sales are projected in the mid-$11 billion range, up from -- up about $1 billion from 2021 with a margin rate in the low 10% range.
Turning to Slide 10.
Our total revenue guidance is $36.2 billion to $36.6 billion, representing a range of 2% to 3% organic growth, consistent with the rate we estimated in October 2021.
This growth is enabled by our strong backlog, which stands at over $76 billion, and covers more than two years of annual sales.
The 2021 book-to-bill of 0.9x was lower than our prior expectation due to the AS F-35 award shift to 2022.
More importantly, our three-year trailing average book-to-bill is approximately 1.22, and remains the foundation of our current and future growth.
As COVID-related headwinds that we experienced late in 2021 continue into early 2022, we anticipate that first quarter 2022 sales will be less than 25% of the full year.
We have increased the segment operating margin rate outlook that we provided in October as we now expect a rate roughly consistent with 2021 in the range of 11.7% to 11.9%.
This projection reflects our continued disciplined approach to cost management and our efforts to offset mix headwinds with strong program performance.
Altogether, we expect transaction adjusted earnings per share to be between $24.50 and $25.10, based on approximately 155 million weighted shares outstanding.
As shown on Slide 11, this includes roughly $2 of year-to-year earnings per share headwinds from lower net pension benefits driven by the reduction in CAS recoveries and higher corporate unallocated expense due to the one-time benefits in 2021.
Earnings volume from sales growth strong operating margin performance and the lower share count will help to offset those nonoperational items.
We project 2022 transaction-adjusted free cash flow of $2.5 billion to $2.8 billion, assuming the R&D tax amortization law is deferred or repealed.
We continue to project about $1 billion of higher cash taxes should current tax law remain in effect.
As I mentioned, our cash tax outlook includes the final payroll tax payment from the CARES Act of approximately $200 million.
Capex is expected to remain roughly consistent with 2021 on an absolute dollar basis and slightly lower as a percentage of sales.
Slide 12 provides our longer-term outlook on cash.
The midpoint of our 2022 transaction-adjusted free cash flow guidance is $2.65 billion, and includes roughly $375 million of lower CAS recoveries than 2021.
From there, we expect a double-digit free cash flow CAGR through 2024, driven by operational performance, lower capex and the absence of the payroll tax headwind.
Our base case again assumes deferral of the R&D tax for all periods.
Speaking of taxes, we're projecting an effective tax rate of approximately 17% going forward, roughly consistent with 2021, excluding the divestiture or mark-to-market pension effects.
Also, we anticipate the resolution of an appeals process for certain open years of legacy OATK tax filings in 2022.
Audit and appeals processes are underway, but in earlier stages for certain Northrop tax years.
We refer you to our 10-K for additional details on the key items, both timing related and permanent in nature to be resolved in those processes.
In closing, we're proud of our 2021 performance, and we're focused on continuing to execute well on our business and financial strategy in 2022.
In summary, we have strong franchise programs that are well aligned to budget priorities.
We are focused on capturing and investing in new growth opportunities while also executing to drive earnings and cash flow growth.
We delivered a solid set of results in 2021, and we are well-positioned to continue growing and performing in 2022 and beyond.
Our top priority for cash deployment remains shareholder return, including a competitive dividend and share repurchases.
With that in mind, our board of directors recently approved an increase in our share repurchase authorization of $2 billion.
And based on our outlook today, we plan on returning at least $1.5 billion to shareholders via share repurchase in 2022.
We have extraordinary talent, and this includes our leadership team.
As we announced in November, Blake Larson is retiring after a 40-year career with Northrop Grumman and its heritage companies.
Blake has helped to position our space business for incredible growth and as important, a focus on performance and quality.
We are grateful for his contributions to our company and our country.
Tom brings strong experience in the space market.
He was part of the space team, and I'm confident in his ability to lead this business.
Natalia, back to you.
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compname reports q3 earnings per share $6.63.
qtrly earnings per share $6.63; qtrly sales $8.72 billion versus $9.08 billion.
sees 2021 sales about $36 billion; sees 2021 mtm-adjusted earnings per share $32.10 - $32.50.
qtrly organic sales rose 3%.
in 2021 continue to expect strong organic sales growth.
q3 sales fell due to lower sales at defense systems and missions systems, and at aeronautics systems.
tight labor market, elevated levels of employee leave, supply chain challenges affected q3 sales.
qtrly defense systems sales fell 24% to $1.41 billion; qtrly mission systems sales fell 5% to $2.44 billion.
qtrly aeronautics systems sales fell 6% to $2.73 billion; qtrly space systems sales rose 22% to $2.68 billion.
for 2022, expect space to remain fastest growing segment; mission systems, defense systems also grow.
for 2022, expect aeronautics systems to decline at rate similar to 2021.
expect lower cas pension recoveries of about $350m impacts earnings in 2022.
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This is Tim Argo, Senior Vice President of Finance for MAA.
Actual results may differ materially from our projections.
As detailed in our fourth quarter earnings report, MAA ended 2020 on a positive note, results were ahead of expectations, and we carry good momentum into calendar year 2021.
During the fourth quarter, leasing traffic was strong, and we captured 6% higher move-ins as compared to prior year.
And despite the normal seasonal slowdown during the holidays, we were able to capture positive blended lease-over-lease rent growth that equaled the prior third quarter with particularly strong renewal lease pricing averaging 5.2% in Q4.
Average physical occupancy also remained strong at 95.7% in the fourth quarter, a slight improvement from the performance in Q3.
We believe these trends supported by improving employment conditions and the positive migration trends across our footprint positions MAA for continued outperformance into the coming spring and summer leasing season.
Overall, conditions are setting up for a solid recovery cycle for apartment leasing fundamental across the Sun Belt over the next three years or so as demand recovers and supply levels moderate a bit into 2022.
I believe for several reasons that MAA is in particularly strong position as we head into the recovery part of the cycle.
First, we expect that our Sun Belt markets will continue to capture job growth, migration trends and demand for apartment housing that will be well ahead of national trends.
While there were clearly favorable Sun Belt migration trends by both employers and households prior to COVID, this past year the trends accelerated.
The primary reasons behind these favorable migration trends, including enhanced affordability, favorable business climates and lower taxes will still be with us well past the point we get the pressures associated with COVID behind us.
Secondly, the efforts we have under way this past year implementing change to a number of our processes involving new technology and web-based tools will continue to drive more opportunity for margin expansion.
Specifically, steps taken to automate aspects of both our leasing and maintenance service operations will drive more efficiency with personnel cost.
We expect to begin harvesting some of those early benefits later this year.
Our redevelopment operation aimed at upgrading and repositioning many of our existing properties continues to capture very attractive rent growth and returns on capital.
These higher levels of -- the higher levels of new apartment supply introduced into a number of markets over the past year will actually expand this redevelopment opportunity for us over the next couple of years.
Our external growth pipeline executed through in-house development, prepurchase of joint venture development projects and the acquisition of existing properties will continue to expand over the next year.
Finally, and importantly, our balance sheet remains in a very strong position with ample capacity to support both our redevelopment and our new growth initiatives.
Calendar year 2020 was certainly not the year we expected, but MAA's full cycle strategy with a uniquely diversified portfolio across the Sun Belt supported by a strong operating platform and balance sheet position the company to hold up well.
Our strategy is working and our platform capabilities are strong.
However, it's your intensity and passion for serving those who depend on our company that enables us to truly excel.
The recovery we saw beginning in May and June continued across the portfolio through the fourth quarter.
Leasing volume for the quarter was up 6%.
This allowed us to improve average daily occupancy from 95.6% in the third quarter to 95.7% in the fourth quarter.
In addition to the improvement in occupancy, we were able to hold blended rents in the fourth quarter, in line with the third quarter and an 80 basis point increase.
All in-place rents or effective rent growth on a year-over-year basis improved 1.3% for the fourth quarter.
As noted in the release, collections during the quarter were strong.
We collected 99.2% of build rent in the fourth quarter.
This is the same result we had in the third quarter of 2020.
We've worked diligently to identify and support those who need help because of COVID-19.
The numbers of those seeking assistance has dropped over time.
In April, we had 5,600 residents on relief plans.
The number of participants has decreased to just 491 for the January rental assistance plan.
This represents less than 0.5% of our 100,000 units.
We saw steady interest in our product upgrade initiatives.
During the fourth quarter, we made progress on our interior unit redevelopment program as well as the installation of our Smart Home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
For the full year 2020, we installed 23,950 Smart Home packages and completed just over 4,200 interior unit upgrades.
January's collections are in line with the good results we saw in the fourth quarter.
As of January 31, we've collected 98.7% of rent build which is comparable to the month end number for the third and fourth quarters of 2020.
Leasing volume in January was strong, up 4.9% from last year.
Blended lease-over-lease rent growth effective during January exceeded last year's results for the first time since March.
Effective blended lease-over-lease pricing for January was positive 2.2%, 40 basis improvement from the prior year.
Effective new lease pricing for January was negative 1.8%.
This is a 70 basis point improvement from January of last year.
January renewals effective during the month were up 6.3%.
Our customer service scores improved 110 basis points over the prior year.
This aids to our retention trends, which are positive for January, February and March, as well as lease-over-lease renewal rates for those months, which are in the 5.5 to 6.5 range.
Average daily occupancy for the month of January is 95.4%, which is even with January of last year.
60-day exposure, which is all vacant units plus notices through a 60-day period, is just 7.8%.
We're well positioned as we move into 2021.
Led by job growth, which is expected to increase 3.4% in 2021 versus the 6.1% drop we saw for our markets in 2020, we expect to see the broad recovery in our region and the country continue.
We expect Phoenix, Tampa, Raleigh and Jacksonville to be our strongest markets and expect Houston, Orlando and D.C. to recover at a slower rate.
They served and care for our residents and our associates, and they have adapted to new business conditions that drive -- and they drive our recovery.
While most buyers have returned to the market, the lack of available for sale properties continues to restrict transaction volume.
Investor demand for multifamily product within our region of the country is very strong.
And this supply/demand imbalance is driving aggressive pricing.
Due to the robust demand, supported by continued low interest rates, cap rates have compressed further and are frequently in the high 3% and low 4% range for high-quality properties in desirable locations within our markets.
We expect to remain active in the transaction market this year.
So based on pricing levels we're currently seeing, we're not optimistic that we will succeed in finding existing communities that will clear our underwriting hurdles in 2021.
While acquiring will be a challenge, as noted in the earnings guidance, we do plan to come to market with $200 million to $250 million of planned property dispositions this year.
We will redeploy those proceeds into our growing development pipeline, which currently stands at $595 million with eight projects in just over 2,600 units.
In the fourth quarter, we started construction on the MAA Windmill Hill in Austin, Texas as well as Novel Val Vista, a prepurchase in Phoenix, Arizona.
Both of these are lower density suburban projects that we expect to deliver stabilized NOI yields around 6%, well in excess of our current acquisition cap rates.
Despite increased construction costs as well as some supply chain issues related specifically to cabinets and appliances, our development and prepurchase projects remain on budget with no significant delay concerns at this point.
We have several other development sites owned or under contract that we hope to start construction on in 2021 and into 2022.
We are encouraged that despite facing some supply pressure, our Phase two lease-up property located in Fort Worth continues to lease up at our original expectations as does our soon to be completed Phase two in Dallas, where over 90% of the units have been delivered.
Turning to the outlook for new supply deliveries in 2021.
Based on our assessment and the projection data we have, new supply deliveries across our major markets are projected to remain flat with 2020 levels, at 2.8% of existing inventory.
Consistent with previous year's, we expect delayed starts, extended construction schedules, canceled projects and overall construction capacity constraints to continue to impact actual supply deliveries to some degree.
While clearly, new supply does have an impact on our business, it's just one side of the equation with demand playing a significant role as well.
And for reasons Eric mentioned in his comments, we believe the demand for multifamily housing within our region of the country will remain strong and improve this year as the economy continues to recover.
When looking at the ratios for expected job growth to new supply deliveries in 2021, we expect leasing conditions in our footprint to improve from last year.
Encouragingly, the data on permitting activity and construction starts for our region of the country continue to show activity below prepandemic levels.
This group -- this drop in activity will likely lead to a moderating level of new supply deliveries into 2022, setting up for what we believe will be an improved leasing environment beyond this year.
That's all I have in the way of prepared comments.
Core FFO of $1.65 per share for the fourth quarter produced full year core FFO of $6.43 per share, which represented a 2.7% growth over the prior year and is well above our internal expectations following the breakout of the pandemic.
Stable occupancy, strong collections and positive pricing performance were the primary drivers of continued same-store revenue growth for the fourth quarter, which is 1.8% and for the full year, which is 2.5%.
As expected, same-store operating expenses for the fourth quarter were impacted by growth in real estate taxes, insurance costs and the continued rollout of the bulk internet program, which is included in utilities expenses.
And though some of this pressure will carry into 2021, we expect overall same-store operating expenses to begin moderating this year, which I'll discuss just a bit more in a moment.
Our balance sheet remains in great shape.
We had no significant refinancing activity during the fourth quarter, but we continue to fund the development pipeline and internal redevelopment programs.
As Brad mentioned, our development pipeline has increased to eight deals with total projected costs of $595 million.
During the quarter, we funded $104 million of development costs, leaving less than half or another $259 million remaining to be funded toward the completion of the current pipeline.
Though still growing, our pipeline is still is only about 3% of our enterprise value, which is a modest risk, given the overall strength of our balance sheet and a diversified portfolio strategy.
As Tom mentioned, we also made good progress toward the -- during the quarter on our internal programs, funding a total of $40 million toward the interior unit redevelopments, Smart Home installations and external amenity upgrades, bringing our full year funding for lease programs to $76 million, which is expected to begin contributing to our growth more strongly late in 2021 and 2022.
We ended the year with low leverage, debt-to-EBITDA of only 4.8 times and with $850 million of combined cash and borrowing capacity under our line of credit.
Finally, we provided initial earnings guidance for 2021 with our release, which is detailed in our supplemental information package.
Core FFO for the full year is projected to be $6.30 to $6.60 per share, which is $6.45 at the midpoint.
The primary driver of earnings performance is same-store revenue growth, which is projected to be around 2% for the year.
This growth is based on the expectation of continued improving economic trends and job growth in our markets, as Tom outlined, and we believe these trends will support both stable occupancy levels, averaging around 95.5% for the year.
And modestly improving pricing trends through the year, driving effective rent growth for the year of around 1.7%.
An additional contribution of 30 to 40 basis points of projected revenue growth for the year is related to the final portion of our Double Play bulk internet program.
We do expect the first quarter to be our lowest revenue growth for the year as it will bear the full impact of 2020's pricing performance growing from there as the -- head from there as improving leasing trends take full effect.
Same-store operating expense growth is projected to moderate some as compared to 2020, will continue to be impacted by the rollout of Double Play and higher insurance costs with these costs combining for an estimated 1.4% of the same-store expense growth in 2021.
But excluding Double Play and insurance, all other same-store expenses are expected to increase in a more modest 2.5% to 3% range for the full year.
And this includes real estate tax growth of 3.75% at the midpoint, which is moderating, but still somewhat elevated.
Overhead costs for 2021 are projected to be more normalized, with total overhead expenses expected to be about $107 million for the year, which is a 2.8% increase over the midpoint of our original guidance for 2020.
Our forecast also assumes development funding of $250 million to $350 million for the year, primarily provided by projected asset sales of $200 million to $250 million.
And given our current forecast, we have no current plans to raise additional equity, and we expect to end the year with our debt-to-EBITDA just below 5 times.
So that's all we have in the way of prepared comments.
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qtrly core ffo per share $1.64.
sees 2021 core ffo per share $6.35 to $6.65.
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I hope everyone is staying healthy and safe.
Let's start on slide four.
We are making great progress this year at DTE for our team, our customers and our communities positioning us to deliver for our investors.
This progress has produced a strong second quarter and positions us well for continued growth.
Our company celebrated Juneteenth together last month with a series of virtual meetings, we pay tribute to this important day with global community partners.
A number of employees offered reflections on what the day means to them personally.
Overall, it was a great way to come together and honoured a significant holiday.
We continue to focus on service excellence for our customers and delivering clean, safe and reliable energy as we continue our clean energy transformation.
DTE Electric received approval from the MPSC to further expand the voluntary renewable program MIGreenPower, while also making it even more affordable, including increased access for low-income customers.
Additionally, we partnered with Ford Motor Company to install new rooftop solar and battery storage technology at the Ford Research and Engineering Center.
The array includes an integrated battery storage system and will be used to power newly installed electric vehicle chargers.
This can generate over 1,100 megawatt hours of clean energy.
We also continue to support the communities where we live and serve.
We were also recognized by Points of Light for the fourth consecutive year as one of the Civic 50.
This award highlights DTE as one of the top 50 community-minded companies nationwide and corporate citizenship.
We also launched a Tree Trim Academy to create 200 high-paying jobs in Detroit.
DTE has a need for Tree Trimmers, and the community has a need for good high-quality jobs.
It will also help us continue to improve electric liability as Trees account for over 70% of our customer outages.
On the investor front, we completed the spin of the midstream business.
Now DTE Midstream is a stand-alone company and DTE Energy is a predominantly pure-play utility with 90% of operating earnings coming from our utilities.
The transaction went very smoothly and was well received by all stakeholders.
We didn't miss a beat on a very strategic transaction and many said, we made it look easy.
We delivered a strong second quarter with earnings of $1.70 per share and we are raising our 2021 operating earnings guidance and continue to pay a strong dividend.
DTE is continuing to deliver successful operating results.
At DTE Electric, we made another significant step toward our goal of reducing carbon emissions as we retired River Rouge Power Plant in the second quarter.
For over 60 years, the River Rouge Power Plant delivered safe, reliable and affordable energy for community throughout, Southeast Michigan.
River Rouge is one of the three coal-fired power plants, DTE is retiring by the end of 2022, which is an integral part of our company's clean energy transformation.
We continue to look at ways to accelerate our coal fleet retirements and potentially file our updated IRP before September of 2023.
We continue to expand on our voluntary renewable program, which is exceeding our high expectations.
In the first quarter, we announced the commitment of new customers to MIGreenPower, including the State of Michigan, Bedrock and Trinity Health.
During the second quarter, we signed up a number of new large customers, including Detroit Diesel, which is now one of our largest voluntary renewable customers.
The program continues to grow at an impressive rate.
So far, we've reached 950 megawatts of voluntary renewable commitments with large business customers and approximately 35,000 residential customers.
We have an additional 400 megawatts in the very advanced stages of discussion for future customers.
MIGreenPower is one of the largest voluntary renewable programs in the nation and helps advance our work toward our net 0 carbon emission goal while helping our customers meet their decarbonization goals.
We have made progress with our expedited tree trimming program, which is greatly improving reliability for our customers and have received Michigan Public Service Commission approval to securitize the tree trimming costs along with costs associated with the River Rouge Power Plant retirement.
At DTE Gas, we are on track to achieve net 0 greenhouse gas emissions by 2050.
We began the second phase of construction on our major transmission renewal project in Northern Michigan in June.
The project includes the installation of a new pipeline as well as facility modification work which will reduce the risk of significant customer outages.
Project is on track to be in service by the first quarter of next year.
Last quarter, we announced our New CleanVision Natural Gas Balance program.
This program provides the opportunity for customers to purchase both carbon offsets and renewable natural gas.
We enable them to reduce their carbon footprint.
We are proud of how fast the program is growing.
Finally, we have over 3,000 customers subscribed, and we are looking forward to seeing it become as successful as our voluntary renewable program at DTE Electric.
On our Power and Industrial business, we continue to add new projects as we began construction on a new RNG facility, our large dairy farm in South Dakota.
This will be P&I's largest dairy RNG project to date.
Project will directly inject RNG into the Northern Natural Gas system for sale into the California transportation fuels market.
Facility is expected to be in service in the third quarter of 2022.
We are also in advanced discussions on several new industrial energy and RNG projects and we'll provide updates on these as they progress.
P&I was also recognized by the Association of Union Contractors with the 2020 Project of the Year Award for the Ford Dearborn cogeneration project.
Overall, I am extremely proud of the team's accomplishments year-to-date, and I'm looking forward to more successes in 2021 and beyond.
Now moving on to slide six.
As I said, we've had a very strong start to 2021.
We are raising our operating earnings guidance midpoint from $5.51 per share to $5.77 per share, moving our year-over-year growth and operating earnings per share guidance from 7.4% to a robust 12.5%.
We are able to use some of this favorability to position the company to continue to deliver in future years.
We mentioned in Q1, we were deep into planning for 2022 in a great level of detail.
With all of this work, we feel great about achieving a smooth 5% to 7% growth trajectory into 2022 and through the five-year plan.
You are not going to see any surprises from us in our growth rate in 2022 in spite of the area roll off [Phonetic] and the converts coming due.
90% of our future operating earnings will be from our two regulated utilities, where we have a large investment agenda with $17 billion of capital investment in our five-year plan, focused on clean energy and customer reliability.
Overall, we feel very confident with our performance in 2021 and our future operational and financial performance.
Dave, over to you.
Let me start on slide seven to review our second quarter financial results.
Total operating earnings for the quarter were $329 million.
This translates into $1.70 per share.
You can find a detailed breakdown of earnings per share by segment, including our reconciliation to GAAP reported earnings in the appendix.
I'll start the review at the top of the page with our utilities.
The second quarter was a really warm quarter for us here in Michigan.
In fact, it was the seventh warmest on record.
DTE Electric earnings were $238 million for the quarter, which was $19 million higher than the second quarter of 2020, primarily due to higher commercial sales, rate implementation and warmer weather offset by nonqualified benefit plan gains that we had in 2020.
As we mentioned in the first quarter call, we've taken steps to reduce the variability of these investments going forward.
Moving on to DTE Gas.
Operating earnings were $7 million, $4 million lower than the second quarter of last year.
The earnings decrease was driven primarily by the warmer weather in 2021, offset by new rates.
Let's keep moving to the Gas Storage and Pipelines business on the third row.
Operating earnings for GSP were $86 million.
This was $16 million higher than the second quarter of 2020, driven primarily by the LEAP pipeline going into service and strong earnings across the pipeline segment.
On the next row, you can see our Power and Industrial segment operating earnings were $34 million.
This is a $9 million increase from second quarter last year due to new RNG projects beginning operation.
On the next one, you can see our operating earnings at our Energy Trading business were $21 million, which is $16 million higher than second quarter earnings last year due primarily to strong performance in the gas portfolio.
Year-to-date through the second quarter, this positions us positive to our expectation and our original guidance for the year.
Finally, Corporate and Other was unfavorable $22 million quarter-over-quarter, primarily due to the timing of taxes and higher interest expense.
Overall, DTE earned $1.70 per share in the second quarter of 2021, which is $0.17 per share higher than 2020.
Moving on to slide eight.
Given the strong start to the year, we were able to use this favorability to position ourselves to continue to deliver for our customers and investors in future years.
And we are also increasing our 2021 operating earnings per share guidance midpoint $5.51 per share to $5.77 per share.
The increase in guidance is due primarily to warmer-than-normal weather, sustained continuous improvement, and uncollectible expense variability at DTE Electric, higher REF volumes at P&I, and stronger performance of energy trading due to the realization of gains from a small, long physical storage position during the extreme cold weather event in Texas in the first quarter.
In the third quarter, we are seeing additional sales upside for Electric compared to our plan and higher than planned REF volumes at P&I.
We are continuing to explore opportunities to support future years through our invest strategy and to support future customer affordability.
As you can see on the slide, there is no Gas Storage and Pipeline segment in our operating guidance for this year.
The GSP segment will be classified as discontinued operations starting in the third quarter.
We continue to focus on maintaining solid balance sheet metrics.
Due to our continued strong cash flows, DTE is targeting no equity issuances in 2021 and has minimal equity needs in our plan beyond the convertible equity units in 2022.
We have a strong investment-grade rating and targeted an FFO-to-debt ratio of 16%.
With the proceeds from the spin-off of DTM, we are retiring long-term parent debt of approximately $2.6 billion after debt breakage costs.
These were NPV-positive transaction and immediately earnings per share accretive as we were able to retire a higher interest rate debt to support our current plan and to deliver our 5% to 7% operating earnings per share growth rate.
We feel great about our second quarter accomplishments, and we are confident in achieving our increased 2021 guidance and continuing to deliver on our long-term 5% to 7% operating earnings per share growth rate.
Our utilities continue to focus on our infrastructure investment agenda specifically investments in clean generation and investments to improve reliability and the customer experience.
We continue to focus on maintaining solid balance sheet metrics and are targeting no equity issuances in 2021.
In closing, after executing a successful spin of our midstream business, DTE continues to be well positioned to deliver the premium, total shareholder returns that our investors have come to expect over the past decade with strong utility growth and a growing dividend.
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anticipate that orders could continue to be lumpy and remain in a $40 to $60 million range per quarter for 2021.
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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.
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.
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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.
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Total revenues for the fourth quarter of fiscal 2021 increased 20% to $153.6 million, compared to $128.4 million in the same quarter last year.
Net earnings for the quarter were $5.8 million or $0.53 per diluted share, compared to net earnings of $14.7 million or $1.35 per diluted share in the prior year.
Net earnings for the quarter were reduced by an after-tax LIFO impact of approximately $4.5 million or $0.41 per diluted share.
Total revenues for the full fiscal year 2021 increased 20% to $567.6 million compared to $474.7 million in the prior year.
Net earnings for fiscal 2021 were $42.6 million or $3.88 per share compared to net earnings of $38.6 million or $3.56 per diluted share in the prior year.
Irrigation segment revenues for the fourth quarter increased 63% to $125.3 million, compared to $77 million in the same quarter last year.
North America irrigation revenues of $53.5 million increased 30% compared to last year's fourth quarter.
The increase in North America irrigation revenues resulted from a combination of higher irrigation equipment unit sales volume and higher average selling prices.
In the international irrigation markets, revenues of $71.7 million increased 100% compared to last year's fourth quarter.
The increase in international irrigation revenues resulted primarily from higher unit sales volumes along with higher selling prices and a favorable foreign currency translation impact of $2.8 million.
The largest sales volume increases were in the Brazil and Middle East markets.
Total irrigation segment operating income for the fourth quarter was $10.6 million, an increase of 78% compared to the prior year fourth quarter.
And operating margin was 8.4% of sales compared to 7.8% of sales in the prior year fourth quarter.
The impact of higher irrigation system unit volume was partially offset by the impact of higher raw material and other costs.
We continue to face some margin headwind as the realization of pricing actions lags the impact of cost increases.
Fourth quarter operating results were also reduced by approximately $5 million resulting from the impact of the LIFO method of accounting for inventory, under which higher raw material costs are recognized in cost of goods sold rather than in ending inventory values.
During the quarter, we added additional inventory as a buffer against supply chain uncertainty, expected cost increases and as part of a build ahead plan in connection with the temporary shutdown at the Lindsay, Nebraska facility to install productivity upgrades.
We expect to realize some benefit of this fourth quarter LIFO impact in future periods as inventory quantities decline.
For the full fiscal year, total irrigation segment revenues increased 35% to $471.4 million compared to $349.3 million in the prior year.
North America irrigation revenues of $273.9 million increased 22% compared to the prior year and international irrigation revenues of $197.5 million increased 59% compared to the prior year.
Irrigation segment operating income for the full fiscal year was $63.2 million, an increase of 53% compared to the prior year and operating margin was 13.4% of sales, compared to 11.8% of sales in the prior fiscal year.
Infrastructure segment revenues for the fourth quarter decreased 45% to $28.4 million compared to $51.4 million in the same quarter last year.
The decrease resulted primarily from lower Road Zipper system sales compared to the prior year.
Revenues in the prior year included a large project in the United Kingdom that did not repeat in the current year.
And in the current year we've continued to see the timing of certain projects impacted by coronavirus-related delays.
Infrastructure segment operating income for the fourth quarter was $5.8 million compared to $19.9 million in the same quarter last year.
And Infrastructure operating margin for the quarter was 20.5% of sales, compared to 38.8% of sales in the prior year.
Current year results reflect lower revenues and the less favorable margin mix of revenues compared to the prior year fourth quarter and were also reduced by approximately $1 million resulting from the impact of LIFO.
For the full fiscal year, infrastructure segment revenues decreased 23% to $96.3 million compared to $125.3 million in the prior year.
Infrastructure operating income for the full fiscal year was $20.2 million, compared to $42.7 million in the prior year.
And operating margin for the year was 21% of sales compared to 34.1% of sales in the prior year.
Turning to the balance sheet and liquidity.
Our total available liquidity at the end of the fiscal year was $196.7 million with $146.7 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility.
Our total debt was $115.7 million almost all of which matures in 2030.
At the end of the fiscal year we were well within our financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0.
We are well positioned going forward to invest in growth opportunities that create value for our shareholders.
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compname posts q4 earnings per share $0.53.
q4 earnings per share $0.53.
q4 revenue rose 20 percent to $153.6 million.
expect a slower start to fiscal 2022 due to specific project delays.
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My comments today will address three areas of interest for Insperity's stockholders.
First, I will discuss our strong Q4 and full year 2020 results, highlighting our success throughout the pandemic.
Second, I will address our year-end transition into 2021 and the trends driving our game plan for this year.
I'll finish my remarks with comments about the longer-term and our efforts to begin a new five-year run of unit and earnings growth for Insperity.
Our financial results for 2020 were quite impressive, with less than a 1% decline in worksite employees and a year-over-year increase of 15% in adjusted EBITDA, especially in light of the significant challenges faced throughout the year.
Ultimately, the financial impact of shutdown-related layoffs in our client base was more than offset by lower direct costs due to behavioral changes in response to the pandemic.
These results continue to demonstrate the resiliency of our small business client base, the value of our HR services and the strength of our business model in client selection and risk management.
The highlight for the year was the way our Insperity employees immediately responded to challenges and delivered vital support to clients, worksite employees and their families.
The dedicated service and personal touch from our people, caring for clients dramatically reinforced our tag line, HR that makes a difference.
Another highlight was our success transitioning to remote selling and increasing our capabilities throughout the year.
For both the full year and the fourth quarter, we achieved 81% of our pre-COVID budget in booked sales.
We believe this is excellent, considering how the budget increases each quarter throughout the year, especially in Q4 where we typically budget over 35% of our annual book to sales.
Another exceptional point in looking back at 2020 is the pricing strength that continued throughout the year.
This is particularly important in keeping up with long-term trends and direct costs going forward.
It's also important to point out we were able to continue our technology development road maps for future improvements, while also completing many projects made necessary by legislative and regulatory changes.
Overall, I'm very pleased with our accomplishments in 2020 and the agility we displayed as an organization.
These efforts position the company for a successful year-end transition going into 2021 and a solid plan for the new year.
Our year-end transition refers to the seasonal churn in our client base between the large number of new accounts added from the fall selling campaign and client attrition in January and February from the concentration of renewals that occur at this time of year.
This is especially important, since the transition sets the starting point in paid worksite employees for the new year in our recurring revenue business model.
The bottom line to this year-end transition is we had an excellent year in paid worksite employees from fall campaign bookings and retention of all accounts in all segments, with one notable exception that I'll discuss in a minute.
The paid worksite employees added in January from previously booked new accounts was down only 6% from 2020, which is excellent considering last year was pre-COVID.
When you add an account scheduled for first payroll in February, we expect to be down only 2% in worksite employees from new accounts for the full year-end transition period compared to last year.
Our year-end retention was equally impressive under these conditions, as paid worksite employees subtracted from terminating accounts was even with last year among our smallest accounts, and improved by double digits in our core, emerging growth and mid-market segments.
This validates the value we delivered last year and bodes very well for our growth going forward.
The one exception in this year-end transition is the unexpected loss of our largest account we've ever had in our Enterprise segment that paid 6,800 worksite employees in December.
We expected this account to renew for 2021.
However, we were notified in mid-November, they were taking the HR function back in-house.
This account was a U.S. subsidiary of a large international firm that started with us with only 60 employees six years ago.
We served this company very well and delivered the platform that supported their exceptional growth from an average of 240 employees in 2015 to 4,800 in 2020.
This account is actually a great success story for Insperity, which we expect to use in future marketing efforts.
We also learned a tremendous amount we can leverage in the future regarding serving fast-growing enterprise customers.
Also, it's important to note the gross profit contribution per worksite employee in our pricing model goes down as the account size goes up.
So even though this account represented about 2% of our worksite employees in 2020, it represented only 1% of our gross profit contribution.
This account grew into a one of a kind for us as our remaining enterprise accounts represent less than 3% of our worksite employee base, with no account exceeding 2,000 employees today.
So our growth plan for 2021 includes a lower starting point in paid worksite employees for Q1, followed by growth acceleration over the balance of the year, driven by the current trends in sales retention and growth in our client base.
We expect to build on the sales momentum from the fall campaign in our recent virtual sales convention.
We are beginning this year with some very positive underlying trends in our sales effort as we extend best practices and remote selling across the Business Performance Advisor team.
First, even though the number of proposals for our flagship workforce optimization solution in the fourth quarter was down 13% from the same period in the prior year, the number of accounts sold was up 2% due to a 17% improvement in our closing rate.
Secondly, as we enter the new year, we reset our BPAs into the perform -- into performance tiers that they achieved through their production in the prior year.
We build the overall budget for the new year off these individual production levels to set expectations for the year ahead.
Over the past year, we had significant movement up through the tiers, demonstrating the success of our long-term plan of growing and training the BPA sales team.
This has been occurring to some degree in recent years.
However, the impact is expected to be larger this year, as fewer of these BPAs with improving performance are flowing into management roles.
As a result, we expect the sales efficiency gain this year just from the higher percentage of BPAs that are in the higher tiers.
This maturity of our sales organization allows for sales growth and momentum without hiring as many new BPAs.
We also are continuing to hold most of our meetings with prospects remotely through Zoom meetings.
We expect as the pandemic moderates, our sales opportunities will increase and mixing in face-to-face meetings may have a positive effect on sales efficiency.
Relative to our outlook for our two other growth drivers, we expect to continue to drive high levels of client retention over the balance of the year.
However, the full year number will be weighed down by the large account that recently terminated.
We expect growth in the client base to be on par with the underlying trends we experienced in the last half of last year in the new hires and regular terminations.
This analysis excludes COVID-related furloughs and those employees that later returned to work.
This level of growth in the client base implied for 2021 would be an improvement from last year, however, still the lowest we've experienced in recent prior years.
Our plan for profitability for this year factors in some pressure at the gross profit line from normalization of healthcare claims, an uptick in unemployment cost and following our normal practice and estimating workers' compensation expense, where we start the year with a conservative estimate, and hopefully, we'll earn some upside from our efforts in safety and claims settlement over the course of the year.
We are comfortable that our strong pricing over the last 18 months or so has effectively met our targets for matching price and cost in these programs.
We expect to earn an appropriate fee within our historical range for managing these programs.
Our priorities for our operating plan for 2021 are focused on initiatives needed to regain our growth momentum, post-COVID.
Our goal is to lay the groundwork over the balance of this year for consistent predictable double-digit unit and earnings growth, like we experienced from 2015 to 2019.
We expect to continue to invest in growing the BPA team.
However, mostly in the last half of the year as we benefit from the tier movement in the first half.
We are continuing to refine our marketing efforts to targeted prospects to drive lead generation of accounts more likely to be a good fit for Insperity.
We made good progress on this front, increasing our digital spend in the fourth quarter and increasing the percentage of booked accounts coming from our marketing programs to 55%.
We expect to continue to invest in technology development to support our client base and implement Salesforce to improve our already best-in-class sales and service results.
Salesforce is a significant and important investment for the company, which we believe will provide an enhanced platform to support our continuous improvement and service excellence standards.
Ultimately, we expect to capture more data and more information more easily, providing the opportunity to leverage and optimize the use of our data to the benefit of our clients.
Applying the Salesforce analytics and AI against our data on a consolidated platform will give us the best view we've ever had across all products, prospects and customers.
One final observation important to note is the step-up in interactions with our clients, initially caused by the pandemic.
Our total inquiries per week from our clients more than doubled last April and has not receded to previous levels.
I believe this new level of ongoing interaction and support of our clients is one of the primary reasons for the double-digit improvement in retention we are experiencing across most of our client segments.
Our clients are relying more heavily on our services and experiencing HR that makes a difference from our unique premium service model.
In addition, we are beginning this year with 8% more clients than we had a year ago, while our average account size is down by about 1.5 worksite employees, largely due to the pandemic.
In our view, it's evident demand for our service is substantial, and the small business community is positioned for a rebound.
In summary, I believe we're in an excellent position for 2021 to set the stage for growth acceleration this year and for sustained growth in the long term.
This reminds me of 2014 when we were putting the finishing touches on our refined sales motion with our BPAs and improving our mid-market sales and service models to improve retention.
Those refinements led to a strong five-year run beginning in 2015, nearly doubling the size of the company, tripling the adjusted EBITDA and increasing the valuation of the company fivefold.
I'm certainly not promising a repeat of those impressive results or guiding to those growth levels.
However, I do believe we are in a position to take our learnings and improvements from this challenging past year and set up another impressive run of unit and earnings growth for Insperity.
At this point, I'd like to pass the call back to Doug.
Douglas S. Sharp -- Senior Vice President.
Now let's discuss the details behind our fourth quarter results.
We reported Q4 adjusted earnings per share of $0.49 and adjusted EBITDA of $38 million.
These results reflect outperformance in the level of paid worksite employees compared to our expectations in the continued uncertain and challenging business environment.
Upside in our direct cost programs brought about by the structure and the ongoing management of these programs and some dynamics related to the pandemic and continued management of our operating costs.
As for our growth, we continued the sequential increase in paid worksite employees since the low point in May of 2020, when the impact of the pandemic caused many of our clients to furlough or permanently lay off their employees.
Our recovery in the level of paid worksite employees since this period was driven by the return to work of many of these employees and effective selling and client retention.
Q4 average paid worksite employees increased 3% sequentially over the Q3 period, coming off the 2% sequential increase in Q3 over Q2.
During Q4, all three growth drivers exceeded our expectations.
Gross profit increased by 3.5% over Q4 of 2019, despite 1.8% fewer paid worksite employees due to improved pricing and the higher-than-expected contributions from our benefit and workers' compensation programs.
During Q4, total benefit costs returned closer to pre-pandemic levels as lower healthcare utilization was largely offset by COVID-19 testing and treatment costs.
However, previously deferred care costs did not materialize at the forecasted level.
Our workers' compensation program continued to perform well due to ongoing management of safety practices and claims, and to a lesser degree, a favorable net impact from the reduction of workers' compensation claims associated with the work-from-home status of many of our clients' employees.
Now turning to operating expenses.
We continue to manage costs commensurate with the current operating environment, while also investing in our long-term growth plan.
Operating expenses, excluding stock-based compensation and depreciation and amortization, increased just 5% over Q4 of 2019.
Fourth quarter operating expenses included costs associated with a 9% increase in the average number of trained Business Performance Advisors and the opening of six new sales offices throughout 2020.
We held other corporate employee head count flat over the past year due in a large part to the effort and the effectiveness of our staff in the face of increased HR service demands from within our client base.
Cost savings continue to be realized in other areas of the business, both through effective management and because of pandemic-related cancellations or shutdowns.
These areas include G&A costs such as travel and training and costs associated with certain sales and marketing events.
The Q4 year-over-year increase in total operating expenses of 19% was impacted by increased stock-based compensation costs.
This increase was driven primarily by our outperformance and the level of paid worksite employees and earnings in the face of the significant challenges brought about by the pandemic.
Now turning to our full year 2020 operating results, adjusted EBITDA increased 15% over 2019, $289 million, and adjusted earnings per share increased 12% to $4.64.
The average number of paid worksite employees for the full year 2020 declined by less than 1% in a very challenging environment.
Worksite employees paid from new sales declined by only 1.5% from 2019, largely on the success of our remote selling.
Client retention averaged 82% due to the resiliency of our clients and our quick and effective response to assist our clients with our premium level of HR services.
These same factors contributed to our clients' ability to return a significant amount of their initially furloughed staff to a full-time status and clients in certain industries adding to their employee base over the course of the year.
Gross profit increased 10% over 2019 as improved pricing and the favorable impact of our benefit and workers' compensation programs more than offset the slight decline in paid worksite employees and the comprehensive service fee credits provided to our clients during Q2.
Lower healthcare utilization brought about by the pandemic resulted in 2020 benefit cost per covered employee being relatively flat compared to 2019.
This compares to our original pre-pandemic 2020 budget, which anticipated a cost increase of approximately 3%.
Now as you may recall, we were targeting benefit pricing increases slightly above the 2020 budgeted cost trend to address increased costs associated with 2019's elevated large claim activity.
We ended 2020 slightly exceeding these pricing targets.
Now operating expenses, excluding stock-based comp and depreciation and amortization, increased by just 5.5% in 2020 over 2019 as growth, product and technology investments were partially offset by cost savings in the other areas that I mentioned a few minutes ago.
Total operating expenses increased 12% over 2019 and included the increase in stock-based comp tied to our outperformance.
Our execution, combined with the dynamics of the pandemic, produced strong cash flow over the course of 2020.
We ended the year with a solid balance sheet, while continuing to invest in the business and providing strong return to our shareholders.
We invested $98 million in capital expenditures during the year to support our recent and future growth, and returned $161 million to shareholders through our dividend and share repurchase programs.
We repurchased a total of 1.4 million shares during 2020 at a cost of $99 million; increased our dividend rate by 33% in February; and paid out a total of $62 million in dividends.
We ended the year with $212 million of adjusted cash and $130 million available under our $500 million credit facility.
Now let me provide our 2021 guidance, which incorporates wider-than-usual growth in earnings ranges, given the ongoing uncertainty in the macro environment.
As for our growth metric, we are forecasting a 2% to 6% increase in the average number of paid worksite employees for the full year 2021.
We expect to begin this year with a 1.5% to 2.5% decline in Q1 when compared to the pre-pandemic 2020 period.
The sequential decline from Q4 of 2020 includes the loss of the large account, which Paul just mentioned.
Now subsequent to Q1, our growth is expected to be driven by the recent growth and tenure in the number of trained Business Performance Advisors, continuing solid core client retention and modest net hiring in our client base, brought about by a gradual improvement in the business environment.
Our range of forecasted growth is largely dictated by the timing and degree of such an improvement in its impact on the three drivers of our growth.
As for our gross profit area, you may recall that our key metric is gross profit per worksite employee per month, which takes into account our co-employment service fee pricing, the pricing and cost management of our direct cost programs, including benefits, workers' compensation and payroll taxes; along with contributions from our traditional employment and other products.
It may be helpful to begin our discussion with the review of recent history to gain some perspective on how we are currently reviewing 2021.
This metric averaged $261 in 2017, $272 in 2018, $259 in 2019 and $287 in 2020.
Now let's take a few minutes to break down some of the details as we look at our expectations for 2021.
Our co-employment service fee pricing is expected -- is impacted by new and renewal pricing and any changes in client mix.
This pricing remains strong throughout 2020 and throughout the recent sales and renewal period.
And we combined with our pricing targets over the range of 2021 and a favorable client mix impact from the loss of the larger lower-priced account, we expect our overall service fee pricing to improve over 2020.
Also, you may recall that comprehensive service fee credits were provided to our clients in Q2 of 2020, which is lower than the prior year's overall service fee.
We expect a more normal overall benefit cost trend in 2021 when taking into account the expected increase in healthcare utilization over the course of the year and our best estimate of COVID vaccination and treatment costs.
When you consider the flat cost trend in 2020, this would equate to an expected 2021 cost increase of 6% to 7%.
This includes an outsized Q2 year-over-year increase given the extraordinary low claims in Q2 of 2020.
Now if you take a step back to 2019, this equates to annualized cost trends of approximately 3% from 2019 through 2021.
Since we have taken a steady approach to pricing over the last two years, we believe we have effectively matched our pricing with this two-year cost trend.
However, this is still -- there is still a considerable amount of uncertainty around benefit utilization and COVID case count treatment and vaccines.
This uncertainty contributes to a wide normal range in our earnings guidance.
As for our workers' compensation cost area, we have experienced improving cost trends over recent years from ongoing management of client selection, safety and claims.
Similar to prior years, we intend to budget 2021 conservatively and allow for these factors to possibly drive additional cost benefit throughout the year.
As for the payroll tax area, we're projecting an increase in state unemployment tax rates as a result of the pandemic impact on unemployment.
Many states have issued rules to exclude COVID-related unemployment claims from the employer's 2021 SUTA rate.
However, as we sit here today, the majority of these states have not yet finalized their rates.
Accordingly, in an effort to estimate our 2021 rates, we have communicated with certain larger states to verify their intentions and perform detailed analysis and modeling.
We have incorporated these estimated rates in our outlook, and we expect this area to have a $1 reduction in gross profit per worksite employee per month for the full year 2021 and a $5 reduction in Q1 2021 due to the seasonality of our unemployment taxes.
So as for the bottom line, when you combine each of these factors, we are budgeting gross profit per worksite employee at a level closer to 2018 than into the high point of 2020 or the low point of 2019.
Now as I mentioned earlier, in addition to the upside in the gross profit area in 2020, we also managed operating costs significantly below our 2020 budget.
Our overall 2021 operating plan balances maintaining certain costs at 2020 levels, with investing in targeted initiatives important to our long-term growth.
With the growth in the number of BPAs throughout 2020 and their increased tenure, we intend to manage the growth in a number of hired BPAs to about 4% in 2021.
We intend to manage other corporate head count to a 2% increase.
We are budgeting for a return in 2021 of a portion of marketing and business promotion costs which were not incurred in 2020 due to the pandemic shutdown.
We have also increased our lead generation budget.
As for our G&A costs, we experienced significant savings during 2020, particularly in the area of travel and training.
We plan to continue to manage these costs at this lower level and will assess the opportunity and need for any increased activity as pandemic conditions improve.
Now as Paul just mentioned, an important initiative this year is the purchase and implementation of Salesforce.
Our 2021 budget includes the product and estimated implementation cost associated with this effort.
During the implementation phase, we will experience some duplication and cost while still using our current sales and service software.
However, after implementation, any incremental costs over and above our current software solutions are expected to be minimal.
As for 2021, we are budgeting for approximately $6 million in incremental costs related to the Salesforce initiative.
So in considering all these factors, we are budgeting for a 4% increase in cash operating costs in 2021 over 2020.
As for our noncash items, we have budgeted for a decrease in stock-based compensation when compared to 2020, due to the performance-based feature of our stock awards and a setting of new targets for the 2021 year.
We have budgeted for a $10 million increase in depreciation and amortization over 2020, associated with software development costs related to the recent improvements in our payroll and HCM system, which were previously capitalized and the recent expansion of our corporate facility.
So in conclusion, we are forecasting improved worksite employee growth of 2% to 6%, combined with lower gross profit per worksite employee and a slight increase in cash operating costs per worksite employee.
Given the continued uncertainty in the macro business environment, we believe it's prudent to forecast a wider than typical range of $225 million to $275 million in adjusted EBITDA.
As for adjusted EPS, we are forecasting full year 2021 in a range of $3.27 to $4.20.
This assumes an estimated tax rate of 26.5%, generally consistent with our 2020 rate and the increase in depreciation and amortization that I just discussed.
We are forecasting Q1 adjusted EBITDA in a range of $84 million to $103 million and adjusted earnings per share from $1.37 to $1.72.
As for our quarterly earnings pattern, keep in mind that our Q1 earnings results are typically higher than subsequent quarters.
In particular, we typically earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits, and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met.
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q4 adjusted earnings per share $0.49.
sees q1 adjusted earnings per share $1.37-$1.72.
sees 2021 adjusted earnings per share $3.27 - $4.20.
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Avner will review our financial performance and provide trends and key assumptions for the balance of 2021 with closing remarks from Steve.
This will be followed by Q&A.
A replay of today's call will be available for the next seven days.
I would now like to call over to our President and Chief Executive Officer, Steve Kaniewski.
Before we recap our second quarter results, I would like to share some opening comments.
Like many companies, we have faced unprecedented levels of cost inflation, especially raw materials and transportation since the beginning of the year.
These levels are pervasive and must be accounted for in-market pricing.
So, it has been an imperative for us to quickly increase prices globally across all of our businesses.
Current economic trends lead us to believe that inflation will not mitigate in the near term, especially for durable goods and we will continue to take additional pricing actions in all segments as needed while inflationary pressures continue.
For example, in North America, Irrigation, this year we've raised price five times on irrigation systems, totaling more than 30% inclusive of upcoming increases.
And then Utility, utilizing our pricing mechanisms, we've raised price seven times on steel monopoles.
As we have demonstrated over the past few years, price leadership is a strategic priority for us and will continue to be in all of our served markets.
I want to commend them on the improvement in ship complete and on-time metrics, even as our business is accelerating.
We're proud of our team's persistent focus and we expect to continue building on the strong momentum going forward.
Record sales of $894.6 million increased $205.8 million or nearly 30% compared to last year, an increase more than 26% on a constant currency basis.
Sales growth was realized in all segments, most specifically in Irrigation and Utility Support Structures.
Starting with Utility, sales of $267.9 million grew $36.5 million or 15.8% compared to last year.
Higher volumes were driven by strong broad-based demand from ongoing investments in grid hardening and modernization, as well as renewable energy generation.
Moving to Engineered Support Structures, record sales of $269.4 million increased $16 million or 6.3% compared to last year.
Favorable currency and pricing impacts as well as sales growth in wireless communication products and components were slightly offset by anticipated lower North American transportation market volumes.
Global lighting and transportation sales grew 3.3% as pricing improved in all regions, and international markets benefited from increasing stimulus and infrastructure investments, especially in Europe and Australia.
Wireless communication products and components sales grew 7.2% compared to last year.
Carrier spending and support of 5G build-outs continues to drive strong demand globally, as evidenced by significantly higher sales of our small cell integrated products.
Favorable pricing also contributed to sales growth.
I want to take a moment to congratulate our ESS team on delivering a record quarter of sales in operating income.
I'm especially proud of our commercial teams for their demonstrated price leadership during this inflationary environment.
Turning to Coatings, sales of $98.2 million grew $18.2 million or 22.7% compared to last year and improved sequentially from last quarter due to improving end market demand, favorable pricing and currency impacts.
During second quarter, we commenced operations at our new greenfield Coatings facility near Pittsburgh, Pennsylvania, built with enhanced processes to generate less heat and humidity and providing additional recycling opportunities.
This facility aligns well with our ESG principles while serving the growing demand for new infrastructure in this region.
Moving to Irrigation, record global sales of $282 million grew $131.3 million or 87.2% compared to last year with sales growth across all served markets, including more than 35% growth in our technology sales.
Higher volumes and favorable pricing were driven by the continued strength of Ag market fundamentals and deliveries for the large Egypt project.
In North America, sales of $156.1 million grew 57.6% year-over-year.
Strong market fundamentals and improved net farm income projections continue to positively impact farmer sentiment generating strong order flow.
Significantly higher volumes, higher average selling prices and higher industrial tubing sales, all contributed to sales growth.
International sales of $125.9 million grew 1.4 times compared to last year, led by the ongoing delivery of the Egypt project, strong European market demand and record sales in Brazil.
Our sales through the second quarter have exceeded full-year 2020 revenue, a testament to our market leadership in this region.
Regarding our project pipeline in Africa, we recently were awarded more than $20 million of additional projects from new customers in Egypt, Sudan and Rwanda demonstrating our market leadership, global operations footprint and project management capabilities.
Turning to Slide 5, during the quarter, we completed the acquisition of Prospera Technologies, an award winning global leader in AI and machine learning.
For those who attended our virtual Investor Day in May, you will recall how we outlined our strategic pillars for long-term profitable growth.
Accelerating innovation through investments in recurring revenue services is one of the critical components of our industrial tech growth strategy.
Through this acquisition, together Valmont and Prospera have created the most global vertically integrated AI company in agriculture, immediately providing highly differentiated solution focused on in-season crop performance that is able to go beyond traditional irrigated acres.
No one else in the industry can offer this kind of solution.
Prospera brings advance agronomy and unprecedented visibility to the field.
Their technology is currently being used on over 5,300 fields on a variety of crops including corn, soybeans, potatoes, wheat, onions, alfalfa and tomatoes.
Growers are very excited about this technology as evidenced by strong adoption rates and the critical need for growers to reduce inputs while increasing yields, aligning well with our ESG principles of conserving resources and improving life.
Through Prospera solution, vision and talented team, we are moving to the next stage of agricultural development.
Today, approximately half of our irrigation technology sales are generated from recurring revenue services.
With this acquisition, we expect those particular sales to grow more than 50% per year over the next three to five years.
We also expect this acquisition to be accretive to the segment beginning in 2023, as we continue investing in our in-season data services.
Integration is going well and we plan to share more on our accelerated market growth strategy in future quarters.
Additionally, in today's market, the war for talent is pervasive and competitive.
Prospera brings the strongest team in the industry and we are fortunate to have 100 highly talented and motivated employees on board, including experts in data science and machine learning.
As you can tell, I'm very excited about this acquisition.
It builds upon our demonstrated success over the past few years as we move forward together as one company.
We also completed the acquisition of PivoTrac, the subscription based AgTech company that provides remote sensing and monitoring solutions for the southwest U.S. market, helping grow our technology sales to $50 million year-to-date.
Turning to Slide 6, our solar business is another area where we are accelerating growth and new product innovation while supporting our sustainability commitments.
During Investor Day, we talked about solar growth opportunities in both utility and agriculture and I'm very excited to see our growing pipeline of projects in both end markets.
Our backlog of utility-scale and distributed generation projects has been increasing as we expand the solution globally.
In the second quarter, we were awarded projects totaling $47 million.
Additionally, over the past 18 months, we received more than 30 orders for the North American market.
With our industry-recognized class of one status and the benefits of our scale and global supply chain, we're uniquely positioned to help support global customers with their renewable energy goals.
Our Solar Solutions are also driving accelerated growth in agricultural markets.
In the second quarter, we were awarded three projects, totaling $25 million.
We've already completed several others in Sun Belt regions like Brazil and Sudan and our planning an official North American market launch this fall at the Husker Harvest Days farm event.
We are also partnering with large global food producers to help them achieve their own ESG goals.
Working together with our Utility Solar team and world-class Valley dealer network, we have formed a global cross-functional team committed to delivering integrated solutions to support Ag players in their markets.
We're very excited about this growth potential.
Turning to Slide 7.
At our Investor Day, I talked about several of our ESG initiatives and highlighted the many ways that our products and services conserve resources and improve life and help build a more sustainable world.
As we said before, ESG is a strategic priority for us.
Our environment and social quality scores have improved significantly this year from a 6 to a 2 for environment and from a 6 to a 3 for social, while governance has held steady at a solid 2.
While this is a continuous journey, we are proud of the progress we have made so far.
I want to congratulate our teams and business partners who are strengthening our commitment to grow and innovation as a company with ESG in mind.
Turning to Slide 9 and second quarter results.
Operating income of $90.9 million or 10% of sales grew $25.2 million or 38% compared to last year driven by higher volumes in irrigation, improved operating performance and a favorable pricing notably in Engineered Support Structures.
Diluted earnings per share of $3.06 grew more than 50% compared to last year, primarily driven by very strong operating income and a more favorable tax rate of 22.5%.
This rate was realized through the execution of certain tax planning strategies.
Turning to the segments.
On Slide 10, in Utility Support Structures, operating income of $21.2 million or 7.9% of sales decreased $4.1 million or 300 basis points compared to last year.
Strong volume, increased pricing and improved operational performance were more than offset by the ongoing impact of rapidly rising raw material costs during the quarter, which our pricing mechanisms did not allow us to recover.
Moving to Slide 11 in Engineered Support Structures.
Record operating income of $31.9 million or 11.9% of sales increased $9 million or 290 basis points compared to last year.
We're extremely pleased with the results from deliberate proactive pricing actions taken by our commercial teams to more than offset the impact of rapid cost inflation.
We are also recognizing the benefits of previous restructuring actions.
Additionally, our operations team continue to drive performance improvement across the segment through improved productivity and product quality and better ship complete and on-time delivery metrics.
Turning to Slide 12.
In the Coatings segment, operating income of $14.7 million or 14.9% of sales was $4.3 million or 190 basis points higher compared to last year.
Higher volumes, favorable pricing and operational efficiencies more than offset the impact of raw material cost inflation.
Moving to Slide 13.
In the Irrigation segment, operating income of $42.9 million or 15.2% of sales nearly doubled compared to last year and was 80 basis points higher year-over-year.
Significantly, higher volumes and favorable pricing were slightly offset by higher R&D expense for strategic technology growth investments, including product development.
Turning to cash flow on Slide 14.
We delivered positive operating cash flows of $37 million and positive free cash flow this quarter despite continued inflationary pressures, increasing our working capital needs.
This quarter we closed on Prospera acquisition for a purchase price of $300 million, funded through a combination of cash on hand and short-term borrowings on our revolving credit facility.
We also acquired 100% of the assets of PivoTrac for $12.5 million, funded by cash on hand.
As we stated in prior quarters, rapid raw material inflation can create short-term impacts on cash flows.
The current market outlook indicates that general inflationary trends may not subside in 2021, so we would expect some continued short-term impacts.
We expect working capital levels and inventory to remain elevated to help us mitigate supply chain disruptions and opportunistically lock in better raw material pricing.
Accounts receivable will also meaningfully increase in line with sales growth.
As our historical results have shown, we will see improvements in working capital as inflation subside.
Turning to Slide 15 for a summary of capital deployment.
Capital spending in first half of 2021 was $49 million and we returned $42 million of capital to shareholders through dividends and share repurchases, ending the quarter with just over $199 million of cash.
Moving now to Slide 16.
Our balance sheet remains strong with no significant long-term debt maturities until 2044.
Our leverage ratio of total debt to adjusted EBITDA of 2.3 times remains within our desired range of 1.5 times to 2.5 times.
We are increasing sales and earnings per share guidance for fiscal 2021.
Net sales are now estimated to grow 16% to 19% year-over-year driven primarily by very strong agricultural market fundamentals.
Further, we now expect Irrigation segment sales to grow 45% to 50% year-over-year and continue to assume a foreign currency translation benefit of 2% of net sales.
2021 adjusted earnings per share is now estimated to be between $10.40 and $11.10.
I want to take a moment to discuss the rationale for providing an adjusted earning outlook going forward.
As a technology company, the cost structure of Prospera is very different than any acquisition in Valmont's history, including a significant restricted stock grant for talent retention purposes.
We have also acquired intangibles technology assets.
We believe that by excluding Prospera's intangible asset amortization and share-based compensation in the adjusted financials, the metrics will provide a better comparison a future Irrigation segment performance as compared to historical results.
Other metrics and assumptions for 2021 are also summarized on the slide and in the release.
Turning to our second half 2021 Segment outlook on Slide 18.
In Utility Support Structures, we expect a meaningful sequential improvement to the quality of earnings, beginning in the third quarter driven by margin improvement as pricing becomes more aligned with steel cost inflation.
Moving to Engineered Support Structures, we expect continued short-term softness in North American transportation market and improved demand in commercial lighting.
Demand for wireless communication products and components remains strong and we expect sales growth in line with expected market growth of 15% to 20%.
Moving to Coatings, end market demand tends to correlate closely to general economic trends.
We are focused on pricing excellence and providing value to our customers.
Moving to Irrigation, we expect a very strong year 45% to 50% sales growth based on strength in global underlying Ag fundamentals, the estimated timing of deliveries of the large Egypt project and another record sales year in Brazil.
A couple of reminders that I want to mention for this segment.
The first is that the third quarter is a lower sales quarter compared to the rest of the year due to normal business seasonality.
Second, deliveries of the large Egypt project began in fourth quarter 2020, which will affect year-over-year growth comparisons, and as Steve mentioned earlier, we have been consistently raising prices to offset inflationary pressures.
Turning to Slide 19 and the long-term drivers of our segments.
Overall, we continue to see strong demand and positive momentum across all businesses, evidenced by backlog of more than $1.3 billion at the end of second quarter and the demand drivers are in place to sustain this momentum into 2022.
Like many others, we are closely monitoring the COVID Delta variant and continue to follow state and local regulations to keep our employees and customers safe.
At present, government mandated shutdowns in Malaysia, have led to the temporary closure of three of our small facilities there.
The expected impacts from these closures have been included in our full year financial outlook.
Turning to Slide 20.
In summary, I'm very pleased with our strong second quarter results and our team's ability to navigate and capitalize on challenging market dynamics.
We believe this demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends and strong price leadership in the marketplace.
As we discussed at our Investor Day, we remain focused on the execution of our strategy, which is fueled by our dedicated and talented team of 10,000 employees and our differentiated business model.
Through our acquisition of Prospera Technologies and PivoTrac, we are accelerating growth through investments in innovation, technology and IoT building on our strategy to grow recurring revenue services.
Finally, we're very positive on the year as demonstrated by our updated financial outlook and are poised and well positioned to capture growth and drive shareholder value in the future.
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q2 revenue $894.6 million .
q2 adjusted earnings per share $3.06.
sees fy adjusted earnings per share $10.40 to $11.10.
now expects full-year net sales to increase 16% to 19%, and irrigation segment sales to increase 45% to 50%.
valmont - in utility support structures unit, sees meaningful sequential margin improvement in h2 as pricing aligns more with steel cost inflation.
q2 revenue $90.9 million.
valmont industries - expect meaningful sequential margin improvement in second half of 2021 as pricing becomes more aligned with steel cost inflation.
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Such factors may include, without limitation, the following: impact from pandemics such as the COVID-19 pandemic; dependence on the automotive, appliance, commercial vehicle, computer and communications industries; dependence on a small number of large customers, including two large automotive customers; recognition of goodwill and long-lived asset impairment charges; costs associated with restructuring activities; international trade disputes resulting in tariffs and our ability to mitigate tariffs; timing, quality, cost of new program launches; ability to withstand price pressure, including pricing reductions; failure to attract and retain qualified personnel; ability to successfully market and sell Dabir Surfaces products; currency fluctuations; customary risks related to conducting global operations; costs associated with environmental, health and safety regulations; ability to withstand business interruptions; ability to successfully benefit from acquisitions and divestitures; investment in programs prior to the recognition of revenue; dependence on the availability and price of materials; dependence on our supply chain; judgments related to accounting for tax positions; income tax rate fluctuations; ability to keep pace with rapid technological changes; breaches to our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; success of recent acquisitions and/or our ability to implement and profit from new applications of the acquired technology; ability to manage our debt levels and any restrictions thereunder; and impact to interest expense from the replacement or modification of LIBOR.
I'm joined today by Ron Tsoumas, our Chief Financial Officer.
Let's begin on Slide 4 with the business highlights from the first quarter.
I'll start with the situation with COVID-19.
I continue to be proud of our employees' incredible commitment to Methode and to supporting our efforts to provide a safe work environment.
All of our facilities have remained open to some degree through this challenging period and most of our hourly employees have returned to a full work week.
Our offices have systematically begun to reopen, but we're also still making prudent use of work-from-home for our office staff.
We anticipate that we will see some level of headwind risk and uncertainty from the COVID-19 pandemic throughout the fiscal year.
However, as I stressed last quarter, we will continue to invest in our business for long-term growth.
Turning to the business performance.
While the quarter was clearly down due to the pandemic, we saw significant rebound in automotive demand in the latter half of the quarter.
As you recall, most of the auto OEMs were effectively shut down in the first half of the quarter.
And when we reported our fourth quarter results, we were concerned about the stability of OEM production schedules based on the pandemic circumstances.
Methode's first quarter sales decreased 29.3%.
Our net income decreased 26.9%.
And our diluted earnings per share decreased 28% for the fiscal quarter ended August 1st of 2020.
The resulting decremental net income margin of 10% was helped by cost reductions and operational efficiency initiatives.
The net income in the quarter was also aided by discrete tax benefit of $7.8 million.
Adding back the discrete tax benefit, the decremental net income margin would have been 19%.
Ron will provide more detail on these tax items later.
Returning to the automotive business on Slide 6.
It was a particularly strong quarter for awards in EV and hybrid applications.
We received award of a total annual expected sales of approximately $30 million.
Given our ongoing strategy to cross-sell our technologies into the space, we now expect a high-single digit percentage of our fiscal 2021 consolidated sales to come from EV and hybrid programs.
This is an area where we are globally well positioned and we anticipate continued growth.
I will share more on our new awards a little later.
Looking at our non-automotive markets, we saw strength in data centers and appliances on a year-over-year basis.
However, other markets were negatively impacted by the pandemic, including industrial equipment and commercial vehicles, which while down are seeing forecasts improve.
Operationally, we took significant S&A cost saving actions in the quarter to help mitigate the impact from the pandemic despite incurring $1.5 million in S&A restructuring costs, S&A expenses were reduced by $5.8 million year-over-year.
In regard to our balance sheet, we continue to have positive free cash flow and continue to reduce our debt in the quarter.
Our liquidity is strong and our leverage stable.
The strength and flexibility of our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and shareholder return.
Moving to Slide 7.
During the first quarter, Methode booked a number of awards capitalizing on the strategic trends in vehicle electrification, LED lighting and data centers.
The awards identified here represent a cross-section of the business wins in the quarter and represent over $36 million in annual business.
In electric vehicles, we won awards for lighting, overhead console and busbar programs totaling over $22 million annually.
In hybrid vehicles, we were awarded lead frame and busbar programs totaling approximately $9 million annually.
I would like to emphasize that these -- we are winning programs with OEMs in the US, Europe and Asia.
In non-EV LED lighting, we were awarded programs for both auto and commercial vehicle applications.
Lastly, we're also participating in the building of data centers driven by cloud computing with programs for busbars and pluggable modules.
As we have stated before, Methode will continue to evolve its business with innovative, new technology and products for emerging applications and growing markets.
In the medical segment, our efforts to grow the Dabir product line in the quarter continue to be hampered by the postponement of elective surgeries due to COVID-19.
We are seeing some increased activity and believe that this business will return to a growth trajectory in the near future.
Looking forward, we're only providing sales guidance and only for our fiscal 2021 second quarter due to the market risk and uncertainty from the ongoing pandemic.
While we are not providing annual guidance at this time, we do intend to reassess annual guidance as soon as demand stabilizes and we are confident with our customers' forecasts.
While we have certainly seen strong demand over the last several months, it is not clear how much consumer confidence has returned versus the industry just satisfying pent-up demand, hence we remain cautious.
As I shared last quarter, Methode took actions in the first quarter to consolidate operations and further streamline our organization in order to improve efficiencies and set the stage for continued growth.
These actions and any potential future actions will allow us to further improve our execution and be in a better position to grow.
To conclude, given the current global macroeconomic situation and the significant headwinds faced by Methode throughout this past quarter, I am extremely pleased that our strategy and team were able to deliver these results, generate positive free cash flow and maintain a strong balance sheet.
Our focus is on navigating the pandemic situation, while continuing to execute our long-term strategy.
First quarter sales decreased 29.3% or $79.3 million to $190.9 million in fiscal '21 from $270.2 million in fiscal '20.
Sales in the first quarter were negatively impacted by COVID-19, especially in the May through mid-June timeframe.
The production shutdowns mostly impacted the automotive and industrial segments.
The impact of foreign currency on sales was not significant in the quarter.
First quarter net income decreased $7.6 million to $20.7 million or $0.54 per share from $28.3 million or $0.75 per share in the same period last year.
First quarter net income benefited from a discrete tax benefit of $7.8 million and higher other income of $3.4 million, primarily due to COVID-19 assistance of $2.9 million.
The sales drivers from fiscal '20 first quarter to fiscal '21 first quarter were a net $92 million sales reduction due to the impact of COVID and other lower volumes, partially offset by $14 million of new launches.
Foreign currency translation reduced sales by $1 million.
The impacted segments were mostly automotive and industrial.
Moving to Slide 10.
First quarter gross margins were lower in fiscal '21 as compared to fiscal '20, mainly due to the reduced sales due to the impact of COVID.
Product mix was also unfavorable as 26.6% decrease in sales in the higher-margin industrial segment negatively impacted consolidated gross margins.
Fiscal '21 first quarter margins were 23.6% as compared to 28.1% in the first quarter of fiscal '20.
The fiscal '21 first quarter margins included $1.9 million of restructuring expense.
Without the restructuring expense, fiscal '21 first quarter gross margins would have been 24.6%.
First quarter selling and administrative expenses as a percentage of sales increased 190 basis points year-over-year to 13.9% compared to 12% in the fiscal '20 first quarter.
The fiscal '21 first quarter figure was attributable to decreased sales and restructuring expense of $1.5 million, partially offset by lower stock-based compensation expense, lower wages and associated benefits due to salary reductions and four-day work weeks and much lower travel expense.
There was no restructuring expense in the first quarter of fiscal '20.
Without the $1.5 million of restructuring expense, the selling and administrative expense as a percentage of sales for the first quarter of fiscal '21 would have been 13.1%.
The company continues to monitor market factors and trends and will continue to evaluate possible additional actions to reduce overall costs and improve operational profitability, especially in the current COVID-19 environment.
In addition to the $3.4 million incurred in the first quarter from actions taken in the first quarter, the company currently expects an additional expense of $2 million in the second quarter from those first quarter actions.
The company may take additional actions in future period based upon business conditions as required.
Moving to slide 11.
Net income was $20.7 million in the first quarter of fiscal '21 as opposed to $28.3 million in the first quarter of fiscal '20.
The main drivers between the fiscal years were lower sales due to COVID, a favorable change in discrete tax items of $9.1 million, an unfavorable change in restructuring expense of $3.4 million and the receipt of $2.9 million of foreign government assistance due to COVID.
Shifting to EBITDA, a non-GAAP financial measure, fiscal first quarter '21 EBITDA was $29.3 million versus $50.3 million in the same period last year.
EBITDA was negatively impacted by the significant headwinds from the COVID-19 pandemic and included $3.4 million of restructuring expense.
A few other financial items to review.
Year-over-year depreciation and intangible asset amortization expense increased slightly in the first quarter of fiscal '21 to $12.1 million from $11.8 million in the first quarter of fiscal '20.
In the first quarter of fiscal '21, we invested approximately $11.6 million of capex as compared to $13.2 million in the first quarter of fiscal '20.
The first quarter investment represents an approximate $45 million run rate for the current fiscal year, but it is too early to tell if the rate will be maintained throughout the remainder of the year.
However, we have a strong balance sheet and intend to utilize it during this COVID impacted year to make continued investment in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Our intent is to come out of the COVID pandemic stronger than we were when we went into the crisis by judiciously using our strong balance sheet to our long-term advantage.
We had an income tax benefit of $5.1 million as compared to a tax expense of $7.3 million in the fiscal '20 first quarter.
The main driver of the benefit in fiscal '21 was $7.8 million of discrete tax items recorded during the quarter, mainly due to investment tax credits and other credits earned in foreign jurisdictions.
In the fiscal first quarter of '20 -- fiscal year '20, there was a discrete tax expense of $1.3 million.
Without the discrete tax items, the fiscal '21 first quarter effective tax rate would have been 17.2% as compared to 16.6% in the same period last year.
As shown on Slide 12, we did leverage gross debt by $2.3 million in the first quarter.
Since our acquisition of Grakon when adjusting for the $100 million precautionary credit facility draw in March of 2020, we have reduced gross debt by nearly $108 million.
Net debt increased by $4 million in the first quarter of fiscal '21 as compared to the fiscal '20 year end.
We ended the first quarter with $211 million in cash, which includes $100 million precautionary draw on the credit facility in March.
Our debt-to-EBITDA ratio, which is used for our bank covenants, is approximately 1.9.
This figure includes the impact of the precautionary $100 million draw.
Without the draw, the ratio would have been approximately 1.3.
Let's move to Slide 13.
Free cash flow, a non-GAAP measure, which is now defined as cash provided from operating activities minus capex as opposed to prior to fiscal '21 where it was defined as net income plus depreciation and amortization less capex.
For the fiscal '21 first quarter, free cash flow was $4.8 million as compared to $5.9 million in fiscal '20.
As Don mentioned in his remarks, we are providing revenue guidance for the second quarter.
The revenue range for the second quarter will be between $230 million and $250 million.
Don, that concludes my comments.
Melinda, we're ready to take questions.
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compname reports q1 earnings per share $0.54.
q1 earnings per share $0.54.
q1 sales $190.9 million versus $270.2 million.
sees q2 sales $230 million to $250 million.
not providing annual guidance due to mid-term market uncertainty as a result of ongoing pandemic.
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Comments will also reference certain non-GAAP or adjusted measures.
Before turning the call to Carlos, I would like to mention that we will be participating in a fireside chat at the Virtual Morgan Stanley Global Consumer Conference on Wednesday, December 1 at 9:55 AM Eastern.
We hope to see you there.
I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth, operating margin expansion and bottom line results.
Revenues increased 13% for the quarter versus last year and adjusted operating profit reached $70 million delivering an adjusted operating margin of almost 11% and adjusted earnings per share of $0.62 versus $0.58 last year and $0.22 in the pre-pandemic third quarter.
This performance was driven by the hard work, vision and dedication of our teams around the world, the business transformation that we have executed on the amazing product and strong momentum of the Guess brand.
We are very proud of all of you.
I strongly believe our Company is positioned better than ever to extend its distribution, gain market share and increase profitability.
We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.
Our Board's commitment is evident with the previously announced plans to our unused $200 million share repurchase authorization.
And today's approval to double our dividend.
We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically.
Over the last two years, we have successfully executed a full transformation of our business and what better prove that our strategy is working, than our results this fiscal year, when we are guiding to double our operating margin and profit from pre-pandemic levels.
The first piece of this transformation is the innovation of our brand, including launching our first global line innovating the quality and sustainability of our product, upgrading our marketing and visual merchandising, optimizing full price selling, remodeling our store fleet and enriching the customer experience.
Paul has led this critical initiative and together with the product and creative teams, they have been doing an incredible job.
The second piece of the transformation is the reset of our business model.
We have optimized our distribution in both retail and wholesale by removing unproductive stores and accounts, reducing our product offering to result in a single business with more productive SKUs from our global line.
We have also remained laser focused on margin expansion with improvements coming from IMU optimization, longer occupancy and cost reductions, including the consolidation of certain functions in Europe.
As a natural extension of these efforts, during the third quarter, we completed an intra entity transfer of certain intellectual property rights from the US to Switzerland, more closely aligning our IP rights with our business operations.
We are operating in a more capital-efficient way turning inventory faster with less non-productive assets.
This transformation has repositioned this Company's ability to deliver strong growth, significant profitability and superior shareholder returns into the future.
Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change.
We have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2050.
In fact, last month, we signed an open letter to G20 leaders calling for policies that align with this goal.
We also supported the United Nations Conference of Youth to ensure the collective youth voice on climate negotiations is heard.
We are actively working on our climate action roadmap that includes store efficiency measures, investment in renewables and changes to the way that we create and produce our product, I couldn't be prouder of our leadership in this very important area.
Let me add some color to our third quarter results.
Our retail and wholesale businesses in North America have remarkable performance in the period with significant increases in operating profit and margin expansion.
Our licensing business also reported strong quarter, all driven by the strong momentum our brand is enjoying in the marketplace.
Our Europe segment performed well positively impacted by a shift in business to LLY due to the timing of inventory receipts, and I am proud to say that we closed the spring-summer order book for our European wholesale business this quarter with orders up 12% to LLY.
And our sales campaigns for the pre-fall-winter season is looking promising for double-digit growth as well.
These results clearly signal that we are continuing to gain market share.
Our Asia segment had a challenging quarter and continues to be impacted by the COVID situation on government restrictions in several countries including China, Japan and Taiwan.
I am really encouraged by the momentum that we saw in the third quarter in our top line which of course starts with our brand and our product.
We had strong performance in dresses, sweaters outerwear and denim as well as our high-end Marciano brand.
North America saw a pop in the mid-tops while Europe remained strong in athleisure.
Our men's business outperformed in North America, and in accessories sales of handbags and watches were solid in both regions.
I believe, the strength that we have been seeing in categories like denim, Marciano, handbags, dresses and outerwear bodes well for the future as these provide us key levers to drive same-store sales growth.
Guess is a true lifestyle brand and is poised to capitalize on current consumer trends.
Casualization is here to stay, which will help fuel our continued growth in categories like denim.
We have a diversified denim offering with silhouette including skinny, straight leg, mom jean and mini flare and see this as key opportunity for future growth.
At the same time, we see consumers returning to social activities and fashion-oriented which is seen in other key areas of our business like dresses and Marciano.
Regarding our store fleet, we opened 55 new stores so far this year, most of which were pop-ups with new gas and factory stores, but also specialty conference like accessories, activewear, Marciano, kids and our Gen Z concept Guess Originals.
We continue to believe that we have substantial whitespace for new stores in many of our markets and stores are a key pillar to represent a lifestyle attributes of our brands, provide a tool for new customer acquisition will complete the omnichannel experience.
In connection with the elevation of our brand, we embarked on our remodeling program that will ultimately touch roughly 630 stores.
Including new stores, this would represent 80% of our entire fleet in Europe and North America by the end of next year.
We continue to invest in technology including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience.
Our e-commerce business continues to grow with sales in North America and Europe in the third quarter, up 15% to last year and 37% to LLY.
This is a source of both revenue and profitability growth for our brand and it represents a material go forward opportunity for us.
And we continue to make progress on our customer centricity initiatives including omnichannel capabilities and advanced data analytics and customer segmentation.
In Europe, we are rolling out omnichannel and ship from store capabilities in all countries and we have launched a new gift card application for the holidays.
Regarding customer analytics, we have nearly 6 million contactable customers in our databases in North America and Europe and have added 1 million new customers this year so far.
Over 85% of this customers provide us with their mobile phone number and over 20% with their home address.
So we can leverage SMS marketing and mailers.
As part of the Customer 360 projects, we recently launched our CRM platform, which gives us a 360 view of our customer and enable us to improve the way we segment and personalize our communication marketing and promotional strategies.
This is fully implemented in Europe and early results are very promising.
The same application will be implemented in North America next year.
We'll continue to drive innovation in this area and fund investments in technology and customer analytics.
Regarding inventory and the supply chain, it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side.
Our team is doing an incredible job mitigating this challenges to the extent possible.
Our work to consolidate our vendors going from over 500 to around 135 as well as the execution of the global line which reduce SKUs by over 40% has enabled us to leverage higher volumes to push through production.
We have ordered product in advance to allow for extended lead times and our inventory levels at the end of Q3 reflect this.
We maintain a globally diversified sourcing strategy which has helped us to limit impacts when areas experienced disruptions.
We are also moving roughly 10% of our apparel sourcing to locations that are closer to the final distribution to get out and tighten costs as well as exploring alternative shipping methods like to change to move product faster between China and Europe and we are certainly investing in air transportation when it makes sense to get our product in time to sell.
This year, we have gone through above at 7% usage of air freight versus a prior average of about 3%.
In addition, as with the rest of the industry, we are experiencing increases in raw material cost like cotton.
We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post-consumer waste products.
All of this is obviously resulting in elevated costs which we have built into our outlooks.
Importantly, we have been successful in increasing prices with AURs up 15% to 20% alongside our innovation and product quality to mitigate the impact this cost increases are having on our profitability.
As of the end of Q3, we had over a $100 million of inventory in transit representing almost 25% of our total ownership compared to 12% in pre-pandemic Q3.
A lot of this product will support our post holiday business primarily to service our European wholesale business and our on-hand inventory today is completely aligned with our demand expectations for the upcoming holiday season.
I feel strongly about our plans for the holiday business.
We have a lot of newness coming to stores.
Our assortment and the elevated quality of our product is clearly resonating with our customers as evidenced by our strong start to the fourth quarter.
In North America, traffic is gaining momentum recently and we are experiencing good conversion and strong AURs.
Recent improvement in trends in our tourist location suggests that we are getting a boost from the change in travel restrictions implemented in the US earlier this month.
In Europe, we have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also remain strong.
As we have done all year, we plan to continue to be less promotional than in the past, especially with store wide level discounts.
We are increasing marketing to fuel the customer acquisition.
We are expanding the use of direct mail and catalog pieces planning to send out 1.2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites.
We have bought key product feature in our marketing campaigns in significant debt.
We have also added video capabilities to show product attributes more effectively.
When you put it altogether, we see top line growing in excess of 20% in the fourth quarter period versus last year and operating profit exceeding $100 million.
This represents an increase in both the top and bottom line to our previous outlook for the year and Katie will give us more color on this in a few minutes.
Looking past this year, we remain confident in our longer-term goals to reach revenue of $2.8 billion and operating margins of 12% in fiscal year 2024.
In closing, let me just say that I could not be prouder of what our team has accomplished in the last 2.5 years since I've been back.
We have highly dedicated people who share an incredible passion to pursue our purpose.
And on this team when we commit to something we deliver.
We committed to elevating our brand we are delivered.
I think Paul and our product teams have done extraordinary work with this and today, we have one line of product for the entire world across all categories and our products are the best they have been in our Company's history, highly elevated, of great quality and very consistent with the DNA of the Guess brand.
We committed to transforming the business we are delivering.
We have reacted to every aspect of our business model including our store portfolio, digital business, sourcing and logistics operations and systems infrastructure.
We also committed to expanding our margins and we are delivering here too.
We now expect to reach an 11% operating margin this year, double our margin of two years ago and well ahead of our initial plans.
While these are all significant accomplishments, I strongly believe that the best is yet to come for us.
We are in an inflection point at Guess, and I'm very confident that our business is well positioned to generate superior returns in the future and our results will be here to prove it.
You have our commitment.
With that, let me pass it to Katie to review our financials in more detail.
I'm excited to tell you more about our financial performance this quarter which truly exceeded our expectations.
We tripled earnings to pre-pandemic levels and are raising both our top and bottom line outlook for the year.
The brand is showing strong momentum going into the holiday season and despite the challenging supply chain we have the products to support that demand.
These results are again a testament of our organization's commitment to win, flexibility to adapt during volatile times and pure grit.
I love being part of this passionate team.
Now, let me take you through the details on the quarter.
Third quarter revenues were $643 million, up 13% to last year and up 4% compared to LLY.
This exceeded our expectations as our Americas Retail, European wholesale and licensing businesses all outperformed.
Overall, the 4% revenue increased to pre-pandemic LLY with the result of growth in our European business driven by wholesale including shift to sales from Q2 to Q3 as well as e-commerce.
This was partially offset by permanently closed stores and negative same-store sales in Europe and Asia.
Excluding sales from the over 170 stores that we have closed since the pandemic, Q3 revenue would have been up 9% to LLY.
And let me just remind you that these stores are accretive to operating profit by about $20 million on a run rate basis.
Let's talk a bit about sales performance by segment.
In Americas Retail, revenues were up 30% versus last year and down 5% versus LLY, better than our expectations.
Again this quarter, the declines for LLY was driven entirely by permanent store closures which are worth roughly 7% of sales.
So we're constantly US and Canada were up 2% in constant currency versus LLY.
Same-store sales in the US remain positive despite continued negative traffic trends with positive conversion and AUR growth over 20%.
I'm happy to report that sales in our over 70 stores in Canada have improved substantially driven by a material increase in traffic in that region as the pandemic there is beginning to wane.
This quarter, we continue to be a lot less promotional lapping also four events on holidays like Labor Day that we didn't do this year, which has an impact on our topline, but of course a benefit to our bottom line.
I can help to point out the increase in profitability that we have brought to this segment that is allowing us to capitalize on our positive sales trends.
Operating margin in Q3 was over 14% versus less than 1% in the prior two years and operating profit is 15 times what it was in pre-pandemic LLY even on lower sales, what an incredible business transformation.
In Europe, revenues were up 3% versus last year and 19% versus LLY.
The increase to LLY is primarily a result of growth in our wholesale business.
As you may recall from last quarter, our shipments for the fall-winter season were a few weeks away due to challenges with the supply chain.
So we had a shift in sales from Q2 into Q3.
But even absent the shift, this business had positive momentum and we are gaining market share here.
While our retail business continues to be pressured by pandemic-related traffic declines, we saw a significant sequential improvement in our sales since last quarter.
Store comps for Europe were down 13% in constant currency versus LLY, a 7% improvement from down 20% last quarter as a result of improved traffic and continued increases in AURs.
In Asia, revenue was down 8% in the last year and 31% to LLY, nearly half of this decline was driven by the permanent store closures.
Our store comps were down 25% in constant currency versus LLY, 5% better than Q2 with negative sales comps in South Korea and China more moderate than other areas in the region.
This region has struggled with the resurgence of COVID-19 as well as the lack of consumer confidence which is deeply impacting our sales.
Our Americas wholesale sales were up 64% to last year and 5% to LLY driven by higher sales in the US and licensing revenue continues to outperform, up 37% to last year and 20% to LLY in Q3 driven by strong performance in shoes, perfumes and watches.
Total company gross margin for the quarter was 45.7% more than 800 basis points higher than two years ago.
Our product margin increased 340 basis points this quarter versus LLY primarily as a result of lower promotions and higher IMU, partially offset by business mix and increased freight, which was worth about 100 basis points this quarter.
Occupancy rates increased 500 basis points driven by business mix, lower rents and permanently closed stores.
Adjusted SG&A for the quarter was $223 million compared to $206 million two years ago.
The increase is the result of variable costs for both the e-commerce and wholesale businesses, mostly in Europe which grew materially into LLY as well as higher performance based compensation.
Adjusted operating profit for the third quarter was $70 million versus $55 million last year and $23 million two years ago.
This is a 27% increase to last year and an over 200% increase to pre-pandemic levels.
Our balance sheet remains strong.
We ended the third quarter with $391 million in cash, $26 million higher than last year's sales at the end of Q3.
Our cash balance was impacted by an $80 million US tax payments made in connection with the IP transfer that Carlos mentioned.
We expect to receive this amount in Switzerland over the next 5 to 10 years.
Inventories were $482 million, up 23% in US dollars and 22% in constant currency versus last year and down 8% in constant currency to LLY.
This increase reflects our strategy to secure good in advance of the holidays and Q1 in light of the global supply chain disruptions and elongated transit times.
Year-to-date capital expenditures were $41 million up from $12 million in the prior year, but below pre-pandemic levels, mainly driven by investments in new stores, remodels and technology.
Free cash flow for the first three quarters of the year was negative $41 million driven down by the $80 million US tax payments that I previously mentioned.
Excluding the tax payments, our free cash flow would have been positive $39 million.
Let me touch on capital allocation.
We are confident in our ability to generate sustainable and profitable growth and ample free cash flow.
As a result, we have the runway not only to fund our growth initiatives, but also return incremental capital to our shareholders.
As you recall, last quarter we expanded our share repurchase program to $200 million.
Today, we announced that our Board of Directors has approved a 100% increase in our quarterly dividend from $0.1125 to $0.225.
As a reminder, our dividend was announced earlier [Phonetic] before we executed the $300 million convertible notes to fund share repurchases in April of 2019.
Now let's talk about our go-forward expectations.
We are raising our outlook for the fourth quarter and the full fiscal year.
For the fourth quarter, we are expecting revenue to be down mid-single digits versus LLY driven by timing in our wholesale business and permanently closed stores partially offset by growth in our e-commerce business.
I wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumptions for revenues for a European retail business in the fourth quarter.
In terms of profit, adjusted operating margin for the fourth quarter is expected to be about 100 basis points better than LLY.
Gross margin is expected to expand by around by 500 basis points to LLY driven primarily by business mix, lower occupancy, lower promotions and improved IMU.
And as with the rest of the industry, we are seeing some cost pressures, particularly in freight, which are built into these numbers.
We anticipate that the adjusted SG&A rate will be up around 400 basis points as cost savings are offset by business mix, investments in labor and higher incentive-based compensation.
For the year, we now expect revenue to be down in the low single digits versus LLY and adjusted operating margin to reach just over 11% for the year versus 5.6% in LLY.
This represents a doubling of adjusted operating margin with margin expansion of over 550 basis points to our pre-pandemic business despite a lower revenue base.
To break it down for you, this margin expansion comes from about 250 basis points of lower promotional activity, 200 basis points of IMU improvement, 150 basis points of lower occupancy expense and 200 basis points of channel mix and onetime benefits.
This was partially offset by about 150 basis points of higher inbound freight and 100 basis points of increases in G&A, mostly higher performance-based compensation for this year.
We are very confident in the sustainability of these margin improvements.
We realized that the current environment of significant demand and limitations in product availability have triggered broad increases in margin in our industry.
In our case, most of our margin improvement has come from concrete changes in our business model that Carlos walked you through earlier and are not circumstantial but more permanent in nature.
This margin expansion combined with the potential for future top line growth at Guess is very powerful.
For these reasons, we remain confident in our longer term goals, and we look forward to sharing our outlook for the next fiscal year with you when we report Q4.
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compname reports q3 adjusted earnings per share $0.58.
q3 adjusted earnings per share $0.58.
not providing detailed guidance for q4 or full fiscal year ending january 30, 2021.
qtrly asia retail comp sales including e-commerce decreased 15% in u.s. dollars and 18% in constant currency.
expect revenues in q4 of fiscal 2021 to be down in low to mid-twenties.
during q3, continued to experience lower net revenue compared to same prior-year period as it remained challenged by lower demand.
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Further information about these risks can be found in our filings with the SEC, and we encourage you to review them.
We will attempt to complete our call within one hour.
As we know, another multi-family company is holding their call right after us.
We already have 15 analysts in the queue right now.
If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes.
Our on-hold music today was attributed to team Camden.
We wanted to celebrate the incredible results of our onsite team supported by our regional and corporate staffs that they have achieved throughout the COVID storm.
Despite all the turmoil, team Camden never stopped taking care of business.
That's what you can expect from a team of all-stars.
Instead of 1,000-yard stare, team Camden showed up every day with the eye of the tiger, reminding us of what we know is true, you're simply the best.
So this evening we will join you in spirit, as you all raise your glass to celebrate your remarkable performance.
Our performance for the third quarter was driven by our team, but was also aided by our Camden brand equity and our capital allocation and market selection.
We've always believed that geographic and product diversification would lower the volatility of our earnings.
We're in markets that are pro-business, have an educated workforce, low cost of housing and high quality of life scores.
These attributes drive population and employment growth, which drives housing demand.
The only exception to this market generalization for us is Southern California.
Compared to most other parts of California, however, our properties are in the most business friendly cities and areas in the state.
Our markets have lost fewer high paying jobs than other markets in the U.S. As a matter of fact, it's 5% losses for Camden markets versus 15% for the U.S. Overall, year-over-year employment losses through September have been less in our markets.
Job losses in most of our markets have been in the range of down 2.5% to down 5%, the best being Austin, Dallas, Phoenix, Tampa, Atlanta and Houston.
Toughest markets have been Orlando, Los Angeles and Orange County with job losses between 9.5% and 9.7%.
Another key employment trend our other key employment trends are that are supporting our residents' ability to stay in their apartments and pay rent is that when you think about the job losses that we lost at the beginning of the pandemic, there were 22 million jobs lost, 11 million had been added back.
Of the jobs that have not been added back, 5.8 million are low-income workers making less than $46,000 a year.
And another group 4.1 million folks have not been added back that make between $46,000 and $71,000 a year.
So the lion's share of the 11 million jobs that haven't been that have not been added back are really not our residents.
There are lower income workers that do not live at Camden.
Most of our residents have higher income than that.
And it's unfortunate that we have that many job losses, and we obviously need to add those jobs back as soon as possible, but they aren't negatively impacting Camden's resident base.
Obviously, we're more than pleased with our results for the quarter.
This is certainly the kind of performance that is worthy of celebration by team Camden.
Overall, things seem like they're getting back to something closer to normal, and that's quite a contrast to where we were in April and May of this year.
A few signs that conditions of stabilizing our markets, occupancy for the third quarter was 95.6%, up from 95.2% in the second quarter.
Several of our communities are actually exceeding their original budget for occupancy.
Turnover continues to be a tailwind at 48% for the third quarter and only 42% year-to-date.
There continues to be a lot of anecdotal evidence that home sales are spiking.
In our portfolio, we had 13.8% move-outs to purchase homes in the first quarter of this year that moved up to 14.7% in the second quarter.
And in the third quarter, it moved up again to 15.8%.
But if you take the average, the average year-to-date move-outs to purchase homes, it was 14.8% versus a full year 2019 of 14.6%.
So really very little change year-over-year.
We did see a little uptick in October to 18%, but Q4 is always a little bit elevated.
Clearly, this is a stat that bears some watching to see if the anecdotal evidence starts showing up in the stats.
Before I move on to our financial results and guidance and brief update on our recent real estate activities.
During the third quarter of 2020, we stabilized Camden North End I, a 441 unit $99 million new development in Phoenix, Arizona, generating over a 7% stabilized yield.
We completed construction on Camden Downtown, a 271 unit $131 million new development in Houston.
We recommenced construction on Camden Atlantic, a 269 unit $100 million new development in Plantation, Florida.
And we began construction on both Camden Tempe II, a 397 unit $115 million new development in Tempe, Arizona, and Camden NoDa, a 387 unit $105 million new development in Charlotte.
For the third quarter of 2020 effective new leases were down 2.4% and effective renewals were up 0.6% for a blended decline of 0.9%.
Our October effective lease results indicate a 3.5% decline for new leases and a 2.1% growth for renewals for a blended decrease of 1%.
Occupancy averaged 95.6% during the third quarter of 2020 and this was up from the 95.2% where both experienced in the second quarter of 2020 and that we anticipated for the third quarter of 2020 leading in part to our third quarter operating outperformance, which I will discuss later.
We continue to have great success in conducting alternative method property tours for prospective residents and retaining many of our existing residents, with actually a slight acceleration in total leasing activity year-over-year.
In the third quarter, we averaged 3,227 signed leases monthly in our same property portfolio, slightly ahead of the third quarter of 2019 where we averaged 3,104 signed leases.
To-date, October, 2020 total signed leasing activity is on pace with October, 2019.
Our third quarter collections far exceeded our expectations.
As we collected 99.4% of our scheduled rents with only 0.6% delinquent.
This compares favorably to both the third quarter of 2019, when we collected 98.3% of our scheduled rents with a higher 1.7% delinquency and in the second quarter of 2020, when we collected 97.7% of our scheduled rents with 1.1% of our residents in a deferred rent arrangement and 1.2% delinquent.
The fourth quarter is off to a good start with 98.1% of our October, 2020 scheduled rents collected.
Turning to bad debt, in accordance with GAAP, certain uncollected rent is recognized by us as income in the current month.
We then evaluate this uncollected rent and establish what we believe to be inappropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period.
When a resident moves out owing us money, we typically have previously reserved 100% of the amount owed as bad debt and there'll be no future impacts to the income statement.
We reevaluate our bad debt reserves monthly for collectability.
Turning to financial results.
Last night, we reported funds from operations for the third quarter of 2020 of $126.6 million or $1.25 per share, exceeding the midpoint of our prior guidance range by $0.08 per share.
This $0.08 per share outperformance for the third quarter resulted primarily from approximately $0.055 in higher same store revenue comprised of $0.025 from lower than anticipated net bad debt due to the previously mentioned higher than anticipated collection levels and higher net reletting income, $0.01 from the higher than anticipated levels of occupancy and $0.02 from higher than anticipated other income driven primarily from our higher than anticipated levels of leasing activity.
Approximately $0.005 in better than anticipated revenue results from our non-same store and development communities.
Approximately $0.005 in lower overhead due to general cost control measures and an approximately $0.015 gain related to the sale of our Chirp technology investment to a third-party, this gain is recorded in other incomes.
We have updated our 2020 full year same store revenue, expense, and net operating income guidance based upon our year-to-date operating performance and our expectations for the fourth quarter.
At the midpoint, we now anticipate full year 2020 same-store revenue to increase 1% and expenses to increase 3.4% resulting in an anticipated 2020 same store net operating income decline of 0.3%.
The difference between our anticipated 3.4% full year total expense growth and our year-to-date total expense growth of 2.4% is primarily driven by the timing of current and prior year tax refunds and accruals.
The increase to our original full year expense growth assumption of 3% is almost entirely driven by higher than anticipated property tax valuations in Houston.
We now anticipate total same-store property taxes will increase by 4.7% in 2020 as compared to our original budget of 3%.
Last night, we also provided earnings guidance for the fourth quarter of 2020.
We expect FFO per share for the fourth quarter to be within the range of a $1.21 to $1.27.
The midpoint of $1.24 is in line with our third quarter results after excluding the previously mentioned third quarter gain on sale of technology.
Our normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses are anticipated to be entirely offset by the timing of property tax refunds, lower net market rents and our normal seasonal reduction in occupancy and corresponding other income.
As of today, we have just under $1.4 billion of liquidity comprised of approximately $450 million in cash and cash equivalents.
And no amounts outstanding underneath our $900 million unsecured credit facility.
At quarter end, we had $384 million left to spend over the next three years under our existing development pipeline.
And we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks earning approximately 30 basis points.
At this time, we'll open the call up to questions.
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qtrly ffo per share $1.28.
sees q3 ffo per share $1.30 - $1.36.
sees 2021 ffo per share $5.17 - $5.37.
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I'm Arnold Donald, President and CEO of Carnival Corporation and PLC; and today I'm joined telephonically by our Chairman, Micky Arison; as well as by David Bernstein, our Chief Financial Officer; and by Beth, Robert Vice President, Investor Relations.
What a difference a year made.
We are clearly on our way back to full cruise operations with with 50 ships now serving guests as we end the fiscal year, and that's up from just one ship, one short a year ago.
We've already returned over 65,000 crew members to our ships and thus resuming operations, over 1.2 million guests and counting and still we are [Phonetic] Now we've achieved that while delivering an exceptional guest experience with historically high net promoter scores.
These are strong accomplishment, especially in light of the uncertainty we faced just one year ago when vaccines were not yet available and effective protocols to mitigate the spread of the virus were still evolving.
Today, our team members and the vast majority of guests have received vaccines and many have received boosters.
We have [Indecipherable] the effective protocols for COVID-19 and its very enabling occupancy to progress toward historical lows.
In fact, occupancies at our Carnival Cruise Line brand which currently operates and generates that are most similar to its normally [Indecipherable] generates are now approaching 90% and that's after the impact of the variants on near-term book.
Again, Carnival Cruise Lines continues to outperform with both occupancy and price.
Even at this early stage, as a company, we are now generating meaningful cash flow at the ship level to date and growth, helping to fund start-up costs for the remaining fleet.
Total customer deposits have grown by over $1.2 billion from the prior year alone as our book position continues to build and to strength.
Importantly, we ended the year with $9.4 billion of liquidity and as essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead, as the aforementioned ship operating cash flows and [Indecipherable] continue to build, with 68% of our capacity now in operation and the remainder planned by spring, we are well positioned for our important summer season, where we historically have the lion's share of our operating profit.
Throughout 2021, we said that we expected the environment to remain dynamic and it certainly has.
Of course, [Indecipherable] has been a key strength of ours and we continue to aggressively manage to optimize given this ever changing landscape as we have demonstrated through the Delta variant and now with Omicron, we have navigated near term operational challenges.
While the variants and their corresponding effect on consumer confidence have created some near term booking volatility, out book position has remained resilient.
And in the case of Delta variant, already recovered.
Importantly, these variants have not had a significant impact on our ultimate plan to return our full fleet to guest operations in the spring of 2022.
It is clear we have maximized our return to service in 2021 and we have positioned the company well to withstand the potential volatility on our path to profitability.
At the same time, we have not lost sight of our highest responsibility and therefore our top priorities, which is always compliance, environmental protection and the health, safety and well-being of everyone, that's our guests, the people in the communities we touch and serve, and of course, our Carnival family, our team members shipboard and shoreside.
And to that end, we've achieved many important milestone along the way in our return service, or events, broadening our commitments to ESG with introduction of our 2030 sustainability goals and our 2050 aspiration, and that's building on the successful achievement of our 2020 goal, increase our ESG disclosure by incorporating SASB be and TCFD framework in our sustainability report, bolstering our compliance efforts with the addition of a new Board member with valuable compliance experience, a strong addition to our Board of Directors and our Board Compliance Committee, improving our culture through emphasizing essential behaviors and incorporating them into our ethos [Phonetic] through training and development and through every day real time feedback, as we are already among the most diverse companies in the world with a global employee base representing over 130 countries.
We're focusing our efforts on diversity and inclusion at every level and in all areas of our operation.
And of course, there are many more operational milestones, such as reopening our eight owned and operated private destinations and port facilities, Princess [Indecipherable] Mahogany Bay, Amber Cove [Indecipherable] Santa Cruz de Tenerife and Barcelona, all delivering an exceptional experience to over 630,000 of the 1.2 million guests that's resuming.
Welcoming nine new more efficient ships across our world-leading brand, including Mardi Gras powered by LNG.
Mardi Gras is nothing short of a gamechanger for our namesake brand Carnival Cruise Line, premium brand Holland America introduced the new Rotterdam, sister ships to the very successful Koningsdam and Nieuw Statendam.
For the U.K., we successfully introduced Iona, also powered by LNG.
For Germany, we shortly take delivery about six LNG powered ship AIDAcosma system to the also highly successful AIDAnova.
And for Southern Europe, Costa Firenze and LNG powered Costa Toscana will replace the exit of several less efficient ships.
Now these new ship Mardi Gras, Iona, Costa Toscana have joined AIDAnova and Costa Smeralda to be the only and with the addition of AIDAcosma shortly.
The only six large cruise ships in the world currently powered by LNG, demonstrating our leading edge decarbonization efforts.
Now while the utilization of LNG is a positive step with the environment, so LNG is inherently 20% more carbon efficient.
It is not our ultimate solution.
We have announced our net zero aspirations by 2050.
Now where there is no known answer to zero carbon emissions in our industry at this time, we are working to be part of the solution.
We have and expect to continue to demonstrate leadership and executing carbon reduction strategy.
We are focused on decreasing our unit fuel consumption today, reducing even the need for carbon offsets.
Our decarbonization efforts have enabled us to peak our absolute carbon emissions way back in 2011, and that's despite an approximately 25% capacity growth since that time.
And while today based on publicly available information, we believe we are the only major cruise operator to peak our absolute emissions, our entire industry is moving in the right direction.
And as a company with a 25% reduction in carbon intensity already under our belt, we are well positioned to achieve our 40% reduction goal by 200 and are working hard to reach that deliverable ahead of schedule.
Now in addition to our cutting edge LNG efforts, we have many other ongoing efforts to accelerate decarbonization.
To name just a few, they include itinerary optimization and technology upgrades to or existing fleet and an investment of over $350 million in areas such as air conditioning, waste management lighting, and of course, the list goes on.
We are actively increasing our shore power capabilities.
Greater than 45% of our fleet is already equipped to connect the shore power and we plan to reach at least 60% by 2030.
Now we helped develop the first port with show power capability for cruise ships, leading to the development of 21 ports to date and counting.
We are focused on expanding shore power to our high value ports around the world, that includes Miami; Southampton, England; and Hamburg, Germany.
So ultimately achieve net zero emissions over time, we are investing in research and development, partly on projects to evaluate and pilot maritime skill battery and fuel cell technology and working with Classification Societies and engine manufacturers to assess hydrogen, methanol as well as bio synthetic fuels, as future low carbon fuel options for our cruise ships.
Also, these efforts combined with the exit of 19 less efficient ships are forecasted to deliver upon return to full operation a 10% reduction in unit fuel consumption on an annualized base.
Now that's a significant achievement on our path to decarbonization.
Our strategic assist to accelerate the exit of 19 ships vessels with a more efficient and a more effective fleet overall and it's lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025, now that's down from 4.5% annually pre COVID.
While capacity growth is constrained, we will benefit from this exciting roster of new ships spread across our brand and they even to capitalize on the pent-up demand and drive even more enthusiasm around our restart plans.
A enjoy a further structural benefit to revenue from these enhanced guest experiences, new ship, due to the richer mix of premium price balcony cabins, which will increase 6 percentage points to 55% of our fleet in 2023.
Now of course, as we mentioned before, we've also achieved a structural benefit to unit costs as we deliver these new, larger, more efficient ships, coupled with the exit of 19 less efficient ships, it will help generate a 4% reduction in ship level unit cost going forward, enabling us to deliver more revenue to the bottom line.
Upon returning to full operation, nearly 50% of our capacity will consist of these newly delivered, larger, more efficient ships, expediting our return to profitability and improving our return on invested capital.
Now we are clearly resuming operation as a more efficient operating company, and we'll use our cash flow strength to reduce our leverage on our path back to investment grade credit.
Last quarter, we discussed the initial impact of the Delta variant.
We indicated we saw an impact on near-term booking volumes in the month of March.
Booking volumes have since accelerated sequentially and returned to pre-delta levels in November.
And as we said we would, we maintain price despite the disruption, achieving 4% higher revenue per passenger cruise day in our fourth quarter than in the fourth quarter of 2019.
In fact, the Carnival Cruise Line brand where we as I mentioned are able to offer more comparable itineraries to those in 2019 experienced its second consecutive quarter of double-digit revenue growth for the year, while improving occupancy with nearly 60% of its capacity returned to serve.
Now that's a testament to the fundamental strength in demand for our cruise product, especially when you consider this was accomplished without the benefit of a major advertisement.
We expect to build on this momentum with the brands announcement just last week on its Funderstruck campaign, engineered to highlight the joy and following of our Carnival Cruise.
That advertising campaign is launching over the holiday, including the activations on Christmas Day and Times Square on New Year's Eve, in time for our [Indecipherable] something that's very present in the news today, Omicron there.
We have also experienced some initial impact on near-term bookings, although difficult to measure.
That said, we have a solid book position and intensely constrained capacity for the first half of 2022.
With the existing demand and limited capacity, we remain focused on maintaining price.
Bookings continue to build for the remainder of 2022 and well into 2023, and we are achieving those early bookings with strong demand.
In fact, pricing on our book position for the back half of 2022 improved since last quarter, and that's despite the Delta variant.
The current environment while challenging, has improved dramatically since last summer.
And as the current trend of vaccine rollout and advancements in therapies continues, it should improve even further by next summer.
So looking forward, we remain on a path to consistently deliver and slow from operations during the second quarter 2022 and generate profit in the second half of 2022.
Importantly, we believe we have the potential to generate higher EBITDA in 2023 compared to 2019, given despite our modest growth rate, additional capacity and our improved cost structure.
Throughout the pause, we have been proactively managing to resume operations as an even stronger and more efficient operating company, to maximize cash generation and to deliver double-digit return on investment.
Once we return to full operations, our cash flow will be the primary driver to return to investment grade credit over time, creating greater shareholder value, and we continue to move forward in a very positive way.
And for that, I again express my deepest appreciation to our Carnival team members, both shipboard and shoreside, who consistently go above and beyond.
I am very proud of all we've accomplished collectively to sustain our organization through these challenging time and I'm very humbled by the dedication I've seen from our teams throughout.
Of course, we couldn't have done it without the overwhelming support from all of you.
I'll start today with some color on our positive cash from operation followed by a review of guest cruise operations along with a summary of our fourth quarter cash flow, then I'll provide an update on booking trends and finish up with some insights into our financial position.
Turning to cash from operation.
I am so happy to report that our cash from operations turned positive in the month of November, ahead of our previous indication, driven by increases in customer deposits and other working capital changes.
We all know that booking trend are a leading indicator of the health of our business with solid fourth quarter booking trend leading the way, driving customer deposits higher, positive EBITDA is clearly within our site.
Over the next few months, we expect ship level cash contributions to grow as more ships return to service and as we build on our occupancy percentage.
However, cash from operations and EBITDA over the next few months will be impacted by restart related spending and dry-dock expenses as 28 ships, almost a third of our fleet will be in dry-dock during the first half of fiscal 2022.
Given all these factors combined, we expect both monthly cash from operations and monthly EBITDA to consistently turn positive during the second quarter of fiscal 2022.
So 2022 will be a tail to hear.
While we expect the net loss for the first half of 2022, it makes me feel so good to say we expect the profit for the second half of 2022.
Now let's look at guest cruise operation.
During the fourth quarter, we successfully restarted 22 ships.
During the month of December, we will restart an additional seven ships, so we will be celebrating on New Year's Eve with over two thirds of our fleet capacity in service.
Our plans call for the remainder of the fleet to restart guest cruise operations by spring, putting us in a great position for our seasonally strong summer period.
For the fourth quarter, occupancy was 58% across the ships in service and that was a 4 point improvement over the 54% we achieved last quarter during the peak summer season despite the slowdown in bookings just prior to the fourth quarter from the Delta variant.
During the fourth quarter, we carried over 850,000 guests, which was 2.5 times the number of guests we carried in the third quarter.
Our brands executed extremely well with net promoter scores continuing at elevated levels compared to pre-COVID scores.
Revenue per passenger cruise day for the fourth quarter 2021 increased 4% compared to a strong 2019 despite the current constraints on itinerary offering.
We had great growth in onboard and another per diems on both sides of the Atlantic.
Increases in bar, casino, shops, spot, and Internet led the way onboard.
Over the past two years, we have offered and our guests have chosen more and more bundled package options.
In the end, we will see the benefit of these bundled packages and onboard and other revenue as we did during the second half of 2021.
As a result of these bundled packages, the line between passenger ticket revenue and onboard revenue is blurred.
For accounting purposes, we allocate the total price paid by the guests between the two categories.
Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics.
For those of you who are modeling our future results based on our planned restart schedule for fiscal 2022, available lower berth days or ALBDs as they are more commonly called, will be approximately $78 million.
By quarter, the ALBDs will be for the first quarter $14.1 million.
For the second quarter, $17.8 million.
For the third quarter, $23 million even.
And for the fourth quarter, $23.1 million.
Fuel consumption will be approximately 2.9 million metric tons.
The current blended spot price for fuel is $563 per metric ton.
I did want to point out that due to the cost of a portion of our fleet being in pause status during the first half of 2022, restart related expenses, the cost of maintaining enhanced health and safety protocols and inflation, we are projecting net cruise costs without fuel per ALBD in 2022 to be significantly higher than 2019 despite the benefit we get from the 19 smaller less efficient ships leaving the fleet.
Remember that because a portion of the fleet will be in pause status during the first half, we are spreading costs over less ALBDs.
We do anticipate that most of these costs and expenses will end with 2022 and will not reoccur in fiscal 2023.
In addition, we expect depreciation and amortization to be $2.4 billion for fiscal 2022, while net interest expense without any further refinancings is likely to be around $1.5 billion.
Next, I'll provide a summary of our fourth quarter cash flows.
During the fourth quarter 2021, our liquidity, increased by $1.6 billion to $9.4 billion at the end of the fourth quarter from $7.8 billion at the end of the third quarter.
The increase in liquidity was driven by the $2 billion senior unsecured notes we issued in October to refinance 2022 maturities.
The $360 million customer deposit increase added to the total.
This was the third consecutive quarter we saw an increase in customer deposits.
Completion of a loan we previously mentioned, supported by the Italian government, with some debt holiday principal refund payments added another $400 million.
Working capital and other items net contributed $300 million.
All these increases totaled $3.1 billion, which was somewhat offset by our cash burn of $1.5 billion.
Simply, our monthly average cash burn rate of $510 million per month times 3.
it should be noted that our monthly average cash burn rate for the fourth quarter 2021 was better than planned, driven by lower capital expenditures.
Turning to booking trends.
Our cumulative advance book position for the second half of 2022 and the first half of 2023 are at the higher end of historical ranges and at higher prices compared to 2019, with or without FCC's, but normalized for bundled packages.
This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was the high watermark for historical yield.
Booking volumes for the same period during the fourth quarter of 2021 were higher than the third quarter.
During the fourth quarter 2021, we significantly increased our advertising expense compared to the third quarter in anticipation of the full fleet being in operation in the spring of 2022, generating demand and allowing us to improve pricing on our book position.
However, the fourth quarter advertising expense is still significantly below our spending in the fourth quarter 2019.
Finally, I will finish up with some insights into our financial position.
What a difference a year makes except for our liquidity.
As Arnold indicated, we entered 2022 with $9.4 billion of liquidity, essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead as ship operating cash flows and customer deposits continue to build.
Through our debt management efforts, we have refinanced $9 billion to date, reducing our future annual interest expense by approximately $400 million per year and extending maturities, optimizing our debt maturity profile.
With our 2022 maturities already refinanced, we do not have any financing needs for 2022.
However, we will pursue refinancings to extend maturities and reduce interest expense at the right time.
Given our long history of positive strong resilient and growing cash flows, unlike many other industries, in 2023 our focus will shift to deleveraging, driven by cash from operations.
We expect to return to investment grade credit over time, creating greater shareholder value.
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carnival corporation & plc provides third quarter 2021 business update.
carnival corp - booking volumes for all future cruises during q3 of 2021 were higher than booking volumes during q1 of 2021.
carnival corp - cumulative advanced bookings for second half of 2022 are ahead of a very strong 2019.
carnival corp - voyages for q3 of 2021 were cash flow positive and company expects this to continue.
carnival - booking volumes for all future cruises during q3 of 2021 were higher than booking volumes during q1 2021, albeit not as robust as q2 2021.
carnival corp - monthly average cash burn rate for q3 of 2021 was $510 million.
carnival corp - also opened bookings for further out cruises in 2023, with unprecedented early demand.
carnival corp - company expects monthly average cash burn rate for q4 to be higher than the prior quarters of 2021.
carnival corp - expects monthly average cash burn rate for q4 to be higher than prior quarters of 2021.
carnival corp - expects a net loss on both a u.s. gaap and adjusted basis for quarter and year ending november 30, 2021.
carnival - consistent with gradual resumption of guest cruise operations, continues to expect to have full fleet back in operation in spring 2022.
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We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer.
I will lead off today's call by providing an overview of our performance for the third quarter of 2021 and highlight the company's investment and capital markets activities.
And then I'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.
The net result of our well-positioned in-place portfolio and the continued execution of our active and accretive investment program was a 5.8% increase in total revenues, a 13.2% increase in adjusted funds from operations, and a 6.4% increase in AFFO per share.
The company benefited from the stability of its portfolio of convenience and automotive retail assets, which continued to perform well, meaning that we had another quarter of full rent collections, including all amounts owed to us as a result of our 2020 COVID-related rent deferments.
The success of our investment strategies year-to-date has been a key contributor to our earnings growth.
We invested $61.1 million in 25 properties during the quarter, and another $8.8 million just after quarter-end, bringing our year-to-date total investment activity to more than $144 million.
This accelerated pace of investment activity was highlighted by our ability to bring new high-quality tenants into our portfolio, including Flash Market with sites located across the Southeastern U.S. and Splash Carwash, whose footprint spans the Northeast.
We also continue to successfully execute on our multiple investment strategies, which include [Indecipherable] leasebacks, accretive acquisitions of net leased properties, and development funding for new industry assets.
In addition, rent commenced on three redevelopment projects during the quarter including our second and third projects, with 7-Eleven for remodeled C&G locations in the Baltimore and Dallas-Fort Worth MSAs, bringing our completed projects to 22 since the inception of our redevelopment program.
We also announced yesterday that we successfully amended and extended our $300 million credit agreement, which now will mature in October 2021.
The improved terms of our facility further validate the company's platform and strong performance over the last several years.
When combined with our active ATM program, which we've used to raise more than $50 million this year, and our strong balance sheet, we continue to have access to capital and the right credit profile to support our growth objectives.
Given our performance year-to-date, I am pleased that our Board approved an increase of 5.1% in our recurring quarterly dividend to $0.41 per share.
This represents the eighth straight year with a dividend increase.
Our Board believes this annual increase is appropriate, as it maintains a stable payout ratio and is tied to the company's growth over the past year.
Furthermore, we are again pleased that our year-to-date accretive investment activity has positioned the company to raise its 2021 AFFO per share guidance.
I want to reiterate our commitment to effectively executing on both new investment activity and the active asset management of our portfolio.
Our teams continue to work diligently to source and underwrite new opportunities to invest across our target asset classes including convenience stores, car washes, automotive-related retail properties in strong metropolitan markets across the country as well as to unlock embedded value through selective redevelopments.
We believe our success year-to-date demonstrates our ability to source opportunities that align with our investment strategies, and that will continue to drive additional shareholder value.
As of the end of the third quarter, our portfolio includes 1,011 net lease properties, five active redevelopment sites, and five vacant properties.
Our weighted average lease term was approximately 8.8 years, and our overall occupancy, excluding active redevelopments, remains constant at 99.5%.
Our portfolio spans 36 states across the country plus Washington, D.C., and our annualized base rents, 63% of which come from the top 50 MSAs in the U.S., continue to be well covered by our trailing 12-month tenant rent coverage ratio of 2.6 times.
In terms of our investment activities, we had a highly successful quarter in which we invested $61.1 million in 25 properties.
Subsequent to the quarter-end, we acquired two additional properties for $8.8 million, bringing our year-to-date investment activity to $144.5 million across 82 properties.
We completed two transactions in the convenience and gas sector during the quarter.
The first was a 15 property sale-leaseback with Flash Market, a subsidiary of Transit Energy Group.
In this transaction, we invested $35.1 million to acquire the properties, which are located throughout the Southeast United States with a concentration around the Raleigh-Durham, North Carolina MSA.
Properties acquired have an average store size of 3,600 square feet and an average property size of 1.7 acres.
In addition, 53% of the properties have sub-tenancies with either quick-serve restaurants or auto service operators.
We also completed our first development funding project with Refuel in the Charleston, South Carolina MSA.
Our total investment in the project was $4.5 million, including our final investment of $1.1 million during the third quarter.
As per the terms of our development funding transactions, we acquired the property upon completion of development in conjunction with our final funding payment and simultaneously entered into a long-term triple net lease.
In the carwash sector, we completed three transactions in the quarter.
We acquired two newly constructed properties from WhiteWater Express carwash in Michigan for $7 million.
These properties were added to our existing unitary lease with WhiteWater.
We also acquired two additional properties for an aggregate purchase price of $8 million, which are leased to Go Car Wash in San Antonio, Texas, and Las Vegas, Nevada MSAs.
Additionally, we acquired our first property with Splash car wash, which is located in New Haven, Connecticut MSA.
Our purchase price was $4 million for the property.
In the auto service sector, we acquired our first Mavis Tire property.
We invested $4.6 million to acquire the properties in the Chicago, Illinois MSA.
Getty also advanced $1.2 million of development funding from three new industry convenience stores with Refuel in the Charleston, South Carolina MSA, bringing the total amount funded by Getty for these projects to $8.9 million at quarter-end.
As part of this transaction, we will accrue interest on our investment during the construction phase of the project, and we will expect to acquire the properties via sale-leaseback transaction upon completion and final funding.
The weighted average initial lease term of our completed transactions for the quarter was 14.6 years, and our aggregate initial cash yield on our third quarter acquisitions was 6.7%.
Subsequent to quarter-end, we acquired two properties in the Boyington, Vermont MSA from Splash Carwash.
Purchase price was $8.8 million, and the cap rate was consistent with our year-to-date acquisition activity.
We ended the quarter with a strong investment pipeline and remain highly committed to continuing to grow our portfolio of convenience and automotive retail real estate, and we expect to pursue that growth through continued sourcing of direct sale-leaseback, acquisitions of net lease properties, and development funding for new-to-industry assets.
Moving to our redevelopment platform.
During the quarter, we invested approximately $331,000 in both completed projects and sites, which remain in our pipeline.
In addition, rent commenced on three redevelopment projects during the quarter, including two 7-Eleven convenience stores and one property leased to BJ's Wholesale Club, which is adjacent to one of our newly constructed superstores.
In aggregate, we invested $0.5 million in these three projects and generate a return on investment capital of 43%.
At quarter-end, we had eight signed leases or letters of intent, which includes five active projects and three projects at properties, which are currently subject to triple net leases and have not yet been recaptured from the current tenants.
The company expects rent to commence at two additional development sites during the fourth quarter of 2021.
In total, we have invested approximately $1.9 million in eight redevelopment projects in our pipeline and estimate that these projects will require a total investment by Getty of $7.4 million.
We project these redevelopments will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.
Turning to our asset management activities for the quarter.
We sold one property during the quarter, realizing $2.3 million in gross proceeds, and exited five lease properties.
We expect the total net impact of these activities will have de minimis impact on our financial results.
As we look ahead, we will continue to selectively dispose the properties that we determine are no longer competitive in their current format or do not have compelling redevelopment potential.
Let me start with a recap of earnings.
AFFO, which we believe best reflects the company's core operating performance, was $0.50 per share for the third quarter, representing a year-over-year increase of 6.4%.
FFO was $0.48 per share for the quarter.
Our total revenues were $40.1 million, representing a year-over-year increase of 5.8%.
Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables was 7.5% to $34.3 million.
Strong acquisition activity over the last 12 months and recurring rent escalators in our leases were the primary drivers of the increase, with additional contribution from rent commencements at completed redevelopment projects.
On the expense side, G&A costs increased in the quarter, primarily due to employee-related expenses, including noncash and stock-based compensation.
Property costs decreased marginally due to reductions in real estate tax expense and environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, increased in the quarter due to certain legal fees and changes in net remediation costs and estimates.
We turn to the balance sheet and our capital markets activities.
We ended the quarter with $567.5 million of total debt outstanding, including $525 million of long-term fixed-rate unsecured notes and $42.5 million outstanding on our $300 million revolving credit facility.
Our weighted average borrowing cost was 4% and the weighted average maturity of our debt was 6.3 years.
In addition, our total debt to total market capitalization was 29%.
Our total debt to total asset value was 37%, and our net debt-to-EBITDA was 5.1 times.
Each of these leverage metrics are calculated according to the definitions in our loan agreements.
As Chris mentioned, yesterday, we announced the amendment and extension of our $300 million revolving credit facility, which is now set to mature in October 2025, with two 6-month extensions, where we have the option to extend to October 2026.
In addition to extending the term, we were able to reduce the interest rate by 20 to 50 basis points, depending on where we are in the leverage-based pricing grid, and amend certain covenant provisions to align with those generally applicable to investment-grade rated REITs.
We also amended each of our outstanding unsecured notes to conform to the new credit facility covenant provisions.
All in all, this is a good transaction for Getty.
We reduced our cost of capital, improved some terms, and importantly, demonstrated the continued support of our bank group and unsecured noteholders.
With the credit facility extended, our nearest debt maturity is now the $75 million of senior unsecured notes that come due in June of 2023.
Moving to ATM activity.
We continue to be selective with our equity issuance during the quarter, raising $19.8 million at an average price of $31.12 per share.
Year-to-date, we raised a total of $50.1 million through the ATM.
We think about our future capital needs more broadly, we remain committed to maintaining a strong credit profile with meaningful liquidity and access to capital, low-to-moderate leverage, and a well-laddered and flexible balance sheet.
With respect to our environmental liability, we ended the quarter at $47.8 million, which was a decrease of approximately $300,000 from the end of 2020.
For the quarter, net environmental remediation spending was approximately $1.3 million.
And finally, as a result of our investment in capital markets activities in the first nine months of the year, we are raising our 2021 AFFO per share guidance to a range of $1.93 to $1.94 from our previous range of $1.89 to $1.91.
Our guidance includes transaction activity completed year-to-date but does not otherwise assume potential acquisitions or capital markets activities for the remainder of 2021.
Factors which may impact our guidance include variability with respect to certain operating costs and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, including certain property demolition costs and transaction costs for deals that are ultimately not completed.
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getty realty increases quarterly dividend by 5% to $0.39 per common share.
getty realty corp - increases quarterly dividend by 5% to $0.39 per common share.
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These risks include those set forth in the Risk Factors section of Hess' annual and quarterly reports filed with the SEC.
Also on today's conference call, we may discuss certain non-GAAP financial measures.
A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.
Today, I will review our continued progress in executing our strategy.
Greg Hill then will discuss our operations and John Riley will cover our financial results.
With COP26 beginning this Sunday, it is appropriate to address the energy transition.
Climate change is the greatest scientific undertaking of the 21st century.
The world has two challenges to grow our global energy supply by about 20% in the next 20 years and to reach net zero emissions by 2050.
The International Energy Agency published its latest World Energy Outlook earlier this month, which provides four scenarios to shed light on these challenges.
It is important to remember that these are scenarios not forecast to help guide policymakers and business leaders in their decision making.
In all four scenarios, oil and gas will still be needed in the decades to come.
Significantly more investment will be required to meet the world's growing energy needs, much more in renewables and much more in oil and gas.
Our reasonable estimate for global oil and gas investment from these IEA scenarios is at least $400 billion each year over the next 10 years.
Last year, that number was $300 billion.
This year's estimate is $340 billion.
To ensure a successful an orderly energy transition, we need to have climate literacy, energy literacy and economic literacy.
Our strategy is to grow our resource base, have a low cost of supply and sustain cash flow growth.
While delivering industry-leading environmental social and governance, performance and disclosure by investing only in high-return, low cost opportunities, we have built a differentiated and focused portfolio that is balanced between short cycle and long cycle assets.
Our cash engines are the Bakken, the Gulf of Mexico and Southeast Asia, where we have competitively advantaged assets and operating capabilities.
Guyana is our growth engine and is on track to become a significant cash engine in the coming years, as multiple phases of low-cost oil developments come online.
Also, by adding a third rig in the Bakken in September and completing the turnaround and expansion of the Tioga Gas Plant, the Bakken is expected to generate significant free cash flow in the years ahead.
By successfully executing our strategy, our company is positioned to deliver strong and durable cash flow growth through the end of the decade.
Based upon the most recent sell side consensus estimates, our cash flow is estimated to grow at a compound annual growth rate of 42% between 2020 and 2023, which is 50% above our peers and puts us in the top 5% of the S&P 500.
As our portfolio generates increasing free cash flow, we will first prioritize debt reduction and then cash returns to shareholders through dividend increases and opportunistic share repurchases.
We have continued to maintain financial strength as well as managing for risk.
As of September the 30th, we had $2.4 billion of cash on the balance sheet.
In July, we prepaid half of our $1 billion term loan maturing in March 2023 and we plan to repay the remaining $500 million in 2022.
This debt reduction combined with the start up of lease of Phase 2 early next year, is expected to drive our debt to EBITDAX ratio under 2% and also enable us to consider increasing cash returns to shareholders.
In August, we completed the sale of our interest in Denmark for total consideration of $150 million effective January 1, 2021, and received $375 million in proceeds from Hess Midstream's buyback of Class B units from its sponsors Hess Corporation and Global Infrastructure Partners.
Earlier this month, our company also received net proceeds of $108 million from the public offering of Hess-owned Class A shares of Hess Midstream.
The Denmark sale and these Midstream monetizations brought material value forward and further strengthened our cash and liquidity position.
Key to our long-term strategy is Guyana, one of the industry's best investments.
On the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator, we announced the 19th and 20th of significant discoveries during the third quarter at Whiptail and Pinktail.
And on October 7th, we announced the 21st significant discovery on the block at Cataback.
These discoveries will underpin our Q, our future low cost oil development.
We see the potential for at least six FPSOs on the Stabroek Block producing more than $1 million gross barrels of oil per day in 2027, and up to 10 FPSOs to develop the discovered resources on the block.
On October 7th, we increased the gross discovered recoverable resource estimate for the block to approximately 10 billion barrels of oil equivalent, up from the previous estimate of more than 9 billion barrels of oil equivalent.
And we continue to see multibillion barrels of future exploration potential remaining.
In terms of our current Guyana developments, gross production from the lease of Phase 1 complex average 124,000 barrels of oil per day in the third quarter.
The lease of Phase 2 development is on track for start-up in early 2022 with a gross production capacity of 220,000 barrels of oil per day and the leasing Unity FPSO arrived in Guyana on Monday.
Our third development on the Stabroek Block at the Payara field is on track to achieve first oil in 2024 also with a gross capacity of 220,000 barrels of oil per day.
Our three-sanctioned oil developments have a breakeven Brent oil price of between $25 and $35 per barrel.
The plan of development for our fourth development on the block at Yellowtail was recently submitted to the Government of Guyana for approval.
Pending government approvals, the project is envisioned to have a gross capacity of approximately 250,000 barrels of oil per day with first oil in 2025.
We are proud to be recognized as an industry leader in our environmental, social and governance performance and disclosure.
Earlier this month, our company received a AAA rating in the MSCI ESG ratings for 2021 after earning A ratings for the previous 10 consecutive years.
The AAA rating digit makes Hess as a leader in managing industry specific ESG risks relative to peers and reflects our strong management practices to reduce carbon emissions as well as our top quartile performance in areas such as biodiversity and land use, reduction of air and water emissions and waste, and making a positive impact on the communities where we operate.
In summary, we remain focused on executing our strategy and achieving strong operational and ESG performance.
Our company is uniquely positioned to deliver cash flow growth over the next decade.
That is not only industry leading, but which we believe will rank among the best in the S&P 500.
After our term loan is paid off and our portfolio generates increasing free cash flow, we will prioritize return of capital to our shareholders through dividend increases and opportunistic share repurchases.
In the third quarter, we continued to deliver strong operational performance, meeting our production targets despite extended hurricane-related downtime in the Gulf of Mexico and safely executing a major turnaround at our Tioga Gas Plant in North Dakota.
Companywide net production averaged 265,000 barrels of oil equivalent per day excluding Libya in line with our guidance.
In the fourth quarter and for the full year 2021, we expect companywide net production to average approximately 295,000 barrels of oil equivalent per day excluding Libya.
Turning to the Bakken, third quarter net production averaged 148,000 barrels of oil equivalent per day.
This was above our guidance of approximately 145,000 barrels of oil equivalent per day and primarily reflected strong execution of the Tioga Gas Plant turnaround and expansion, no small task in a COVID environment that required strict adherence to extensive safety protocols to keep more than 650 workers safe.
For the fourth quarter, we expect Bakken net production to average between 155,000 and 160,000 barrels of oil equivalent per day.
For the full year 2021, we forecast our Bakken net production to average approximately 155,000 barrels of oil equivalent per day, compared to our previous guidance range of 155,000 to 160,000 barrels of oil equivalent per day.
This guidance reflects an increase in NGL prices, which reduces volumes under our percentage of proceeds contracts, but significantly increases this year's earnings and cash flow.
In the third quarter, we drilled 18 wells and brought 19 new wells online.
In the fourth quarter, we expect to drill approximately 19 wells and to bring approximately 18 new wells online.
And for the full year 2021, we continue to expect to drill approximately 65 wells and to bring approximately 50 new wells online.
In terms of drilling and completion costs, although we have experienced some cost inflation, we are maintaining our full year average forecast of $5.8 million per well in 2021.
Since February, we've been operating two rigs.
But given the improvement in oil prices and our robust inventory of high return drilling locations, we added a third rig in September.
Moving to a three-year three rig program will allow us to grow cash flow and production better optimize our in basin infrastructure and drive further reductions in our unit cash costs.
Now moving to the offshore.
In the deepwater Gulf of Mexico, third quarter net production averaged 32,000 barrels of oil equivalent per day, compared to our guidance range of 35,000 to 40,000 barrels of oil equivalent per day.
Our results reflected an extended period of recovery following Hurricane Ida, which caused power outages at transportation and processing facilities downstream of our platforms.
Production was restored at all of our facilities by the end of September.
In the fourth quarter, we forecast Gulf of Mexico net production to average between 40,000 and 45,000 barrels of oil equivalent per day.
For the full year 2021, our forecast for Gulf of Mexico net production remains approximately 45,000 barrels of oil equivalent per day.
In Southeast Asia, net production in the third quarter was 50,000 barrels of oil equivalent per day in line with our guidance of 50, 000 to 55,000 barrels of oil equivalent per day, reflecting the impact of planned maintenance shutdowns and lower nominations due to COVID.
Fourth quarter net production is forecast to average approximately 65,000 barrels of oil equivalent per day and our full year 2021 net production forecast remains at approximately 60,000 barrels of oil equivalent per day.
Now turning to Guyana.
In the third quarter, gross production from Liza Phase 1 averaged 124,000 barrels of oil per day or 32,000 barrels of oil per day net to Hess.
Replacement of the flash gas compression system on the Liza Destiny with a modified design is planned for the fourth quarter and production optimization work is now planned to take place in the first quarter of 2022.
These two projects are expected to result in higher production capacity and reliability.
Net production from Liza Phase 1 is forecast to average approximately 30,000 barrels of oil per day in the fourth quarter and for the full year 2021.
Liza Phase 2 development will utilize the 220,000 barrels of oil per day Unity FPSO, which arrived in Guyana Monday evening.
Next steps will be more in line installation and umbilical and riser hook up.
First oil remains on track for first quarter 2022.
Turning to our third development at Payara, the Prosperity FPSO hull entered the Keppel yard in Singapore on August 1st.
Topside fabrication of dynamic and development drilling are underway.
The overall project is approximately 60% complete.
The Prosperity will have a gross production capacity of 220,000 barrels of oil per day, and is on track to achieve first oil in 2024.
As for our fourth development at Yellowtail earlier this month, the joint venture submitted a plan of development to the Government of Guyana, pending government approvals and project sanctioning.
The Yellowtail project will utilize an FPSO with a gross capacity of approximately 250,000 barrels of oil per day.
First oil is targeted for 2025.
As John mentioned, we announced three discoveries since July.
In July, we announced that the Whiptail 1 and 2 wells encountered 246 feet and 167 feet of high quality oil bearing sandstone reservoirs respectively.
This discovery is located approximately four miles southeast of well 1 and 3 miles west of the Yellowtail.
In September, we announced that the Pinktail 1 well located approximately 22 miles southeast of Liza 1 encountered 220 feet of high quality oil bearing sandstone reservoirs.
And finally earlier this month, we announced a discovery of Cataback located approximately 4 miles east of Turbot 1.
The well encountered 203 feet of high quality hydrocarbon bearing reservoirs, of which approximately 102 feet was oil bearing.
These discoveries further underpin future developments and contributed to the increase of estimated gross discovered recoverable resources on the Stabroek Block to approximately 10 billion barrels of oil equivalent.
Exploration and appraisal activities in the fourth quarter will include drilling [Indecipherable] exploration well located approximately 11 miles northwest of Liza 1.
This well as a significant step out tests that will target deeper Campanian and Santonian aged reservoirs.
Appraisal activities in the fourth quarter will include drill-stem tests at Longtail 2 and Whiptail 2 as well as drilling the Tripletail 2 well.
In closing, we have once again demonstrated strong execution and delivery and are well positioned to deliver significant value to our shareholders.
In my remarks today, I will compare results from the third quarter of 2021 to the second quarter of 2021.
We had net income of $115 million in the third quarter of 2021, compared with a net loss of $73 million in the second quarter of 2021.
On an adjusted basis, which excludes items affecting comparability of earnings between periods, we had net income of $86 million in the third quarter of 2021, compared to net income of $74 million in the second quarter of 2021.
Third quarter earnings include an after-tax gain of $29 million from the sale of our interest in Denmark.
On an adjusted basis, E&P had net income of $149 million in the third quarter of 2021, compared to net income of $122 million in the previous quarter.
The changes in the after-tax components of adjusted E&P results between the third quarter and second quarter of 2021 were as follows.
Higher realized crude oil NGL and natural gas selling prices increased earnings by $110 million.
Lower sales volumes reduced earnings by $147 million.
Lower DD&A expense increased earnings by $37 million.
Lower cash costs increased earnings by $14 million.
Lower exploration expenses increased earnings by $10 million.
All other items increased earnings by $3 million.
For an overall increase in third quarter earnings of $27 million.
Sales volumes in the third quarter were lower than the second quarter, primarily due to hurricane-related downtime in the Gulf of Mexico, planned maintenance downtime and lower nominations in Malaysia and lower sales in the Bakken, resulting from the planned Tioga gas plant maintenance turnaround.
In Guyana, we sold three 1 million barrel cargoes of oil in the third quarter, up from two 1 million barrel cargoes of oil sold in the second quarter.
For the third quarter, our E&P sales volumes were under lifted compared with production by approximately 175,000 barrels, which had an insignificant impact on our after-tax results for the quarter.
The Midstream segment had net income of $61 million in the third quarter of 2021, compared with $76 million in the prior quarter.
Third quarter results included costs related to the Tioga Gas Plant maintenance turnaround that was safely and successfully completed.
Midstream EBITDA before noncontrolling interest amounted to $203 million in the third quarter of 2021, compared with $229 million in the previous quarter.
Turning to our financial position at quarter-end excluding Midstream, cash and cash equivalents were $2.41 billion and total liquidity was $6 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.1 billion.
During the third quarter, we received net proceeds of $375 million from the sale of $15.6 million Hess-owned Class B units of Hess Midstream and proceeds of approximately $130 million from the sale of our interest in Denmark.
In July, we prepaid $500 million of our $1 billion term loan and we plan to repay the remaining $500 million in 2022.
In October, we received net proceeds of approximately $108 million from the public offering of 4.3 million Hess-owned Class A shares of Hess Midstream.
Our ownership in Hess Midstream on a consolidated basis is approximately 44% compared with 46% prior to these two recent transactions.
In the third quarter, net cash provided by operating activities before changes in working capital was $631 million, compared with $659 million in the second quarter.
In the third quarter, net cash provided by operating activities after changes in operating assets and liabilities was $615 million, compared with $785 million in the second quarter.
Changes in operating assets and liabilities during the third quarter decreased.
Net cash provided by operating activities by $16 million compared with an increase of $126 million in the second quarter.
Now turning to guidance.
First for E&P, our E&P cash costs were $12.76 per barrel of oil equivalent including Libya and $13.45 per barrel of oil equivalent excluding Libya in the third quarter of 2021.
We project E&P cash cost excluding Libya to be in the range of $12 to $12.50 per barrel of oil equivalent for the fourth quarter and $11.75 to $12 per barrel of oil equivalent for the full year, compared to previous full year guidance of $11 to $12 per barrel of oil equivalent.
The updated guidance reflects the impact of higher realized selling prices in 2021, which significantly improved cash flow, but reduced volumes received under percentage of proceeds contracts and increased production taxes in the Bakken.
DD&A expense was $11.77 per barrel of oil equivalent including Libya and $12.38 per barrel of oil equivalent excluding Libya in the third quarter.
DD&A expense excluding Libya is forecast to be in the range of $13 to $13.50 per barrel of oil equivalent for the fourth quarter and the full year is expected to be in the range of $12.50 to $13 per barrel of oil equivalent.
This results in projected total E&P unit operating costs excluding Libya to be in the range of $25 to $26 per barrel of oil equivalent for the fourth quarter and $24.25 to $25 per barrel of oil equivalent for the full year of 2021.
Exploration expenses excluding dry hole costs are expected to be in the range of $50 million to $55 million in the fourth quarter and approximately $160 million for the full year, which is at the lower end of our previous full year guidance of $160 million to $170 million.
The Midstream tariff is projected to be approximately $295 million for the fourth quarter and approximately $1.95 billion for the full year.
E&P income tax expense excluding Libya is expected to be in the range of $35 million to $40 million for the fourth quarter and the full year is expected to be in the range of $135 to $140 million, which is up from previous guidance of $125 million to $135 million, reflecting higher commodity prices.
We expect non-cash option premium amortization will be approximately $65 million for the fourth quarter.
For the year 2022, we have purchased WTI collars for 90,000 barrels of oil per day with the floor price of $60 per barrel and a ceiling price of $90 per barrel.
We have also entered into Brent collars for 60,000 barrels of oil per day with a floor price of $65 per barrel and a ceiling price of $95 per barrel.
The cost of this 2022 hedge program is $161 million, which will be amortized ratably over 2022.
During the fourth quarter, we expect to sell two 1 million barrel cargoes of oil from Guyana.
Our E&P capital and exploratory expenditures are expected to be approximately $650 million in the fourth quarter.
Full year guidance remains unchanged at approximately $1.9 billion.
For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be approximately $70 million for the fourth quarter and the full year is projected to be approximately $280 million, which is at the midpoint of our previous guidance of $275 million to $285 million.
Turning to corporate, corporate expenses are estimated to be in the range of $30 million to $35 million for the fourth quarter and the full year is expected to be in the range of $125 million to $130 million, which is down from our previous guidance of $130 million to $140 million.
Interest expense is estimated to be in the range of $90 millon to $95 million for the fourth quarter and the full year is expected to be in the range of $375 million to $380 million, compared to our previous guidance of approximately $380 million.
This concludes my remarks.
We will be happy to answer any questions.
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q3 net profit 115 million usd versus -243 million usd loss year ago.
net production, excluding libya, was 265,000 boepd in q3 of 2021, compared with 321,000 boepd in q3 of 2020.
qtrly net production from bakken was 148,000 boepd compared with 198,000 boepd in prior-year quarter.
qtrly net production from gulf of mexico was 32,000 boepd, compared with 49,000 boepd in prior-year quarter.
q3 2021 e&p results include a pre-tax gain of $29 million associated with sale of corporation's interests in denmark.
on an adjusted basis, corporation reported net income of $86 million, or $0.28 per common share, in q3 of 2021.
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I speak for all of us when I say we hope you and those close to you are safe and healthy.
These are important to review and contemplate.
As everyone on the call today is well aware, the business environment has changed dramatically over the last quarter.
Unfortunately, there's a lot we don't know in the short term about the duration and impact of the COVID-19 pandemic.
These items include an uncertain shutdown time frame for many areas of our economy, ongoing changes to consumer purchasing habits, the potential for a disruptive supply chain, rising unemployment and many other economic factors.
This means results could change at any time and the forecasted impact of COVID-19 on the company's business results now look as a best estimate based on the information available as of today's date.
Additional information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company 10-K.
I'll now hand it over to our CEO, Ron Lombardi.
Let's start on slide four.
Without question, the COVID-19 pandemic is at the top of mind for everyone, and as Phil outlined, there are numerous uncertainties.
We have a proven business model that we believe is capable of managing through this extraordinary period and along with our proven 3-pillar strategy that continues to position us well for whatever challenges we find in fiscal 2021.
We are an agile and capable organization, which has allowed us to quickly adjust to the change experienced so far.
On slide four, we have some highlights which are underpinned by our strategy and business attributes.
We are putting the health of our employees, partner employees and communities first.
We've adapted effective work-from-home plans and have enhanced robust safety protocols across our Lynchburg facility, which continues to operate at near-normal output levels.
The comprehensive strategy we've put in place on the first point as well as the benefit of our business model has enabled us to establish strong business continuity plans, which I'll discuss in detail later.
Next, investing for growth.
We are protecting our brands and our marketing plans continue to advance our brand-building playbook.
The environment is unique, but we have the benefit of a leading, diversified and widely distributed brand portfolio that gives us the ability to adapt quickly.
We'll talk about this in more detail later.
Last on the page is a reminder of our disciplined capital strategy.
We continue to benefit from a strong operating model and disciplined capital strategy with an industry-leading financial profile that will enable us to focus on debt reduction and liquidity while continuing to invest in our brands for the long term.
The sum of this is that the proactive approach we are taking positions us well to adapt to marketplace changes in the face of uncertainty.
I'll go over Q4 results, give a brief recap on our full year fiscal 2020 and review our cash flow and liquidity profile.
Flipping to slide six, you can see the highlights of our fourth quarter.
Q4 was a strong finish to the year, including revenue up 4.6% on an organic basis.
This performance was led by continued growth in our international segment and our growing e-commerce business as well as a significant lift from consumer spending in March as we believe consumers stocked up as a result of COVID-19.
During the fourth quarter, we continued to benefit from our ongoing investments and focus on e-commerce.
Our e-comm business grew over 60% in the quarter as we benefited from consumers shifting to online purchasing.
Notably, our consumption growth was about 7%, driven by these factors for the quarter after previously trending at about 2% prior to March, which was consistent with our expectations for the year.
Adjusted gross margin of 59.4% was up 200 basis points versus the prior year, primarily as a result of higher volume and geographic mix.
For Q1, we expect margins similar to prior quarters of about 58% as we expect a more normalized mix.
Adjusted earnings per share of $0.82 per share was also up meaningfully, increasing approximately 14% versus the prior year as we benefited from higher sales growth, gross margin favorability and a reduction in interest expense and share count.
Free cash flow was $52.5 million in the quarter and continued to benefit from our industry-leading EBITDA margins, efficient capital spending and low cash tax rate.
We continue to adhere to a disciplined capital allocation approach from this cash generation, which I'll discuss a bit later.
For the full year fiscal 2020, our organic net revenues increased 1.3% versus the prior year, which excludes the impact of foreign currency and the divestiture of our Household Cleaning segment in the prior year.
Similar to Q4, our full year benefited from strong international segment growth, which was up over 15% versus the prior year when excluding foreign exchange.
E-commerce also grew rapidly, increasing approximately 50% for the full fiscal year and now accounts for approximately 5% of our net sales.
Adjusted EBITDA declined slightly versus the prior year, impacted by the divestiture of Household Cleaning.
As a reminder, we fully lapped the comparison impacts of Household Cleaning beginning in Q2 of fiscal 2020.
Adjusted earnings per share of $2.96 per share increased 6.5%, benefiting from our continued efforts to delever and opportunistically execute share buybacks.
Full year fiscal 2020 net revenues decreased slightly to $963 million but as mentioned on the prior slide, increased 1.3% on an organic basis after excluding foreign currency and the divestiture of Household Cleaning.
For the full year, organic growth was impacted by the effect of retailer inventory reductions, primarily in the drug channel.
Adjusted gross margin, which excludes transition costs associated with our new logistics provider, was 58.3% for the full year, up 130 basis points versus the prior year, primarily driven by mix associated with strong international growth and the divestiture of Household Cleaning.
In terms of A&P, we came in at 16% of revenue in Q4 and 15.3% for the fiscal year.
Consistent with our strategy, we reinvested gross margin gains by opportunistically investing A&P behind our core brand portfolio in Q4.
For Q1, we would expect A&P to be below the fiscal 20% of sales as marketing plans are being adjusted in response to the current situation, resulting in A&P spending moving to future quarters.
Our G&A spending was just over 9% for the year, up slightly in dollars year-over-year.
In Q1, we would expect G&A to be about $22 million.
Finally, we reported adjusted earnings per share in fiscal 2020 of $2.96, representing an increase of 6.5% versus the prior year, primarily driven by the effects of debt paydown and share repurchases.
We expect to continue to reduce debt outstanding, and as a result, we anticipate approximately $22 million of interest expense in Q1.
In Q4, we generated $52.5 million in adjusted free cash flow, which resulted in a full year adjusted free cash flow of $206.8 million.
This represents 2% growth versus the prior year despite the sale of the Household Cleaning business.
We continue to maintain industry-leading free cash flow with fiscal 2020 free cash flow conversion coming in at 136%.
At March 31, we finished the year with approximately $1.6 billion in net debt and a leverage ratio of 4.7 times.
During the year, we continued our focus on debt reduction and reduced net debt by $135 million.
We also repurchased approximately $57 million in shares opportunistically during the year, enabled by our strong cash generation.
Although we continue to have repurchase authorization capacity, we have suspended these efforts in favor of focusing on liquidity in the current environment.
In addition, we proactively built our liquidity position to strengthen our balance sheet, ending the year with approximately $95 million in cash.
Moving forward, given the current operating environment, we intend to maintain a heightened level of cash on hand as a precautionary measure.
As we look forward, we feel good about our capital positioning for a few reasons.
First, we have leading and consistent cash flows and we'll continue to be disciplined around capital deployment with continued priority around debt paydown.
Second, we issued new senior notes in December 2019, and our earliest debt maturity is now January 2024.
And third, we have material cushion to our debt covenants, which are detailed in our 10-K.
Fiscal 2020 was a successful year in many ways, owing in large part to the continued execution of our strategy.
First, we continued to invest behind our core portfolio, which led to growing categories and market share for many of our leading brands.
I'd also like to highlight the success in our International segment, which had a great year as we grew many key brands meaningfully, including Hydralyte.
Second, our cash generation and free cash flow conversion remain best-in-class.
As Chris highlighted, we generated $207 million in free cash flow, driven by strong EBITDA margin and low cash taxes.
Finally, our disciplined capital allocation allowed for multiple areas of investment in fiscal 2020.
Importantly, we continued to focus on debt reduction, reducing our leverage to within our long-term targeted range of 3.5 to five times.
We also used roughly 1/4 of our free cash flow to opportunistically repurchase our stock.
Even in a challenging environment, we delivered excellent results in fiscal 2020, and our strategy leaves us well positioned for future success.
This 3-pillar strategy is highly adaptable and will be our guide as we approach fiscal 2021.
Turning to slide 12, you can see the ways we expect to do this.
We believe our proven 3-pillar strategy and the building blocks shown here position us for success as we navigate this pandemic.
First, our business continuity plan is robust and critical to executing these strategies that tie back to each of our pillars.
We have a diversified leading portfolio that's a key strength in many economic environments, including this one.
Our company is nimble and we are able to adapt quickly and refocus efforts around targeted brands and opportunities.
We'll share some realtime marketing examples of this shortly.
We are also adapting quickly to the changing retail shopping trends and continue our proactive investments in channel opportunities such as e-commerce.
And finally, capital allocation and liquidity will remain critical in this highly volatile environment.
We will remain disciplined capital allocators and true to our company discipline.
Let's dive in on each of these in more detail beginning on slide 13.
As mentioned earlier, we continue to prioritize putting our employees first through various proactive measures.
We have numerous manufacturing partners which are all operating in a similar capacity.
We continue to work with our third-party suppliers around continuity of supply, including prioritizing activities to maintain ample inventory on our leading brands.
These efforts include concentrating SKU manufacturing around critical brands and items, finding alternative suppliers as a precaution and other measures.
Fortunately, even with increased demand experienced in March, our inventory remains well positioned as we were able to benefit from the elevated inventory levels we had maintained during our warehouse transition to a new third-party logistics provider, which was completed at the end of March.
Our number one brands represent over 2/3 of our sales, as you can see on the right-hand side of the slide and is a strength in the current environment.
These brands often hold a long history with consumers, which we believe positions us for continued demand as consumers focus on their health and hygiene more than ever.
With a leading position, they also get to focus on the end goal of driving category growth rather than fighting for share.
This heritage, combined with our long-term brand building and meaningful innovation and new products, continues to differentiate us from other brands and private label.
For example, in fiscal 2020, our leading brands continued to drive category growth and the majority of them outperformed private label meaningfully.
On the left, you can see our diversified portfolio participates across various categories, addressing a broad range of needs.
This reach is a strength.
This diversity ensures our ability to opportunistically allocate resources where consumer insights dictate, drive brand building in both the short term and long term.
This is especially true now as consumer purchase patterns and trends affected by the pandemic are shifting rapidly.
With the market changing, we are seeing consumers change not only what they buy but where they shop due to shelter-in-place orders.
This is a unique attribute of the current pandemic, which makes our current environment different from past recessions.
Our wide-ranging portfolio is impacted in many different ways by this.
On the right end of the opportunity spectrum, consumers are showing increased interest for pain, cough and cold treatments along with feminine care products.
Other products shown in the middle are fairly consistent with the recent trends, and we expect them to be unaffected by current changes in daily living.
On the left, we have brands that are now expected to see lower usage rates as a result of the pandemic as consumers reduce time outdoors and in vacationing.
So how are we capitalizing on these opportunities?
The focus is to allocate greater investments to high-opportunity brands.
Investments will be both by brand and channel as we'll discuss on the next two slides.
While Nix and Dramamine are being affected by the current environment, our investments will strike the balance between the current headwinds being faced by these brands and with long-term brand building effort and potential.
Here, you can see marketing efforts on the left include reaching consumers at home through digital and addressable TV efforts, having the ability to have Monistat shipped to your door rapidly.
A key brand-building strategy is to move share from prescription treatments over time and these marketing efforts are timely to support this objective.
Next in the middle of the slide is Summer's Eve.
With consumers staying at home, we have refocused marketing efforts around home workouts and highlight on our recently launched Summer's Eve active product.
Last, on the right of the slide is Clear Eyes.
We've had several new messages from the brand since the pandemic began.
The most important to us is a digital effort launched in late April, saluting all the hospital workers on the front line fighting COVID-19.
We launched this tribute by donating 100,000 bottles of Clear Eyes to hard-hit hospitals New York City.
Each of these are real-time examples of our nimble marketing approach and ability.
In addition to consumers shifting brand focus as a result of a pandemic, consumers are also changing their preferences on where they are shopping.
Beginning in March, consumer interest in e-commerce ordering and omnichannel click-and-collect shopping accelerated sharply as consumers looked to minimize their person-to-person contact during the pandemic.
As an example, in the month of March alone, we saw an increase of 186% in new visitors browsing Prestige products in certain e-commerce retailers.
This resulted in our impressive fourth quarter commerce sales growth that Chris highlighted earlier.
Moving ahead, we could see this channel representing as much as 8% or more of our total sales in fiscal 2021.
So just like with our brand, we are being nimble with our channel investments.
Our example's shown here, a reminder about quick and easy shipping to a home from Monistat, keyword advertising for BC and combo pack-it to reduce frequency of purchases.
Over the last several years, we've been proactively investing in the emerging e-commerce channel, investing behind digital content and expanding distribution to ensure that our trusted brands are easily available for purchase as customers research and shop for their healthcare needs in new ways.
In summary, we're rapidly adopting retail and brand plans to an evolving environment, and a diversified and leading portfolio of brands gives us a great starting point.
In fiscal 2020, our brand-building efforts continued to deliver strong financial results.
We finished the year with over $205 million in cash flow and a mid-30s EBITDA margin.
As you can see on the chart at the left, we reinvested gross margin gains into A&P, consistent with our long-term strategy.
With this strong strategic positioning, we are then left with options of how to best allocate this capital to enhance shareholder value.
Going into fiscal 2021, this strategy remains consistent and disciplined.
First and foremost, we will continue to invest behind our brands, which are aimed at reinforcing long-term connections with consumers regardless of the economic environment.
Second, we continue to focus on deleveraging.
We continually evaluate the operating environment and how to best manage our leverage profile at any given time.
Currently, we have proactively built cash, as Chris discussed, and also have significant liquidity available due to our capital structure.
Number three and four on the page are other capital considerations, which are always contemplated if the first two priorities are satisfied.
Although admittedly challenging, given the limited economic environment visibility, we will continue to evaluate each of these priorities if they make sense and add long-term value for our shareholders.
Let's wrap up on slide 20 and recap what we've just discussed.
We have a time-tested playbook that is set up to navigate this changing and challenging environment.
Regardless of the landscape, we always focus on ensuring business continuity and will continue brand building for the term.
This is applicable as we think about fiscal 2021 but in a very different way compared to prior years.
We've talked a lot about uncertainty today and we're contemplating a number of factors.
How long shelter-in-place lasts, various economic impacts from the pandemic and many others.
Accordingly, we are not offering our typical full year financial outlook, but we do want to offer some insight to our thinking for Q1.
In Q1, we are anticipating a reversal of the accelerated consumption trends experienced in March.
So far, this quarter, we are seeing consumption declines as shoppers stay home.
Partially offsetting these factors were higher retailer orders in April as retailers replenished their stores following the March spike in consumption.
The net effect of all of this is difficult to predict.
But as of today, we anticipate Q1 revenues of $220 million or more.
We also anticipate earnings per share of $0.70 or more for Q1 as our proactive expense management and cost timing are expected to more than offset the anticipated revenue decline as compared to the prior year.
Meanwhile, we expect to maintain a strong financial profile and continued capital allocation optionality.
We anticipate continuing to leverage our financial profile to drive strong free cash flow conversion.
And we'll use this cash to focus on debt reduction while being mindful of managing liquidity through each quarter.
By executing this strategy, we believe we are set up for continued success.
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q1 earnings per share $1.14.
q1 revenue $269.2 million versus refinitiv ibes estimate of $232.4 million.
raising full-year fiscal 2022 outlook.
sees 2022 adjusted earnings per share $3.90 or more.
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Gary Norcross, our Chairman, President and CEO, will discuss our quarterly operating performance and share our strategy for continued accelerating revenue growth.
Woody Woodall, our Chief Financial Officer, will then review our financial results, including our balance sheet, cash flow and segment-level trends.
Turning to Slide 3.
Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings and adjusted net earnings per share.
These are very important financial performance measures for the company but are not financial measures as defined by GAAP.
I'm extremely proud of our third quarter results, which returned to positive organic growth for the quarter, an impressive results for our team, given the backdrop of a global pandemic.
We continue to sell new business, grow the top line, expand margins and generate exceptional free cash flow.
Our strong performance demonstrates the durability of our unique business model and underscores our commitment to lifting our clients and communities.
While others have been forced to retrench and preserve capital, we continue to invest for growth, bringing new solutions and services to our clients now.
This quarter alone, we launched several new solutions, including Access Worldpay, which is now the world's most advanced payments gateway; ClearEdge, a new subscription-based offering that enables community banks to run a highly efficient, modern bank while also benefiting from simplified pricing and contracting; Ethos is our innovative, new data ecosystem that provides clients with a unified view across our enterprise, powering data-driven insights and automating reporting.
In addition, we partnered with The Clearing House to launch our new real-time payments managed service, which provides a complete turnkey service for financial institutions to quickly and cost-effectively connect to the United States' real-time payments network.
Even with all these new solutions, we continue to look beyond our own current capabilities to see what's next on the horizon for our clients.
I'm pleased to announce that we recently completed our fifth annual Fintech Accelerator program, which was just named Best Fintech Accelerator by Finovate, and we launched our new FIS Impact Labs, both of which are focused on accelerating transformative innovation into the market.
Now more than ever, our clients are embracing innovative technologies like these and our scalable end-to-end solutions are increasingly in demand.
We saw evidence of this demand from our recent InFocus client event, which was heavily attended and expanded its reach virtually this year to nearly 40 countries and which drove a 25%-plus increase in demand for FIS solutions.
Our strong new sales performance has increased our backlog by 6% organically during the third quarter.
And our pipeline is exceptionally strong, up more than 30% year-over-year as we continue to grow and win new business.
We are also adding our new sales opportunities for revenue synergies.
As of the end of the third quarter, we are generating $150 million in annual run rate revenue synergies and we have $60 million more currently being implemented with our clients.
This puts us in great shape to exceed our $200 million revenue synergy target before the end of the year.
We clearly have the momentum to continue accelerating revenue growth through 2021 and to sustain high single-digit top line growth into the future.
Our ability to leverage our world-class scale is driving ongoing margin expansion.
Adjusted EBITDA margins expanded 340 basis points sequentially and 30 basis points year-over-year during the third quarter as we continue to harness the operating leverage inherent in our business.
We remain focused on further enhancing our superior cost structure by driving automation, streamlining our organizational structure and generating expense synergies through our proven integration capabilities.
Our unique combination of durable revenue growth and persistent operating leverage enables us to generate exceptionally high levels of free cash flow.
We will use our free cash flow to invest back into our business, both organically to delivering innovative solutions like the ones that I mentioned a few moments ago, as well as inorganically to expand into new high-growth segments of the market.
This, in turn, will reinforce the momentum that we're building to drive continued growth acceleration.
Turning to Slide 6.
People often ask me what's next for FIS and how their investments allow us to compete with disruptors.
In order to answer that question, it's important to understand not only where we've been, but where we are going, what's new and what's next for FIS and most importantly, for our clients.
It begins with the pathway to transformation that we started five years ago.
We consolidated data centers and moved solutions to the cloud.
We rearchitected our application stack to be modular and componentized while upgrading and integrating our enterprise tool sets.
And we launched a dramatically more client-friendly approach to delivery and service.
Now we are leveraging our technology and expertise to leapfrog over inflexible point solutions using cloud-native open architecture to deliver digital omni-channel solutions that are simple to integrate and easy to navigate.
In this way, we are helping our clients to quickly adapt to rapidly changing consumer expectations with innovative solutions that are fast, flexible and frictionless.
What you can expect to see next from our centers around our unique ability to tailor end-to-end experiences by connecting the global financial ecosystem in ways that only FIS can do.
We serve each of our clients as a trusted partner by building new and unique capabilities to better solve their challenges.
We then scale these new capabilities across our cloud-based environment for the benefit of all of our clients in a highly efficient and cost-effective manner.
This is the advantage of our unique business model.
And we're just getting started.
By investing approximately $1 billion annually in new product development and R&D, we are bringing tomorrow's innovation forward now.
And by using our one-to-many model, we can continue to grow faster than the market, support our clients' needs and sustain their technology leadership.
I'll give you a few examples of how we are bringing together capabilities from across the business to create new and exciting growth opportunities on Slide 7.
Case New Holland is a global leader in agriculture and industrial equipment.
They have been a valued client with our capital markets business for the past three years, leveraging our auto and equipment finance solutions to deliver a robust and automated digital experience for its customers.
They recently asked us to help them to drive data and insights as well as improved acceptance across their network of more than 900 dealerships.
Now we're bringing capital markets together with merchant by partnering to drive frictionless payments.
Another great example is our Premium Payback solution, which enables consumers to pay for purchases with reward points.
Demand is very strong from both our banking and merchant clients as there is a compelling value proposition for each of them as well as for the consumer.
Thousands of financial institutions, representing more than 7,000 card loyalty programs, are enrolled in the FIS Premium Payback ecosystem.
In this quarter, we added one of the largest issuers in the world to our points bank, further driving adoption.
In addition, we announced this quarter that Walgreens is now one of the growing number of merchants to offer its customers our Premium Payback service, joining companies like PayPal, Shell and BP.
The ability to use loyalty points is becoming an increasingly important factor in consumer decisions on where to shop.
Highlighting the type of next-generation value that we are offering to our clients now.
Another area where we are driving phenomenal value is with our merchant bank referral network.
When we signed the Worldpay deal, we thought that we would be able to sign three to four new bank referral agreements per year.
As it turns out, we have signed more than 15 significant new bank relationships, adding well over 1,000 branches to our partner distribution network in the first year.
Lastly, it's gratifying to see one of the key benefits of the deal come to fruition as we expand our global reach.
We're leveraging our combined scale to enable our merchant business to enter new countries and markets.
Our e-com business remains a global leader and continues to be a partner of choice for multinational companies and leading global brands.
We're expanding into six new countries this year, including Argentina, which we announced most recently.
With our new domestic acquiring licenses, Worldpay from FIS can deliver advanced payment technology to both merchants and global companies operating in these countries around the world.
I'm also happy to announce that we have successfully expanded our integrated payments business into Europe.
We signed more than 30 partners there already and are finalizing agreements with several more.
Winning these new partners gives us access to distribution that will drive accelerated growth through 2021 and beyond.
With recent investments in the U.S. as well, new wins are up significantly within our integrated payments despite the pandemic.
In banking, we added another top 30 financial services firm to our growing roster of large client wins.
They will use our Modern Banking Platform to power their online bank and chose FIS because of our cutting-edge technology and omni-channel capabilities.
We are also seeing strong success with our digital and mobile banking solutions.
This quarter, we signed an agreement with a top 50 bank, who chose us because our Digital One and mobile banking solutions will enable them to rapidly innovate, further differentiate their consumer user experience and increase their speed to market for new products.
In merchant, we signed a top 100 luxury retailer, who chose to partner with us because of our end-to-end capabilities, including our debit routing, e-commerce and differentiated omni-channel technology.
Sticking with the omni-channel theme for a moment, I'm very pleased to announce that Walmart, the world's largest retailer, recently began processing e-commerce transactions with us, further expanding our existing relationship.
It's a testament to our superior client value proposition and omni-channel capabilities that we continue to win share of wallet with our largest global clients.
In integrated payments, we signed two of the world's leading dealer management system software providers, one in the U.S. and one in the U.K. Between the 2, it will provide us with distribution to thousands of dealerships through these leading ISVs.
Turning to capital markets.
Demand for our end-to-end, SaaS-based solution remains robust.
I'm excited to announce that we signed a deal with a leading global technology company to power their complex multinational treasury function as well as to modernize their B2B payment operations.
The company selected FIS because of our cloud-based technology, flexible deployment and simple integration.
We also signed a significant new deal with a large Japanese bank to provide a middle- and back-office post-trade derivative clearing solutions.
The bank chose us in order to leverage our new API-driven technology stack to drive efficiencies and reduce operational risk.
We clearly have the momentum to continue accelerating revenue growth through 2021 and to sustain high single-digit top line growth into the future based on our new solutions, our unique ability to combine our knowledge and expertise from across our business and new ways to solve our clients' challenges and due to our continued sales success with marquee clients.
As Gary highlighted, we're excited about the momentum that we are building in the business.
Our pipelines are full with more than 30% in banking and capital markets and remain the largest that I've ever seen.
Our cloud-based end-to-end solutions are clearly resonating in the market right now.
Transaction and volume growth continue to improve in our merchant segment.
And we are seeing positive trends in our revenue yields as well.
And with our backlog consistently growing in the mid- to upper single digits for multiple quarters in a row, I feel really good about our ability to accelerate revenue growth next year, consistent with the 7% to 9% range we have been messaging.
But let's start with our third quarter results beginning on Slide 10.
We delivered a strong set of financial results with significantly improving trends.
On a consolidated basis, revenue increased 13% to $3.2 billion, up 1% organically, which represents a marked improvement from the 7% decline that we experienced last quarter.
Improving revenue growth was primarily driven by two things: stronger recurring revenue in both banking and capital markets as well as improving trends throughout the quarter within our merchant business.
Adjusted EBITDA increased to $1.4 billion with margins expanding 340 basis points sequentially and 30 basis points year-over-year to 42%.
We continue to expect margins to expand sequentially again in the fourth quarter as consumer spending trends continue to improve, driving margin expansion for the full year as compared to 2019.
As a result of our improving revenue growth and profitability, we achieved adjusted earnings per share of $1.42 for the third quarter.
Touching on our Worldpay integration.
We are more than two years ahead of schedule.
We have achieved $150 million in revenue synergies as we continue to see really strong traction with our Premium Payback solution.
And we are significantly outperforming our initial expectations for merchant bank referrals.
We have also achieved cost synergies of over $700 million, including $385 million in operating expense savings, contributing to our adjusted EBITDA margin expansion.
I'll expand more around our segments with Slide 11.
Banking Solutions revenue increased 3% organically to $1.5 billion.
This includes a three percentage point headwind related to COVID as well as an exceptionally large license comparison in the prior year period.
Excluding these, organic revenue growth was closer to 6% for banking, which is more consistent with our strong growth in recurring revenue.
Adjusted EBITDA was $653 million for banking, representing 220 basis points of sequential margin expansion to 43%.
This is a very good result as the team drove effective cost management to overcome the large margin headwind associated with last year's license comparison.
Our merchant segment also saw a significant rebound in the quarter.
Revenue was flat on an organic basis at $1 billion.
This represents 14 points of improvement over 2Q when normalizing for the U.S. tax deadline shift as we continue to win market share, particularly in our e-commerce, integrated payments and merchant bank referral channels.
Adjusted EBITDA in the segment was $487 million, representing over 700 basis points of sequential margin improvement as we saw a material rebound in our higher-margin transaction processing revenue.
Capital markets revenue has increased 3% year-to-date on an organic basis, demonstrating more than one point of acceleration compared to the prior year period.
We continue to see good progress in transitioning this business to a SaaS-based recurring revenue model and away from license sales.
Capital markets declined 1% in organic revenue growth for the third quarter and was primarily due to quarterly differences in the timing of license renewals.
And we expect quarterly variability of this segment to continue to improve as we complete the transition to SaaS.
Recurring revenue continues to grow strongly and new sales for our SaaS-based recurring revenue solutions increased by nearly 50% during the third quarter, reinforcing our confidence for continued acceleration in revenue growth during 2021 and beyond.
Adjusted EBITDA was $286 million, representing a consistent 46% margin with last quarter, as capital markets teams continue to manage cost and execute at a very high level.
Turning to Slide 12 for an overview of our recent merchant volume and transaction trends.
We continue to see improvement throughout the third quarter with volume and transaction growth exiting the quarter at 6% and 3%, respectively.
Trends have consistently improved since April.
And this is especially notable for our revenue yields.
Historically, merchant revenue growth has been highly correlated with transaction and volumes.
But the severe impact of the COVID pandemic on cross-border and SMB caused revenue growth to fall by more than volume growth last quarter.
This quarter, as expected, we saw that spread narrowing as yields continued to improve, primarily with improving SMB trends.
E-commerce transactions increased 30% in the quarter, excluding travel and airlines.
While the global pandemic continues to affect us all, we believe this is a critical time to continue to invest in our solution suite to empower our merchants into an accelerating digital economy.
As Gary mentioned, we have rolled out significant enhancements within our merchant segment, all of which continue to position FIS as the premier provider of global e-commerce and integrated payments.
Turning to Slide 13.
I wanted to provide some color on the strength of our balance sheet, cash flows and liquidity position.
We ended the quarter with a total debt balance of about $20 billion and a weighted average interest rate of 1.6%.
Our debt balance is up slightly quarter-over-quarter, primarily due to FX translation, as we carry significant euro- and pound-denominated balances.
We continue to generate high levels of free cash flow.
This quarter, we generated $866 million, representing a 27% conversion of revenue.
Capital expenditures were $263 million or 8% of revenue.
As a result, liquidity increased again to $4.2 billion, up by more than $700 million quarter-over-quarter.
Our business model remains durable and our strategy is clearly working to help us win market share.
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sees q3 adjusted earnings per share $1.66 - $1.69; sees fy 2021 adjusted earnings per share $6.45 - $6.60.
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Last night, we released a set of supplemental slides which address second quarter results.
They are available on our website.
An appendix to these slides features additional disclosures, GAAP reconciliations and other information which you should also review.
In fairness to all participants, please limit yourself to one question and one follow-up.
With that, over to Michel.
MetLife's outstanding financial results in the second quarter provides further evidence of the tremendous progress we're making on the pillars of our Next Horizon strategy.
We're continuing to focus with the right capital allocation and investment decisions.
We're continuing to simplify with exceptional expense discipline and we're continuing to differentiate with enhancements to our market-leading Group Benefits platform that are helping to drive record sales.
When it comes to our strategy, we've transitioned from a period of execution risk to one of additional opportunity.
Net income in the second quarter was $3.4 billion, up from $68 million a year ago.
The primary drivers were growth in adjusted earnings, the gain we booked on the sale of our Auto and Home Business and derivative gains in the current quarter relative to derivative losses a year ago.
Strong net income drove book value per share, excluding AOCI, other than FCTA growth, of 8%.
Adjusted earnings in the second quarter were $2.1 billion or $2.37 per share, up 186% from $0.83 per share a year ago.
As in the first quarter, our investment portfolio generated exceptionally strong variable investment income.
Private equity remained the key driver of VII.
As you know, private equity returns are reported on a one quarter lag, so the strong Q2 performance reflected gains from Q1.
We reported private equity gains of 9.7% in the second quarter compared with a negative 8.2% a year ago.
Equity markets continued to perform well from April through June, which we anticipate being reflected in our Q3 earnings.
When we unveiled our Next Horizon Strategy at Investor Day in December 2019, we pointed to the scale and expertise that we have in investments as a competitive advantage for MetLife.
The strategic approach we have taken on private equity is a case in point.
Our decision to sell most of our $2.5 billion hedge fund portfolio and increase the allocation to private equity has provided a better match for our long-dated liabilities, while creating significant value for our shareholders.
This was no accident, but the latest in a series of successful investment decisions from de-risking our portfolio ahead of the financial crisis to selling Peter Cooper Village/Stuyvesant Town nearer [Phonetic] market top.
Turning to our reporting segments.
John McCallion will provide a complete overview shortly.
I would like to focus on how our results show that COVID-19 is both still with us but lessening in its impact.
From an underwriting perspective, we've seen a sizable improvement, but we are still experiencing excess mortality.
In the quarter, the Group Life mortality ratio was 94.3%, below the 106.3% from last quarter but still above the top end of our guidance range.
In Latin America, we had $66 million of COVID losses, again, below the $150 million of COVID losses from Q1, but still above normal.
Yet, at the same time, COVID-19s economic grip is easing somewhat.
At MetLife, we see this emerging in sales trends.
In the U.S. Group business, sales through the first half of 2021 are 39% higher than they were in the first half of 2020 and if current trends hold, 2021 will be a record sales year.
In Latin America, sales are up 55% year-over-year.
On a year-over-year basis, Asia sales are up 42%, while EMEA sales are up 20%.
So while we are not out of the woods, we are starting to see a clearing in the trees ahead.
The path of the pandemic is something outside of our control, but as we have demonstrated over the past year and a half, we are not standing still.
We are moving ahead with urgency to accelerate our strategy.
To further differentiate our Group Benefits business, we acquired Versant Health and immediately became the third largest vision care provider in the United States.
Versant has now been part of our results for two quarters and in Q2, it contributed 6 points of year-over-year growth in U.S. Group premiums, fees and other revenues, consistent with our expectations.
Year-over-year request for vision care proposals are up more than 20% among our national account customers.
We are pleased with how our new vision care offering is performing in the marketplace and expect it to contribute meaningfully to growth going forward.
Similarly, we have enhanced our pet insurance offering to make it even more attractive to customers.
We now offer telehealth concierge services, rollover benefits from the prior year, and family plans covering multiple pets.
In what we believe is a first for the industry, we also cover pre-existing conditions when an employee switches to MetLife pet Insurance from another carrier as long as the condition was covered by the prior plan.
More than 500 employers now offer MetLife pet insurance as a voluntary benefit to their employees and we believe our best-in-class product will continue to make gains in this highly attractive and underpenetrated market.
To strengthen our focus, we made a decision to sell our businesses in Poland and Greece to NN Group.
This was another promise we made at Investor Day to continue to look at our portfolio through the lens of strategic fit and ability to achieve scale and clear our hurdle rate.
Since that time, we have sold or reached agreements to sell our businesses in four markets and we will continue to apply this disciplined approach.
In early April, we also closed on the sale of our Auto and Home Business to Farmers Insurance for $3.94 billion in cash.
The 10-year strategic partnership we forged allows each company to focus on its core strengths: Farmers' 90 years of P&C underwriting and service excellence and MetLife's unrivaled distribution reach in the U.S. Group Benefits space.
The simplified pillar of our strategy was evident in our exceptional expense management.
In the quarter, we delivered a direct expense ratio of 11.4% and we now expect to beat our 12.3% target ratio, not only for all of 2021, but for 2022 as well.
We are making this commitment despite selling our Auto and Home Business, which operated at a lower expense ratio than the overall enterprise.
As we have said many times, we are embedding an efficiency mindset across everything we do that is central to our ability to deliver continuous improvement.
At MetLife, we no longer have expense reduction programs.
We do not need them.
What we have instead is a publicly disclosed direct expense ratio target that we have brought down by 200 basis points over the past five years and promise to keep there.
This is how we hold ourselves accountable and this is how investors can hold us accountable as well.
Our strategic decision to sell Auto and Home contributed to a $6.5 billion cash buffer as of June 30, well above our target range.
We repurchased $1.1 billion of common shares in the second quarter and another $248 million of common shares so far in the third.
And yesterday, our Board approved a new $3 billion share repurchase authorization.
This is on top of the $475 million we have remaining on our December 2020 authorization.
We believe that investing in responsible growth, steadily increasing our common dividend, and buying back common stock are all vital parts of a balanced approach to creating long-term shareholder value.
COVID-19 continues to present MetLife with the opportunity and the obligation to step up for our employees, our customers and our communities.
That work is ongoing.
We are in a new phase of the pandemic.
The primary focus now is on vaccinating as many people as possible.
Nothing will do more to prevent needless tasks and a potential resurgence of the lockdown measures that caused so much economic harm.
As we did over 100 years ago with our visiting nurses program, MetLife has mobilized to make a positive contribution to advance public health.
First and foremost, this means doing all we can to give our own employees and their families access to the vaccines.
Examples from our markets include giving employees paid leave to get vaccinated, covering vaccine-related expenses such as travel and child care, and holding free vaccine clinics for employees and their families in locations as varied as Oriskany, New York and Osaka, Japan.
But it also means helping to vaccinate the broader population as well.
In Nagasaki, Japan, we've opened 6,500 square feet of our headquarters as a free vaccination site.
MetLife Foundation has committed $500,000 to delivering vaccines to underserved communities across the U.S. and our medically trained staff are volunteering to administer doses at vaccine sites.
In closing, to perform as well as we have through a pandemic highlights some fundamental truths about MetLife.
We have an all-weather strategy that holds up well to stress.
We have an investment portfolio that captures meaningful upside.
We have competitive advantages that enable us to grow in the most attractive markets and we have a relentless focus on execution.
At our 2019 Investor Day, we said our Next Horizon Strategy would generate tangible benefits for shareholders: a 12% to 14% adjusted ROE; $20 billion of distributable cash over five years; and an additional $1 billion of operating leverage to self-fund growth.
We are on track to meet every one of those commitments.
I will start with the 2Q '21 supplemental slides which provide highlights of our financial performance and an update on our cash and capital positions.
Please note, in the appendix, we have also provided an updated 25 basis points sensitivity for our U.S. long-term interest rate assumption.
Starting on Page 3.
We provide a comparison of net income to adjusted earnings in the second quarter.
Net income in the quarter was $3.4 billion or approximately $1.3 billion higher than adjusted earnings.
This variance was primarily due to the net investment gains of $1.3 billion, of which $1.1 billion relates to the sale of our Property & Casualty business to Farmers Insurance.
Our investment portfolio and our hedging program continue to perform as expected.
Additionally, adjusted earnings include one notable item of $66 million related to a legal reserve release.
On Page 4 you can see the year-over-year comparison of adjusted earnings by segment excluding notable items.
As I previously noted, there was one notable item of $66 million in 2Q of '21 and no notable items for the prior year period.
Adjusted earnings per share, excluding the notable item, was $2.30, benefiting from strong returns in our private equity portfolio but show most of the year-over-year variance.
Moving to the businesses, starting with the U.S., Group Benefits adjusted earnings were flat year-over-year as volume growth and the Versant Health acquisition largely offset unfavorable underwriting margins.
Group Life mortality improved sequentially but remained elevated in the quarter.
I will discuss in more detail shortly.
Regarding non-medical health, the interest adjusted benefit ratio was 73.8% in 2Q of '21, within its annual target range of 70% to 75%, but higher than the prior year quarter of 58.5%, which benefited from extremely low dental utilization and favorable disability incidence.
We've seen a return to more normal utilization rates for non-medical health and expect this trend to continue.
Therefore, we expect the interest adjusted benefit ratio to remain within its annual target range for the remainder of the year.
Overall, business fundamentals for Group Benefits remained healthy, highlighted by strong top-line growth and persistency.
Group Benefits sales were up 39% year-to-date, primarily due to higher jumbo case activity and remain on track to deliver a record sales year in 2021.
Adjusted PFOs were $5.6 billion, up 29% year-over-year.
Several factors contributed to the strong year-over-year growth, including a $500 million impact relating to dental premium credits and the establishment of a dental unearned premium reserve, both reducing premiums in the second quarter of 2020, which collectively contributed 13 percentage points to the year-over-year growth rate.
In addition, 4 percentage points were related to higher premiums in the current quarter from participating contracts, which can fluctuate with claim experience.
After considering these factors, underlying PFO growth for Group Benefits was roughly 12%, driven by solid volume growth across most products, including continued strong momentum in voluntary and the addition of Versant Health.
Looking ahead to the second half of the year, while Group Benefits reported PFO growth rates will be impacted by the dental unearned premium reserve release in Q3 and Q4, we expect the underlying PFO growth to maintain its strength and resilience for the remainder of 2021.
Retirement and Income Solutions or RIS adjusted earnings were $654 million, up $462 million year-over-year.
The primary driver was higher variable investment income, largely due to strong private equity returns.
This was partially offset by less favorable underwriting margins compared to 2Q of '20.
RIS investment spreads were 224 basis points, up 199 basis points year-over-year, primarily due to higher variable investment income.
Spreads, excluding VII, were 98 basis points, up 13 basis points year-over-year due, in part, to sustained paydowns in our portfolios of residential mortgage loans and residential mortgage-backed securities, a partial recovery in real estate equities and lower LIBOR rates.
RIS liability exposures, including U.K. longevity reinsurance, grew 8% year-over-year due to strong volume growth across the product portfolio, as well as separate account investment performance.
With regards to pension risk transfers, we continue to see a robust PRT pipeline.
Adjusted earnings were up 103% and 91% on a constant currency basis, primarily due to higher variable investment income.
Asia's solid volume growth also contributed to the strong performance driven by higher general account assets under management on an amortized cost basis, which were up 7% and 6% on a constant currency basis.
Additionally, while against a weak 2Q of '20, Asia sales were up 42% year-over-year on a constant currency basis, demonstrating the resiliency in the business.
Latin America adjusted earnings were down 27% and 38% on a constant currency basis, primarily driven by unfavorable underwriting and unfavorable equity markets related to the Chilean encaje, which had a negative 1.5% return in the quarter versus a positive 14% in 2Q of '20.
This was partially offset by favorable investment margins.
COVID-19-related claims improved sequentially.
The impact on Latin America's second quarter adjusted earnings was approximately $66 million after tax.
While Latin America's bottom line has been dampened by the elevated COVID-19-related claims, the underlying fundamentals of the business remain robust as evidenced by strong sales and persistency throughout the region.
Latin America adjusted PFOs were up 12% year-over-year on a constant currency basis and sales were up 55% driven by solid growth in all markets.
EMEA adjusted earnings were down 19% and 23% on a constant currency basis, primarily driven by higher COVID-19-related claims in the current period compared to low utilization in the prior year period.
Solid volume growth was a partial offset.
The current quarter has also benefited from a favorable refinement to an unearned premium reserve positively impacting adjusted PFOs and adjusted earnings by approximately $15 million after tax.
In addition, Poland increase contributed roughly 10% to run rate earnings that will be reported in divested businesses beginning in the third quarter.
EMEA adjusted PFOs were up 8% on a constant currency basis and sales were up 20% on a constant currency basis, primarily due to higher credit life sales in Turkey and solid growth in U.K. employee benefits.
MetLife Holdings adjusted earnings were up $515 million year-over-year.
The increase was primarily driven by strong private equity returns.
In addition, life underwriting margins were favorable.
The life interest adjusted benefit ratio was 47.1%, lower than the prior year quarter of 59.1% and below our annual target range of 50% to 55%.
Corporate and Other adjusted loss, excluding the favorable notable item of $66 million related to a legal reserve release, was $126 million.
This result compared favorably to the adjusted loss of $289 million in 2Q of '20 due to higher net investment income, lower expenses and lower preferred stock dividends.
The company's effective tax rate on adjusted earnings in the quarter was 21.6% and within our 2021 guidance range of 20% to 22%.
Now, I will provide more detail on Group Benefits mortality results on Page 5.
The Group Life mortality ratio was 94.3% in the second quarter of 2021, which is above our annual target range of 85% to 90%.
COVID reported claims in 2Q of '21 were roughly 4.5 percentage points, which reduced Group Benefits adjusted earnings by approximately $75 million after tax.
Additionally, the quarter included a higher level of life claims above $2.5 million and an additional level of excess mortality that appears to be COVID-related.
These, collectively, impacted the ratio by an additional 2.7 percentage points or $40 million after tax.
There were approximately 50,000 COVID-19-related deaths in the U.S. in the second quarter of '21.
While still elevated, total debts have moderated versus the prior year and sequential quarters.
Looking ahead, we expect COVID-19-related deaths in Group Benefits to continue to trend lower.
Now let's turn to Page 6.
This chart reflects our pre-tax variable investment income over the last five quarters, including approximately $1.2 billion in the second quarter of 2021.
This very strong result was mostly attributable to the private equity portfolio, which had a 9.7% return in the quarter.
As we have previously discussed, private equities are generally accounted for on a one quarter lag.
Our second quarter results were essentially in line with PE industry benchmarks.
While all private equity asset classes performed well in the quarter, our venture capital funds, which accounted for roughly 22% of our PE account balance of $11.3 billion with the strongest performer across subsectors with a roughly 19% quarterly return.
On Page 7, second quarter VII of $950 million post-tax is shown by segment.
The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio.
As we have previously noted, RIS, MetLife Holdings and Asia generally account for approximately 90% or more of the total VII and are split roughly one-third each, although it can vary from quarter-to-quarter.
VII results in 2Q of '21 were more heavily weighted toward RIS and MetLife Holdings, as Asia's private equity portfolio is less mature and has a smaller proportion of the venture capital funds that I referenced earlier.
Turning to Page 8.
This chart shows our direct expense ratio over the prior five quarters and full year 2020, including 11.4% in the second quarter of '21.
As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results.
In 2Q of '21, our favorable direct expense ratio benefited from solid top-line growth and ongoing expense discipline, as well as lower employee-related benefits in the quarter.
We expect the direct expense ratio for the remainder of 2021 to be elevated compared to the first half of 2021 due to timing of investments and seasonality.
But as Michel noted, we expect full year '21 and '22 direct expense ratio to be our 12.3% guidance.
Now I will discuss our cash and capital position on Page 9.
Cash and liquid assets at the holding companies were approximately $6.5 billion at June 30, which is up from $3.8 billion at March 31 and well above our target cash buffer of $3 billion to $4 billion.
The sequential increase in cash at the holding companies was primarily due to the proceeds received from our P&C sale to Farmers Insurance of $3.9 billion.
In addition, HoldCo cash includes the net effects of subsidiary dividends, payment of our common stock dividend, a $500 million redemption of preferred stock, share repurchases of $1.1 billion, as well as holding company expenses and other cash flows.
Next, I would like to provide you with an update on our capital position.
For our U.S. companies preliminary second quarter year-to-date 2021, statutory operating earnings were approximately $2.8 billion, while net income was approximately $1.6 billion.
Statutory operating earnings increased by approximately $1.2 billion year-over-year, driven by lower variable annuity rider reserves and an increase in investment margin.
Year-to-date 2021, net income decreased by $286 million as compared to the first half of 2020.
The primary drivers were derivative losses, mostly offset by increases in operating earnings and net investment gains in the current six-month period compared to large derivative gains in the prior year's six-month period.
We estimate that our total U.S. statutory adjusted capital was approximately $18.5 billion as of June 30, 2021, up 9% compared to December 31, 2020 when excluding our P&C business sold to Farmers.
Favorable operating earnings and net investment gains were partially offset by derivative losses and dividends paid to the holding company.
Finally, the Japan solvency margin ratio was 873% as of March 31, which is the latest public data.
The sequential decline in the Japan SMR from 967% at December 31 reflects seasonal dividends and the rise in U.S. interest rates in the quarter ending March 31.
In summary, MetLife delivered another strong quarter, driven by exceptional private equity returns, good business fundamentals, ongoing expense discipline, and the benefits of our diverse set of market-leading businesses and capabilities.
While higher mortality due to COVID-19 has masked the earnings power of Group Benefits in Latin America, the strength of these franchises remain healthy and intact.
In addition, our capital, liquidity and investment portfolio are strong, resilient and position us for success.
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quarterly adjusted earnings per share $2.20.
quarter-end book value of $70.08 per share, down 3% from $72.62 per share at march 31, 2020.
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Before we begin our call today.
These statements are based solely on information that is now available to us.
Additionally, our future performance may differ due to a number of factors.
We also discuss financial measures that do not conform to US GAAP.
We appreciate your interest in SEE and hope you and your families are staying safe and healthy.
We're working through very exciting and challenging times as we continue to transform SEE.
You can see on Slide 3, our strategy to become a world-class digitally driven company, automating sustainable packaging solutions.
I'll share our strategy for growth and automation, digital, and sustainability, within our global core markets.
Chris will review our financial results and outlook in more detail.
I will end with closing remarks before opening the call for Q&A.
Net sales increased 13% in constant dollars with volume growth of 5% and price realization of 8%.
Adjusted EBITDA increased 4%, higher volumes and pricing efforts helped mitigate inflationary pressures and supply disruptions, yet our industry-leading margins were still under pressure at 19.2% compared to 21% last year.
On a per-share basis, adjusted earnings of $0.86 were up $0.04 compared to last year.
We generated free cash flow of $223 million in the first nine months of the year, which compared with $292 million in the first nine months of last year.
Our SEE Operating Engine is performing.
SEE Touchless Automation & Sustainable Packaging Solutions are generating demand, growth, and delivering productivity savings.
I want to highlight our SEE Operating Model on Slide 5, which defines where we're taking SEE and what you should expect us to deliver.
Our innovations in Automation, Digital and Sustainability continue to gain momentum and are driving our growth above our traditional packaging markets.
We are targeting adjusted earnings-per-share growth of greater than 10% and free cash flow conversion of more than 50%.
Our SEE Operating Model generates significant cash from our purpose-driven approach to capital allocation.
To fuel our growth, we are increasing our Capex investments for innovation in Touchless Automation.
Through SEE Venture's Investments, we're using our balance sheet to incubate disruptive technologies and new business models to accelerate our pace of innovation and speed to market.
We continue to return value to our shareholders through share repurchases and dividends.
We further strengthened our capital structure with a $600 million new bond issuance in the third quarter.
For SEE, this is our first secured, investment-grade bond in the company's history.
The proceeds were used to pay down existing debt.
We encourage you to visit our website, where you can read about our innovation and customer success stories.
We create measurable value for our customers through automated and sustainable solutions that are designed to maximize food safety, minimize waste, protect goods and deliver productivity savings.
Sales in our Automation portfolio, which includes equipment, services and spare parts, have increased approximately 20% [Phonetic] year-to-date, accounting for 8% of our total sales.
Autobag Systems, our fastest-growing automated solution, with year-to-date sales up more than 25%, and bookings up approximately 50%.
For proteins, equipment, spare parts and service, sales are up double digits, year-to-date.
Our protein automation pipeline continues to grow across all regions, with major food producers committing to our SEE Touchless Automation future.
Our automated equipment in service sales have a strong pull-through for a high-performance sustainable materials.
Our unique approach to automation has strengthened, with our digital solutions.
Through our SEE Mark Smart Packaging, enabled with our patented digital printing, we are creating Touchless Digital Connectivity from our operations to our customers, and to consumers' homes.
This level of connectivity is transformational for our customers.
It enables us to be embedded into our customers' operations, where we can drive significant savings to their bottom line.
Our customers are buying into our automation future.
In addition to growth in automation, the recovery in foodservice and our innovations and fluids are driving increased demand for our high-performance, sustainable Cryovac barrier bags pouches in case-ready applications across all regions.
In the quarter, our fastest growing Food Solutions was our Cryovac Pouches, designed for fluids and liquids with double-digit sales growth.
We continue to benefit from the industrial recovery and strength automation designed for e-commerce fulfillment.
We're seeing significant shift in our fulfillment portfolio toward automation and sustainable solutions.
In Industrials, we delivered mid-to-high single-digit volume growth.
In Fulfillment, we experienced double-digit volume growth in automation, paper systems, and temperature assurance solutions.
Although, we face global supply challenges across our business, our team is doing a nice job of minimizing disruptions and delivering on increased demands.
I'd also want to highlight that we recently launched a new innovative BubbleWrap on-demand inflator system, designed for industrial and fulfillment customers.
You can see the illustration of this system, on the right side of this Slide.
It features smart technology that recognizes the type of film that's loaded and easily switches between material types, whether it's inflatable cushioning, pouches, or air pillows.
SEE is becoming an automation company.
On Slide 7, you can see how we are making this happen.
For the full year, we expect to exceed our $425 million sales target or over 12% growth in Equipment, System and Service.
We're confident in our ability to exceed our 2025 target of over $750 million, which is more than $500 million will come from Equipment and Systems.
Over the last 12 months, our bookings are up significantly, even though supply disruptions persist.
The pandemic accelerated demand for automation.
As I noted earlier, we're highlighting the success of our Autobag systems portfolio, with bookings up approximately 50% year-to-date, and more than 60% since the start of the pandemic.
The accelerated systems demand will drive up to 7 times, future pull-through for Materials and Services over the equipment lifecycle.
We currently are experiencing a significant increase in all Autobag material orders and we're investing in innovation and capacity expansions to meet this increased demand.
Our year-over-year bookings growth in Auto box is also notable.
Our Touchless Automation value proposition resonates with customers as we're generating significant operational savings and taking our strategic partnerships to the next level.
Sustainability is in everything we do and it starts with our purpose-driven culture and values to how we innovate and invest to generate growth.
Sustainability is core to our responsible sourcing of raw materials, our carbon footprint, as well as our efforts to advance circularity of packaging materials with our customers and suppliers.
You can see on this Slide, our environmental goals and our sustainability pledge.
Our long-term targets are ambitious and lead the industry toward a better future.
As it relates to climate change, we are doing our part with an ambitious pledge to achieve net-zero carbon emissions across our operations by 2040.
We continue to take actions in our own facilities to reduce energy consumption, with incremental investments in Touchless Automation and renewable energy sources.
We are making significant progress on our 2025 Sustainability Pledge, with approximately 50% of our solutions already designed for recyclability, which have reached approximately 20% recycled into a renewable content in those solutions.
We designed our high-performance materials with recyclability in mind, to make sustainability more affordable, and to create a pathway for a circular economy.
You can see on this Slide how Touchless Automation is transforming our operations, our customers' operations, and enabling a circular economy.
We're innovating in smart packaging, incorporating digital technology and delivering supply chain efficiency, sustainability, and brand engagement with our customers.
We are excited to share that in early October, we published our Global Impact Report that highlights our ESG priorities and commitments, related initiatives, our progress, and performance.
We highlight how SEE is shaping the future of the packaging industry and progressing toward our bold environmental targets.
I'll now pass the call to Chris to review our results in more detail.
Let's start on Slide 9 to review our quarterly net sales growth by segment and by region.
In Q3, net sales totaled $1.4 billion, up 14% as reported, up 13% in constant dollars.
Food was up 12% in constant dollars versus last year, and Protective increased 13%.
The Americas and EMEA were both up double digits, with Americas up 14% and EMEA up 13%.
APAC was up 6% versus last year.
On Slide 10, you see organic sales volume and pricing trends by segment and by region.
In Q3, overall volume growth was up 5%, with favorable price of 8%.
Let's start with volumes.
Food volumes were up 6% with growth across all regions.
Americas up 5%, EMEA 6%, and APAC 7%.
Protective volumes were up 4%, led by EMEA with 16% growth, followed by APAC up 4%, and Americas, essentially flat to prior year.
Q3 price was favorable 8% with the Protective at 10%, and food at 7%.
Formula-based pass-throughs, primarily in Food North America, are now better aligned with input costs.
For the full year 2021, we now expect to realize more than $275 million in price, given additional pricing announcements since our last call, as well as timing of formula-based pricing.
As we head into 2022, we will be announcing additional price increases, effective December 1, and in response to continued inflationary pressures.
This increase will vary based on region and product offering and will average between 5% and 10%.
We are engaging directly with our customers to meet increased demand with automation and alternative solutions that drive productivity savings.
On Slide 11, we present our consolidated sales and adjusted EBITDA walks.
Having already discussed sales, let me comment on our Q3 adjusted EBITDA performance of $271 million, which was up 4% compared to last year.
Margins of 19.2% were down 180 basis points.
Despite favorable pricing in the quarter, you can see how the inflationary environment and supply challenges weighed on our results with an unfavorable price cost spread of $18 million.
Operational cost decreased approximately $3 million relative to last year, with Reinvent SEE productivity gains and a $5 million benefit related to an indirect tax recovery in Brazil.
Our SEE Operating Engine is performing with 40% leverage on our higher volumes.
In the month of September, price cost spread turned favorable.
In Q4, we expect this favorable trend to continue.
Adjusted earnings per diluted share in Q3 was $0.86 compared to $0.82 in Q3 2020.
Our adjusted tax rate was 24.9% compared to 20.6% in Q3 2020.
The prior-year tax rate included a benefit of US GILTI regulations issued in 2020.
Our weighted average diluted shares outstanding in the quarter were $151 million.
Turning to Slide 12.
Here we provide an update on Reinvent SEE, which is now the foundation of our SEE Operating Engine.
We have achieved $43 million of benefits in the first nine months of the year, and remain on track to realize approximately $65 million in 2021.
Turning to segment results on Slide 13, starting with food.
In Q3, food net sales of $797 million were up 12% in constant dollars.
Cryovac Barrier Bags and pouches were up for the second consecutive quarter versus last year, and combined, accounted for nearly 50% of the segment sales.
Sales in case-ready and roll stock applications were also up as food service recovers and retail demand remained strong.
Equipment, Parts and Service sales, which account for 7% of the segment, were up low-single-digits in the quarter.
As Ted noted, we are experiencing strong demand in protein automation, and continue to build our pipeline.
Adjusted EBITDA of $169 million in Q3 increased 11% compared to last year, with margins at 21.2% and 40 basis points.
Higher volumes, favorable pricing, and productivity gains offset elevated costs.
On Slide 14, we highlight Protective segment results.
In constant dollars, net sales increased 13% to $609 million.
Relative to last year, Industrial was up more than 15% and fulfillment up approximately 7%.
We faced supply chain disruptions throughout the quarter and leveraged our broad portfolio and global footprint to meet customer demands where possible.
As a reminder, approximately 55% of our Protective sales are derived from industrial end markets and the remaining 45% from fulfillment and e-commerce.
Adjusted EBITDA of $103 million decreased 5.5% in Q3, with margins at 16.9%, down 350 basis points versus last year.
We incurred transitory headwinds, including non-material inflation and labor challenges, which more than offset higher volumes and pricing actions.
Let's turn to free cash flow on Slide 15.
In the first nine months of 2021, we generated $243 million of free cash flow.
Relative to the same period last year, higher earnings and lower restructuring payments were offset by the impact of higher employee-related costs, cash tax payments, and Capex investments to support growth and innovation.
On Slide 16, we outline our purpose-driven capital allocation strategy, focused on creating economic value.
We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives.
As Ted mentioned, I want to highlight that during Q3, we executed a $600 million five-year senior secured bond at 1.573%.
The proceeds of this offering were used to pay down $425 million senior unsecured notes at 4.875%, due in 2022, and $175 million pre-payable term loan debt.
To support our growth initiatives, we are focusing our Capex on Touchless Automation, Digital, and Sustainability.
We are expanding our capacity in equipment to align with customer demands and support continued growth.
We are investing in smart packaging and digital printing and see opportunities to expand our presence in attractive growth markets and geographies.
We are managing our product portfolio with discipline to ensure alignment with our growth strategy.
As it relates to returning capital to shareholders, we have repurchased 6.6 million shares, for $329 million year-to-date September, reflecting confidence in our future growth.
At quarter-end, we have approximately $970 million remaining under our authorized repurchase program.
Our net sales we now estimate are approximately $5.5 billion or up approximately 12% as reported growth to reflect the favorable demand environment and pricing actions.
This compares to our previous range of $5.4 billion to $5.5 billion.
We expect a favorable currency impact of approximately 1.5%.
Given the current environment, we now anticipate adjusted EBITDA in the range of $1.12 billion to $1.4 billion.
On a reported basis, adjusted EBITDA is expected to grow 6.5% to 8.5%.
This compares to our previous guide of $1.12 billion to $1.5 billion.
For adjusted EPS, we expect to be in the range of $3.50 to $3.60, the higher end of our previous guidance.
This assumes depreciation and amortization of $230 million and adjusted effective tax rate of approximately 26%, and approximately 152.5 million average shares outstanding.
And lastly, our outlook for free cash flow is expected to be in the range of $520 million to $540 million.
There is no change to our outlook for 2021 Capex of approximately $210 million, and Reinvent SEE restructuring associated payments of approximately $40 million.
For cash taxes, we anticipate approximately $110 million, which is net of a $24 million tax refund associated with the retroactive application of the revised US GILTI regulations.
As we close out the year and enter 2022, we are executing on our growth strategy, driving productivity and aligning our business with our SEE Operating Model.
With that, let me now pass the call back to Ted for closing remarks.
Demonstrating our ability to grow and expand our presence globally, considering the inflationary pressures in global supply disruptions, is a true reflection of the talent we have at SEE.
We are differentiating ourselves in the markets we serve with a can-do, get-it-done culture.
We're reinventing where we are taking SEE and driving our performance to world-class, where we're [Phonetic] at the table with our customers, solving their most critical packaging challenges with automated and sustainable solutions.
Our strategy is working and continues to gain momentum.
We are purpose-driven to create long-term value for our stakeholders and making our world better than we found it.
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sees fy adjusted earnings per share $3.50 to $3.60.
q3 sales rose 14 percent to $1.4 billion.
sees fy sales about $5.5 billion.
q3 adjusted earnings per share $0.86.
sees full year adjusted ebitda to be in range of $1.12 billion to $1.14 billion.
sees free cash flow in 2021 to be in range of $520 million to $540 million.
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These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic.
Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events.
During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted.
In the third quarter, Sunoco continued to demonstrate the strength of its business model with strong financial results in a period of continuing economic recovery.
For the third quarter of 2021, the partnership recorded net income of $104 million.
Adjusted EBITDA was $198 million compared to $189 million in the third quarter of 2020.
Volumes were approximately two billion gallons, a sequential increase of 2% from the second quarter.
Year-over-year volumes increased 6.4%.
Fuel margin was $0.113 per gallon versus $0.121 per gallon in the third quarter of 2020.
Total operating expenses in the third quarter were up as expected compared to the second quarter at $113 million versus $102 million and were flat to the third quarter of 2020.
Third quarter distributable cash flow as adjusted was $146 million, yielding a current quarter coverage ratio of 1.68 times and a trailing 12-month coverage ratio of 1.43 times, consistent with our long-term target of a minimum of 1.40 times.
On October 25, we declared an $0.8255 per unit distribution, consistent with last quarter.
We continue to maintain a stable and secure distribution for our unitholders, which remains the number one pillar behind our capital allocation strategy.
Leverage at the end of the quarter was 4.05 times, which we expect to increase minimally with the closing of the NuStar acquisition.
Leverage is expected to trend lower toward our 4.0 times target as we move into next year.
Our 2021 full year EBITDA guidance remains $725 million to $765 million, excluding the NuStar and Cato acquisitions.
As anticipated, second half expenses are trending higher than the first half.
However, we expect the full year to come in below our previously guided range due to the extension of many of our 2020 cost-cutting initiatives throughout the first half of 2021.
We are reducing full year 2021 operating expense guidance to $425 million to $435 million compared to our previous guidance of $440 million to $450 million.
Finally, we continue to expect maintenance capital of $45 million and growth capital expenditures of approximately $150 million.
Next, with respect to the recently closed expansions to our midstream business, given the size and timing of the closing of these acquisitions, they will have only a modest impact to 2021 adjusted EBITDA and have been excluded from that guidance.
In the fourth quarter, we took advantage of bond market conditions to derisk our balance sheet and reduce our financing costs.
In October, we issued $800 million of 4.5% senior notes due 2030, using the proceeds to redeem $800 million of our existing 5.5% senior notes due 2026.
The transactions lower our interest rate on this debt by 100 basis points while extending the maturity date by approximately four years.
We will continue to take prudent and proactive measures to strengthen our financial position when opportunities like this arise.
The third quarter's strong results, the recently closed acquisitions, and our opportunistic refinancing demonstrate our commitment to maintaining Sunoco's solid financial foundation and to increasing value to our stakeholders through a strategy of disciplined capital investment and balance sheet management.
Our strong third quarter results were driven by better volume performance, continued strength in margins and continued discipline on expenses.
Volume for the quarter was up over 6% from last year, but the more relevant comparison continues to be performance relative to 2019.
On that basis, we were off about 7% from the third quarter of 2019.
So far, in the fourth quarter, our volumes continue to be in the same range relative to 2019 once you factor in the JC Nolan ramp-up in the fourth quarter of that year.
The third quarter showed improvement versus the first half of the year.
RBOB prices were generally flat from the beginning of the quarter to the end of the quarter, but the increased volatility coupled with our continual gross profit optimization strategies and elevated breakeven margins helped our margins remain solidly within our full year 2021 guidance range.
The final piece of our strong financial performance was continued expense control and discipline.
As Dylan mentioned earlier, we expect second half expenses to be higher than the first half.
Some of the higher spending in the second half of the year is due to timing, and some of it is related to our decisions to defer bringing costs back into the business with a challenging start to the year.
As the margin environment improved through this year, we are more comfortable returning some of our expenses to a more sustainable level going forward.
Before turning it over to Joe, I want to briefly touch on a few more topics.
It seems that over the last few months, the topics of inflation, supply chain challenges and labor shortages have been increasingly visible and discussed.
We have not been immune to any of these challenges.
We have felt the impacts of inflation and incorporated the impact into our forward views on expenses.
Over the last few years, we have demonstrated our ability to control expenses and increase efficiency.
Going forward, we remain committed to delivering an efficient and lean expense structure.
We've also put into place strategies to adequately deal with longer supply chains.
We continue to be proactive in addressing our labor challenges and have been successful at maintaining a team to deliver for our customers.
An important thing to remember is that every one of these issues continues to support higher-than-historic breakeven margins.
Finally, a brief update on our growth efforts.
Our Brownsville terminal remains on track for completion and commissioning by the end of the first quarter.
The project team has done a great job keeping schedule and costs in line even in the face of some of the industry headwinds, I just discussed.
And our integration efforts for the NuStar and Cato acquisitions are well underway.
If anything, we have been excited by some of the additional commercial opportunities we have uncovered in the first month of ownership.
I will wrap up by stating that we will continue to focus on what we can control and what drove this quarter's results, gross profit optimization, growth of our core business and solid and efficient operations.
We delivered a strong third quarter.
Fuel volumes grew roughly 2% versus the second quarter of this year, while our fuel margins remained very healthy.
And just as importantly, we continue to control costs and manage our balance sheet.
Quarter after quarter, we have demonstrated the durability of our business.
Looking toward the fourth quarter, RBOB prices increased rapidly through most of October with a moderate pullback during the last week of the month.
Even if the challenging headwind environment continues, we expect to have a solid fourth quarter.
Fuel margins should remain healthy given higher industry breakevens and fuel volume should remain steady with normal seasonality.
As for full year 2021, we expect to deliver on our adjusted EBITDA guidance.
As we look out further to 2022, you should expect us to have another good year.
We will provide detailed guidance in December.
Moving on to growth.
We continue to strengthen our business by growing our midstream assets.
The NuStar and Cato acquisitions as well as the Brownsville project helped diversify and vertically integrate our business.
It also provides us a more enhanced platform for fuel distribution growth.
Financially, we executed these transactions at very attractive valuations, especially after adding synergies.
On the fuel distribution side, we will continue to grow organically as well as capitalize on acquisition opportunities.
As we continue to grow, we will build on our history of maintaining financial discipline, which means protecting the security of our distributions while also protecting our balance sheet.
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excluding any impact in 2021 from recently closed acquisitions, co continues to expect fy 2021 adjusted ebitda of $725 million to $765 million.
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As always, we appreciate your interest.
Brent Wood, our CFO, is also participating on the call.
We refer to certain of these risks in our SEC filings.
We hope everyone and their families remain well and out of harm's way.
Our third quarter results were strong and demonstrated the resiliency of our portfolio and of the industrial market.
The team produced another solid quarter with statistics such as funds from operations came in above guidance, up 6.3% compared to last quarter -- third quarter last year.
This marks 30 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
Year-to-date FFO per share is up 7.8%.
Our quarterly occupancy, while below prior year, was high averaging 96.6% and at quarter end were ahead of projections at 97.8% leased and 96.4% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends, also benefiting occupancy as a high 83% year-to-date retention rate.
Re-leasing spreads set a quarterly record at 28% GAAP and 16.1% cash.
Year-to-date leasing spreads were solid at 23.1% GAAP and 13.3% cash.
And finally, same-store NOI was up 3% for the quarter and 3.6% year-to-date.
In summary, during a choppy environment, I'm proud of our team's results.
Our strategy is evolving to not only include maintaining occupancy, cash flow and liquidity, as has been the case since March.
Today, we're responding to the strength in the market and restarting development.
Looking at each of our goals, I'm grateful we ended the quarter generally fall at 97.8% leased, our second highest quarter on record.
Houston, our largest market, at 13.5% of rents is 96.2% leased, with an eight-month average collection rate over 99%.
Companywide rent collections remain resilient.
For October, thus far, we've collected 97.6% of monthly rents.
There's still many unknowns about how fast and when the economy truly reopens and recovers.
We all, as a result, simply have less clarity than normal.
Brent will speak to our budget assumptions, but I'm pleased that in spite of the uncertainty, we're tracking toward $5.35 per share in FFO.
This represents a $0.07 per share increase to our July forecast and $0.05 per share above our pre pandemic expectations.
As we've stated before, our development starts are pulled by market demand.
So with the shutdown, we halted new starts.
Given the strength we're seeing in select submarkets, we're planning a few fourth quarter starts and pending permitting timing, these will continue into first quarter of 2021.
And to position us following the pandemic, we've also been working on several new land sites and park expansion.
More details to follow as we close on these investments.
Other strategic transitions -- transactions we've worked on include our 162,000 square foot value-add acquisition in Rancho Cucamonga, near the Ontario airport and dispositions, which hopefully continue toward closing in Houston and on our last property in Santa Barbara.
And now Brent will review a variety of financial topics, including our updated 2020 guidance.
Our third quarter results reflect the resiliency of our team and strong overall performance of our portfolio amid a very challenging year.
FFO per share for the third quarter exceeded our guidance range at $1.36 per share and compared to third quarter 2019 of $1.28 represented an increase of 6.3%.
The outperformance continues to be driven by our operating portfolio performing better-than-anticipated namely higher occupancy and strong rent collections.
From a capital perspective, during the third quarter, we issued $32 million of equity at an average price of $133 per share and earlier this month we closed on two senior unsecured private placement notes totaling $175 million.
The $100 million note was a 10-year -- has a 10-year term with a fixed interest rate of 2.61%.
The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%.
That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength and flexibility, including the complete availability of our $395 million revolver as of today.
Our debt to total market capitalization is 19%, debt-to-EBITDA ratio is 4.9 times, and our interest and fixed charge coverage ratios are over 7.4 times.
Our rent collections have been equally strong.
We have collected 99% of our third quarter revenue and entered into deferral agreements for an additional 0.5%, bringing our total collected and deferred to 99.5% for the third quarter.
Last April, we reported that 26% of our tenants have requested some form of rent deferment.
In the six subsequent months, that only rose to 28% and deferral requests have basically ceased.
The agreed-upon rent deferrals thus far totaled $1.7 million, an increase of only $200,000 since our report in July.
That represents just 0.5% of our estimated 2020 revenues.
We have consistently stated the depth and duration of the pandemic and its impact on the economy is undeterminable.
However, the immediacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for has not materialized.
As a result, our actual performance and revised assumptions for the fourth quarter increased our FFO earnings guidance from a midpoint of $5.28 per share to $5.35 per share or a 7.4% increase over 2019.
The revised midpoint exceeds our original pre-COVID guidance at the beginning of the year.
Among the budget changes were an increase in average occupancy from 96% to 96.5% and a decrease in reserves for uncollectible rent from $3.6 million to $2.3 million.
Note that the reserve for potential bad debt for fourth quarter of $600,000 is not attributable to specific tenants.
Our continued earnings growth directly contributed to increasing our quarterly dividend by 5.3% to $0.79 per share.
Our third quarter dividend was the 163rd consecutive quarterly distribution to EastGroup shareholders and represents an annualized dividend rate of $3.16 per share.
In summary, we were very pleased with our third quarter results.
We will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to carry our momentum into next year.
Now Marshall will make some final comments.
In closing, I'm also proud of our third quarter results.
Our company and our team has worked through numerous downturns and, while different, will work through this one, too.
As the economy stabilizes, it's the future that makes me the most excited for EastGroup.
Our strategy has worked well the past few years.
And coming out of this pandemic, we foresee an acceleration and a number of positive trends for our properties and within our markets.
Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sun Belt markets.
These, along with the mix of our team, our operating strategy and our markets, has us optimistic about the future.
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compname announces q2 ffo per share $1.47.
q2 ffo per share $1.47.
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Our performance under these conditions is outstanding.
Our organization showed the grit, resiliency, discipline and innovation that we are known far.
And we stayed focused on keeping our employees safe, while executing for our customers.
Turning to our financial results.
Throughout our discussion, all my financial commentary disregards the impact of the impairment charge that Mark will cover in detail.
We earned an adjusted $1.44 per diluted share for the second quarter.
Adjusted operating income margins for the second quarter were a strong 5.47% [Phonetic].
Operating cash flow is excellent at $276 million on a year-to-date basis.
We accomplished this in an environment where we had 15.5% negative organic revenue growth for the quarter just ended.
Our Mechanical Construction segment performance was exceptional with operating income growth of 24% and 8.5% operating income margins.
Our Electrical Construction segment had strong operating income margins of 7.2%, despite having a 20.17% [Phonetic] decrease in revenues as they were more significantly impacted by the mandated shutdowns than our Mechanical Construction segment was, and further the Electrical Construction segment is more exposed to the volatility caused by our oil and gas exposure in this segment.
Our US Building Services segment had a very strong quarter with 5.6% operating income margins, despite a 9.8% revenue decrease.
We saw demand improved through the quarter, especially in our mechanical services and government services businesses.
We exited the quarter in a nice hot steamy summer with an even more competitive cost structure.
Our Industrial Services segment is also moving ahead in a very challenged market.
Our customers are cutting costs, deferring work and fighting through a really tough market for them and as a result, for us.
We will continue to maximize any opportunity available, cut costs and look to provide flexible solutions when possible.
I don't anticipate this trend to improve until at least the first quarter of 2021 at the earliest.
We are fortunate to be a segment leader and have long-standing relationships with the most important customers in the downstream refining and petrochemical markets.
Our UK segment had a strong quarter and we expect this execution and performance to continue.
They faced many of the same challenges that our US Building Services segment faced.
However, our UK customer base is more institutional, manufacturing and government-focused, and as a result, we have field [Phonetic] employment throughout the UK shutdown as we were deemed essential in many cases.
So how did we continue performing in this environment and how will we continue to perform.
My comments cut across all EMCOR reporting segments.
We outlined some of these actions on our first quarter call in April and we executed well.
So number one, we focused on employee safety first and as a result, we were able to staff drop safely and with the right people.
Said differently, our people had confidence that we would do the right thing.
We limited guidelines to keep operating, and when necessary to reopen.
We aggressively procured PPE, that's the personal protective equipment upfront.
There are employees needed to keep working and we execute the training necessary to work safely in this environment.
We communicated at all levels with a focus on safety, execution and results.
Our flat organizational structure helped our communications remain effective and unhampered despite COVID-related challenges.
Number two, we thoroughly, quickly implement all the different government mandates and programs with respect to COVID.
Our staff did a superb job in distilling these mandates and programs into specific actions for our subsidiary operations to continue operating productively and safely and in compliance with these varied government mandates.
Number three, we aggressively cut SG&A through both the short and long-term measures.
We cut executive pay 25% in the quarter, cut other salary employees pay in the quarter, furloughed staff, permanently laid off salary staff, cut almost all travel and entertainment expenses, and reduced any additional discretionary expenses.
We reduced $21 million in the quarter versus the year-ago period, and when removing incremental SG&A for businesses acquired, we cut $28 million on an organic basis.
I expect about half of those cuts to be permanent.
We acted fast and decisively and it shows in our results.
Further, we aggressively right-sized our craft labor workforce to match demand through layoffs and furloughs.
Number four, we knew we had to comp out what would be reduced productivity because of increased use of PPE and the implementation of other COVID-related safety measures.
We have successfully combated this challenge and met this challenge by working with our customers and our workforce to offer better scheduling, planning and work practices.
We believe for the most part that we are near breakeven on a productivity basis to where we would have been pre-COVID.
Number five, we trained our field and sales force on IAQ, that is, indoor air quality and other building enhancement products and projects during the initial phases of COVID, so we would be ready to provide solutions for our customers to be able to return to their facilities with confidence and in an improved indoor environment.
Number six, our subsidiary leaders led us well as any organization that I could imagine.
I'll say that again.
Our subsidiary leaders led us well as any organization that I could imagine and they executed all the above initiatives I just mentioned in an exceptional manner.
With all that said, we leave the quarter with a strong RPO position of $4.6 billion [Phonetic], our balance sheet has strengthened through the quarter despite adverse conditions and an even more competitive cost structure than we already had.
With all that said, I will turn the discussion over to Mark.
Over the next several slides, I will supplement Tony's opening commentary on EMCOR's second quarter performance, as well as provide an update on our year-to-date results through June 30.
So let's revisit and expand our review of EMCOR's second quarter performance.
Consolidated revenues of $2 billion, were down $310.2 million or 13.3% over quarter two 2019.
Our second quarter results include $50.2 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year's second quarter.
Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments.
Excluding the impact of businesses acquired, second quarter consolidated revenues decreased approximately $360.4 million or 15.5%.
All of EMCOR's reportable segments experienced quarter-over-quarter revenue declines as a result of the containment and mitigation measures mandated by certain of our customers, as well as numerous governmental authorities in response to COVID-19.
This resulted in facilities closures and project delays, which impacted our ability to execute on our remaining performance obligations in many of the geographies that we serve.
The specifics to each of our reportable segments are as follows.
United States Electrical Construction segment revenues of $445.9 million, decreased $123.5 million or 21.7% from 2019 second quarter.
In addition to the negative impact of the COVID-19 pandemic on second quarter revenues, the unfavorable variance year-over-year was partially attributable to 2019's all-time record quarterly revenue performance.
Revenue declines in most of the market sectors we serve were partially offset by quarter-over-quarter revenue growth in the institutional and hospitality market sectors.
United States Mechanical Construction segment revenues of $790.4 million, decreased $32.7 million or 4% from quarter two 2019.
Excluding acquisition revenues of $47.9 million, this segment's revenues decreased organically 9.8% quarter-over-quarter.
Revenue declines in manufacturing and commercial market sector activities were muted by revenue gains quarter-over-quarter within the institutional transportation and healthcare market sectors.
The prior-year quarter also represented an all-time quarterly revenue record for our US Mechanical Construction segment.
Second quarter revenues from EMCOR's combined United States Construction business of $1.24 billion, decreased $156.2 million or 11.2%.
Some of this growth in RPOs has come at the expense of revenue generation during the second quarter due to COVID-19.
However, we were also successful in obtaining new project opportunities during this period.
United States Building Services quarterly revenues of $472.4 million, decreased $51.3 million or 9.8%.
Excluding acquisition revenues of $2.3 million, this segment's revenues decreased 10.2% from the record results achieved in the second quarter of 2019.
Reduced project and controls activities within their mobile mechanical services division largely attributable to the impact of COVID-19 as well as large project activity in their Energy Services division were the primary drivers of the quarterly revenue decline.
Additionally, as mentioned on previous calls, we are continuing to see a reduction in IDIQ project activity within our government services division due to both a smaller contract base as well as an overall reduction in government spending.
EMCOR's Industrial Services segment was significantly impacted by the sharp decrease and volatility in crude oil prices resulting from geopolitical tensions between OPEC and Russia, as well as the dramatic reduction in demand for refined oil products due to the containment and mitigation measures implemented in response to COVID-19.
These factors have resulted in a decreased demand for our services, as this segment's customer base has initiated severe cost containment measures, which have resulted in the deferral or cancellation of previously planned maintenance, as well as the suspension of most capital spending programs.
As a result, our Industrial Services segment's second quarter revenues declined $212.2 million from the $295.5 million reported in 2019 second quarter.
This represents a reduction of $83.3 million or 28.2%.
United Kingdom Building Services revenues of $93.1 million, decreased $19.4 million or 17.3% from last year's quarter.
The period-over-period revenue reduction was primarily attributable to a decrease in project activities resulting from COVID-19 containment and mitigation measures instituted by the UK government.
This segment's quarterly revenues were also negatively impacted by $3.4 million of foreign exchange headwinds.
Selling, general and administrative expenses of $205.2 million, represent 10.2% of revenues and reflect a decrease of $21.1 million from quarter two 2019.
SG&A for the second quarter includes approximately $7.2 million of incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter decrease of approximately $28.3 million.
The decline in organic selling, general and administrative expenses was primarily due to certain cost reductions resulting from our actions taken in response to the COVID-19 pandemic.
This includes a period-over-period decrease in salaries expense due to both reduced head count as well as temporary salary reductions.
Additionally, incentive compensation expenses decreased due to lower projected annual operating results relative to incentive targets when compared to the prior year.
Lastly, we have experienced reductions in both medical claims as well as certain discretionary spending such as travel and entertainment costs quarter-over-quarter.
The increase in SG&A as a percentage of revenues is due to the reduction in quarterly consolidated revenues, without a commensurate decrease in certain of our fixed overhead costs as we do not deem the current operating environment to be permanent.
During the second quarter, we identified certain indicators of impairment within those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets.
Previously referenced volatility in crude oil prices as well as the containment and mitigation measures implemented in response to the COVID-19 pandemic significantly impacted the demand for our services within these businesses resulting in revised near-term revenue and operating margin expectations.
These negative developments additionally resulted in uncertainty within the US equity markets, which led to an increase in the weighted average cost of capital utilized in our impairment analysis.
The combination of lower forecasted revenue and profitability along with the higher weighted average cost of capital has resulted in the recognition of $232.8 million non-cash impairment charge during the quarter.
$225.5 million of this charge pertains to a write-off of goodwill associated with our Industrial Services reporting unit, while the remaining $7.3 million relate to the diminution in value of certain trade names and fixed assets within our United States Industrial Services and our United States Electrical Construction segments.
As a result of the non-cash impairment charge just referenced, we are reporting an operating loss for the second quarter of 2020 of $122.6 million, which represents a decrease in absolute dollars of $242.6 million when compared to operating income of $120 million reported in the comparable 2019 period.
On an adjusted basis, excluding the impact of the non-cash impairment loss, our second quarter operating income would have been $110.1 million, which represents a period-over-period decrease of $9.8 million or 8.2%.
While adjusted operating income has declined, we have experienced an increase in operating margin on an adjusted basis.
For the second quarter of 2020, our non-GAAP operating margin was 5.5% compared to our reported operating margin of 5.2% in the second quarter of 2019, reflecting strong operating conversion within most of our reportable segments.
Considering the operating environment during the quarter, our entire team did a great job.
Specific quarterly performance by reporting segment is as follows.
Our US Electrical Construction Services segment operating income of $32.2 million, decreased $11.6 million from the comparable 2019 period.
Reported operating margin of 7.2%, represents a 50 basis point decline over last year's second quarter.
The reduction in quarterly operating income and operating margin is due to the significant decrease in revenues as well as the impact of favorable project closeouts within 2019 second quarter.
Second quarter operating income of our US Mechanical Construction Services segment of $66.9 million, represents a $13 million increase from last year's quarter.
Despite the disruption caused by the COVID-19 pandemic, this segment experienced an increase in gross profit within the commercial, institutional and healthcare market sectors.
Operating margin of 8.5%, improved 190 basis points over the 6.6% operating margin generated in 2019, primarily due to a more favorable revenue mix than in the year-ago quarter.
Our total US Construction business is reporting $99.1 million of operating income and an 8% operating margin.
This performance has improved by $1.4 million and 100 basis points of operating margin from 2019 second quarter.
In addition, it represents a sequential improvement from 2020 first quarter in both absolute dollars and margin performance.
Operating income for US Building Services is $26.4 million or 5.6% of revenues.
And although reduced by $1.6 million from last year's second quarter, represents a 30 basis point improvement in operating margin.
The quarter-over-quarter reduction in operating income was due to lower gross profit contributions from their mobile mechanical services and energy services division as a result of reductions in revenues as previously mentioned.
The improvement in operating margin is due to a better mix of service maintenance and repair activities within this segment's mobile mechanical services division.
Our US Industrial Services segment operating income of $3 million, represents a decrease of $13.1 million from last year's second quarter operating income of $16 million.
Operating margin of this segment for the three months ended June 30, 2020 was 1.4% compared to 5.4% for the three months ended June 30, 2019.
The decrease in operating income and operating margin was primarily driven by the reduction in quarter-over-quarter revenues, which resulted from the adverse market conditions mentioned during today's call, as well as significant pricing pressure due to limited shop services opportunities.
UK Building Services operating income of $5.4 million was essentially flat with 2019 second quarter, as foreign exchange headwinds accounted for the modest period-over-period decline.
Operating margin of 5.7%, represents an 80 basis point increase over last year as a result of improved maintenance contract performance as well as the implementation of cost containment measures which resulted in SG&A expense reductions.
We are now on Slide 9.
Additional financial items of significance for the quarter not addressed on the previous slides are as follows.
Quarter two gross profit of $315.3 million is reduced from 2019 second quarter by $31.1 million or 9%.
Despite this reduction in gross profit dollars, we did experience an improvement in gross profit as a percentage of revenues with the reported gross margin of 15.7%, which is 80 basis points higher than last year's quarter.
We are reporting a loss per diluted share of $1.52 as compared to earnings per diluted share in last year's second quarter of $1.49.
On an adjusted basis, after adding back the impairment loss on goodwill, identifiable intangible assets, and other long-lived assets, non-GAAP diluted earnings per share is $1.44 as compared to the same reported at $1.49 in last year's quarter.
This represents a modest reduction of $0.05 or just over 3%.
Not to be repetitive in my commentary, but in light of COVID-19 in the economic backdrop we all experienced during the last several months, EMCOR has done a great job of maximizing returns were given the opportunity to deliver its services.
With the quarter commentary complete, let's turn our attention to EMCOR's first six month results.
Revenues of $4.31 billion, represent a decrease of $169.1 million or 3.8% when compared to revenues of $4.48 billion in the corresponding prior-year period.
Our second quarter revenue declines offset revenue gains posted in quarter one at each of our US Mechanical Construction, US Building Services, US Industrial Services and UK Building Services segments, while our US Electrical Construction Services segment has had two consecutive quarters of revenue contraction.
Year-to-date gross profit of $648.3 million is lower than the 2019 six-month period by $6.8 million or a modest 1%.
Year-to-date gross margin is 15%, which favorably compares to 2019's year-to-date gross margin of 14.6%.
Gross margin improvement was largely driven by our combined US Construction business as well as our UK Building Services segment.
Selling, general and administrative expenses of $432.2 million for the 2020 six-month period, represent 10% of revenues compared to $432.4 million or 9.6% of revenues in 2019.
While SG&A for the year-to-date period has decreased nominally from the prior-year, the substantial cost reduction measures implemented in the second quarter have positioned us at a lower run rate than at this time last year.
We reported a loss per diluted share of $0.14 for the six-month ended June 30, 2020, which compares to diluted earnings per share of $2.77 in the corresponding 2019 period.
Adjusting the results for the current year to exclude the non-cash impairment loss on goodwill, identifiable intangible assets, and other long-lived assets, results in a non-GAAP diluted earnings per share of $2.78.
When comparing this as adjusted number to last year's reported amount of $2.77, we are reporting a $0.01 increase.
I would like to remind everyone on the call that our performance for the first six months of 2019 set records for most financial metrics with earnings per share in particular, exceeding the prior benchmark by almost 30%, not to marginalize the sizable impairment charge taken this year, but the fact that on an adjusted basis, we were able to slightly exceed our previous year record.
Despite the extraordinary market challenges presented, I believe EMCOR has done quite an exceptional job.
My last comment on this slide pertains to EMCOR's income tax rate for 2020.
As noted on the slide, EMCOR's tax rate for the six months ended June 30, 2020 was 59.4%.
Our tax rate for the remainder of 2020 will continue to be impacted by the impairment charges recorded during the second quarter, the majority of which were nondeductible for -- tax purposes.
So with that said, at this time, our full-year estimated tax rate is between 58% and 59%.
However, this can change if any discrete tax events occur during the remainder of the year.
We are now on Slide 11.
I spent some time during our quarter one earnings call detailing EMCOR's liquidity profile.
As a reminder, the first quarter is historically our weakest from a cash generation standpoint, due to the funding of prior-year earned incentive awards.
In addition, 2020's first quarter was negatively impacted by our inability to monetize certain of our first quarter revenue activities due to delays in customer billings resulting from our previously communicated ransomware attack.
However, as Tony mentioned, we had record operating cash flow for the first half of the year and as a result, our liquidity profile has improved from our already strong position.
With strong operating cash flow through June, we have paid down the $200 million revolving credit borrowings outstanding as of March 31, 2020 and our cash on hand has increased to $481.4 million from the approximately $359 million on our year-end 2019 balance sheet.
The improvement in operating cash flow was due to excellent working capital management by our subsidiary leadership teams as well as the benefit of the deferral of certain tax payments due to government measures enacted in response to the COVID-19 pandemic.
These measures which included the deferral of estimated US federal income tax payments, the employer's portion of Social Security tax payments.
Please note that while we will continue to benefit from some of these deferrals throughout the remainder of 2020, our estimated US federal tax payments were funded subsequent to the quarter on July 15.
Changes in additional key balance sheet positions are as follows.
Working capital levels have increased primarily due to the increase in cash just referenced.
Goodwill and identifiable intangible assets have decreased since December 31, 2019, largely as a result of the impairment charges previously referenced, in addition intangible assets have decreased as a result of $29.4 million of amortization during the year-to-date period.
Stockholders' equity has declined due to the operating loss recognized during the first six months of 2020.
EMCOR's debt to capitalization ratio of 13.5%, is essentially flat when compared to our position at 2019's year-end and is reduced from 19.9% at March 31, 2020.
We have just over $1.2 billion of availability under our revolving credit line and anticipate that we will continue to generate positive operating cash flow during the last six months of calendar 2020.
EMCOR's balance sheet and resulting liquidity position remains strong and we continue to preserve our flexibility in evaluating all market opportunities.
In short, we continue to win work and have seen our small productivity improve through the second quarter as it hit a low point in April for bookings and execution.
Some comparisons to consider.
Total RPOs at the end of the second quarter were just about $4.6 billion, up $365 million or 8.6% when compared to the June 2019 level of $4.23 billion.
RPO has also increased $167 million from the first quarter of 2020, reflective of the continued demand as we are seeing for market -- continued demand we are seeing for our services in our markets.
So for the first six months of 2020, total RPOs increased $555 million or 13.8% from December 31.
With all this growth, only $11 million relates to a tuck-in acquisition.
So almost all of that growth is organic.
Domestic RPOs have increased $346 million or 8.4% since the year-ago period, driven mainly by our Mechanical Construction segment.
We did burn through some Electrical Construction project as we completed some complex work.
However, we expect to backfill these projects as we continue to see demand, especially in the high-tech and data center market, and high-tech for us means semiconductor and the data center market.
As the economy opens up, combined with the hotter weather, we are getting more access to facilities and seeing a resumption of our work.
Additionally, both of our Industrial Services and EMCOR UK segments increased RPO level by roughly 15% respectively from June 30, 2019.
On the right side of the page, we have, on 12, we show RPOs by market sector.
Of the eight market sectors listed, all had year-over-year RPO increases, except for manufacturing and industrial.
This is not to be confused with our Industrial segment.
Currently, we are in the process of completing some major food processing projects.
We continue to see demand for these large complicated projects and have a number of potential opportunities we are looking at.
Commercial project RPOs comprise our largest sector -- market sector to over 40% of the total.
This is a 19% increase from year-end, spurred by our data center projects.
And as we have said before, we are uniquely suited for these fast-paced, especially in the hyperscale projects from both electrical and mechanical perspective.
Other very active markets for us are healthcare, and water and wastewater, with these sectors being up 25% and 49% respectively from year-end 2019.
To-date, we have not seen any material slowdown in bidding opportunities apart from the mandated areas, that was New York, New Jersey, Boston and parts of California, and a little bit in Pennsylvania.
However, these areas are now open.
As I said earlier, the industry has adapted safety -- safe work practices and protocols to keep project progressing and especially to keep workers safe.
Finally, we are positioned very well to help our customers as they adjust our HVAC and building control systems to improve the IAQ and cleanliness of their buildings and other facilities.
It starts with the introduction of more outside air into the space as one of the simplest ways to make a building healthier.
But unfortunately, this makes the building less efficient.
We have strong experience in IAQ systems and our service companies and mechanical contractors know how to implement UV lights, bipolar ionization, enhanced filtering and control system modifications.
Most of this work will never make it into reported RPOs from a quarter-to-quarter basis and it is a quick turn, high margin activity.
Together, it will amount to a nice medium-sized project with good margins.
I do expect these IAQ additions to longer-term spur a more robust HVAC replacement market as we seek to increase efficiency to combat the increase in IAQ, especially the introduction of outside air.
So as I said in our first quarter call, I don't know exactly how all the work, specifically will rollout and how that booking will be, it's a fluid and challenging environment.
There will be bumps along the way.
However, the direction of future opportunities for a contractor like us remain pointed in a positive direction.
So now I'm going to close on Pages 13 to 14.
When we went through guidance in April, we said we had hoped that we can provide a view on the outlook for the remainder of the year during the second quarter earnings call.
We have spent the last few weeks debating internally whether to provide more definitive versus generic guidance for the remainder of the year.
We have decided to provide more specific guidance with some caveats which mostly deal with the external environment.
The main caveat is, we expect operating conditions to remain similar to today's operating conditions where most of the country is open for our type of work and we are deemed an essential [Phonetic] activity.
So we decided to give guidance as to the why and what as outlined below.
Subject to that main caveat, we are likely going to earn $5 to $5.50 diluted earnings per share this year on an adjusted basis adding back the impact of impairment.
I think revenues will likely be $8.6 billion to $8.7 billion.
In this revenue guidance is our expectation from our recent forecast where we believe that all of our reporting segments will grow revenues in the second half of the year versus the first half of the year except for our Industrial Services segment.
We now understand how COVID-19 has impacted our productivity.
We have seen stabilization in small project work and the summer heat is helping our US Building Services segment.
We have a strong RPO position and we see markets recovering, especially in our Mechanical and Electrical Construction segments and in our US and UK Building Services segments.
So how do you move up in this range largely will depend on three factors, the external market remains largely same or even improves from today's operating environment.
Under today's conditions, we can book and execute work, keep our workforce productive and we believe we will continue to see the recovery in the small project work.
IF the Industrial Services segment -- our folks have an opportunity to help customers in an unexpected way, then we will perform slightly better than expected.
And we have no major project disruptions or any new significant customer bankruptcies.
So as far as capital allocation, the dividend is safe for the foreseeable future.
However, we are unlikely to make any more share repurchases in the near term.
We will look to execute sensible tuck-in acquisitions, where we have decent visibility into and belief in the long-term success of the acquisition.
That's really no different than any time we buy a company, and we are based on the business, the market and the improvements we can make.
We have several potential Mechanical or Electrical Construction segment acquisitions and are in the preliminary stage of discussion on -- several mechanical services, a few small ones and fire protection acquisitions that we will likely execute.
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q1 earnings per share $1.54.
q1 revenue rose 0.2 percent to $2.3 billion.
raises fy earnings per share view to $6.35 to $6.75.
sees fy revenue $9.2 billion to $9.4 billion.
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Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I've had the pleasure of meeting many of you over the past couple of months as I've transitioned into the CEO role.
I'm excited to be hosting my first earnings call and sharing yet another year of consistent industry-leading financial performance.
Before I discuss our year-end results and our updated five-year capital investment plan, I want to take a moment to reiterate our simple but powerful investment thesis, was simple to put on paper it's not easy to replicate, and that is what sets us apart.
It starts with our industry-leading commitments to clean energy.
Our net zero methane and carbon goals require significant investment as we update our expansive electric and gas systems to achieve decarbonization.
These investment opportunities are supported by constructive energy legislation as well as alignment with our Commission and the MPSC staff.
This strong regulatory and legislative framework is why Michigan is consistently ranked a top tier regulatory jurisdiction.
But investment opportunities in a supportive regulatory environment are not enough.
Our focus on affordability is critical, so our customers can afford these investment.
Now, I've been with the company for 18 years, much of it in operations.
Over that time, we've demonstrated our ability to consistently manage costs as we've invested in the safety and reliability of our systems while improving customer service.
That ability to manage costs is not driven from the top down but from the bottom up.
It's our 8,500 coworkers who are committed to excellence, delivering the highest value to our customers at the lowest cost possible.
This is embedded in our culture and was built in partnership with our union over the last two decades.
These unique attributes to the CMS story or would allow us to deliver for our customers and you, our investors.
Our adjusted earnings per share growth of 6% to 8% combined with our dividend provides a premium total shareholder return of 9% to 11%.
Our ability to deliver this growth each and every year is something we are uniquely capable of doing.
Regardless of weather, a global pandemic, who is leading our state, our Commission or our company, we have delivered consistent industry-leading results year-in and year out 2020 proved this, 2021 will be no different.
In 2020, we delivered adjusted earnings per share of $2.67, up 7% from 2019 and achieved operating cash flow of almost $2 billion, excluding $700 million of voluntary pension contributions in 2020.
Today, we're raising our adjusted earnings per share guidance for 2021 by $0.01 to $2.83 to $2.87 with a focus on the midpoint.
This reflects annual growth of 6% to 8% from our 2020 results.
Last month, we announced our 15th dividend increase in as many years, $1.74 per share, up 7% from the prior year.
We continue to target long-term annual earnings and dividend per share growth of 6% to 8%, again with a focus on the midpoint.
Today, we're also increasing our five-year capital plan to $13.2 billion, up $1 billion from our prior plan.
18 consecutive years of industry-leading financial performance.
I'll let that sit with you for a moment.
I'm pleased with our financial performance, but equally important is our commitment to the triple bottom line.
We balanced everything we do for our coworkers, customers and the communities we serve, our planet and our investors as demonstrated on Slide 6.
2020; 2020 was a tough year for everyone, the global pandemic impacted all of us emotionally, physically and financially.
Through it all, I'm proud of the work done by our coworkers.
We were able to provide over $80 million of support to our customers and communities in 2020 through support programs, low-income assistance, donations to foundations and reinvestment to improve safety and reliability.
We focused our efforts on COVID relief for residential and small business customers, payment forgiveness as well as enhanced support in the area of diversity, equity and inclusion.
This quite change in our work practices as a result of the pandemic, we maintained first quartile, employee engagement, achieved first quartile customer experience and attracted 126 megawatts of new load to our state, which brings with it significant investment and over 4,000 new jobs.
From a planet perspective, we continue to lead the clean energy transition.
We added over 800 megawatts of new wind and are executing on 300 megawatts of new solar.
The first tranche of our integrated resource plan.
Furthering our commitment, over $700 million of investments were made to advance our clean energy transition, additionally, our demand response and energy efficiency programs continue to save our customers money, reduce carbon and earn an incentive.
And last but certainly not least we finished the year with more than $100 million in cost savings driven by the CE Way.
Many of you have asked about my commitment to the CE Way, light blue arrow at the bottom of this slide in my experience leading this operating system over the past five years should be a strong signal.
I'll tell you this, we are positioned well but there is still more opportunity.
Through the CE Way, we will continue to improve reliability, reduce waste and deliver better customer service.
And that is just the tip of the iceberg, there are opportunities in every corner of the company to achieve excellence through the CE Way.
My coworkers and I remain committed.
We will continue to lead the clean energy transition with support from our new five-year $13.2 billion capital investment plan, which translates to over 7% annual rate base growth and focuses on enhancing the safety and reliability of our systems, as we move toward net zero carbon and methane emissions.
In fact, 40% of our plan directly supports our clean energy transition and includes our renewable generation, electric distribution investment to support this generation, grid modernization as well as programs like our main invented service replacement programs which reduce methane emissions.
In addition to our traditional rate base returns, our wind investments, renewable PPAs and demand side resources are supported by regulatory incentives above and beyond our ROE.
These incremental earnings mechanisms enhance our earned returns and combined with our investments in clean energy, our growing percentage of our earnings mix.
Our customers' ability to afford the investments in our system is complemented by our continued focus on cost savings.
Over the last decade, we have reduced the utility bill as a percentage of the customer's wallet and we continue to see further opportunity to reduce costs in the future.
We have unique cost saving opportunities relative to peers and two above market PPAs, Palisades and MCV, which will generate nearly $140 million of power supply cost recovery savings.
This coupled with the future retirement of our remaining coal facilities provides over $200 million or 5% cost savings for our customers.
These structural cost savings combined with the productivity we will deliver through the CE Way will ensure we deliver on our capital plan and keep customer bills affordable.
Now the great thing about the CE Way is it delivers more than cost savings.
What makes us unique is our engaged coworkers, we value our best-in-sector employee engagement and our 8,500 coworkers who work every day to deliver the best value for our customers.
This engaged workforce has doubled productivity which has enabled us to consistently increase our capital plan without significantly increasing our workforce.
Furthermore, we have never served our customers better as we move from the bottom quartile to top quartile not just in the utility industry but across all industries.
Slide 9 serves as an excellent example of how our team leverages the CE Way to deliver on our triple-bottom line.
Our ability to deliver this level of excellence for our customers and investors supported is by Michigan's constructive regulatory environment.
We benefit from a legislative and regulatory construct that supports our rate case proceeding and a statute that allows for financial incentives above and beyond current authorized ROE.
Michigan's regulatory jurisdiction has been ranked in the top tier since 2013.
That's not by accident, it's a reflection of the hard work my coworkers do every day to earn the trust of our customers, policy makers, environmental groups, EMV and MPSC Staff.
Turning to Slide 11, you know, we have a light regulatory docket with no financially significant regulatory outcomes in 2021.
With the approval of our current securitization and electric rate case in December of last year, we'll file our next electric rate case in the first quarter and our gas rate case in December of this year.
Notably, we'll file our second iteration of our integrated resource plan in June.
I'm sure many of you would like a sneak peek, but it's too early, we're in the midst of the modeling phase.
You can be confident that this next iteration will continue to build on industry-leading clean energy commitments and we'll find ways to get cleaner, faster and a corporate storage in customer-driven solutions as they become more cost effective.
Beyond that we'll ask you to stay tuned until our second quarter earnings call, we will provide more information after we file.
We're pleased to report our 2020 adjusted net income of $764 million or $2.67 per share, up 7% year-over-year off our 2019 actuals.
To elaborate on the key drivers of our year-end results, we realized increases in rate relief net of investments due to constructive orders in our recent gas and electric rate cases, strong performance in our non-utility segments and most notably our historic companywide cost reduction efforts led by the CE Way which Garrick noted earlier.
These positive factors were partially offset by mild weather and reinvestments or flex up back into the business.
We've talked in the past about our practice of flexing up, which enables us to put financial upside to work in the second half of the year to pull ahead or connect to work to improve the safety and reliability of our gas and electric systems to fund customer support programs, which was particularly important in 2020 given the effects of the pandemic, invest in coworker training programs and derisk our financial plan in subsequent years.
This tried and true approach benefits all stakeholders, which is the absence of the triple bottom line of people, planet and profit.
On Slide 13, you will note that we met our key financial objectives for the year.
To avoid being repetitive with Garrick's earlier remarks, I'll just note that we invested $2.3 billion of capital in our electric and gas infrastructure to the benefit of customers, including investments in wind farms, which add approximately $500 million of RPS related rate base, which I'll remind you earns a premium return on equity of 10.7%.
I'll also note that our treasury team had a banner year successfully raising approximately $3.5 billion of cost effective capital which includes roughly $250 million of equity while navigating turbulent capital market conditions over the course of 2020.
These efforts further strengthened our balance sheet to the benefit of customers and investors.
Turning the page to 2021, as mentioned, we are raising our 2021 adjusted earnings guidance to $2.83 to $2.87 per share, which implies 6% to 8% annual growth off our 2020 actuals.
Unsurprisingly, the majority of our growth will be driven by the utility and I'll also note a modest level of anticipated upside at the parent and other segment in 2021, largely due to the absence of select non-operating flex items executed in 2020.
All in, we will continue to target the midpoint of our consolidated earnings per share growth range of 7% at year-end, which is in excess of the sector average.
To elaborate on the glide path to achieve our 2021 earnings per share guidance range, as you'll note in the waterfall chart on Slide 15, we'll plan for normal weather, which in this case amounts to $0.06 per share of positive year-over-year variance given the mild winter weather experienced in 2020.
Additionally, we anticipate $0.41 of earnings per share pickup in 2021 attributable to rate relief net of investment costs largely driven by the orders received in the second half of 2020.
It is also worth noting that the magnitude of earnings per share impact here is in part due to the absence of an electric rate increase in 2020 which was a condition of our 2019 settlement agreement.
While we do plan to file an electric case in Q1 of this year, as Garrick mentioned, the test year and economic impact for that case will commence in 2022.
As we look at our cost structure in 2021 you'll note approximately $0.27 per share of negative variance attributable to incremental O&M approved in our recent rate cases to support key initiatives around safety, reliability customer experience and decarbonization, needless to say we have underlying assumptions around productivity and waste elimination, driven by the CE Way and we'll always endeavor to overachieve on those targets while delivering substantial value for our customers.
Lastly, we apply our usual conservative assumptions around sales, financings and other items.
And I'll note that while the pandemic remains relatively uncontested, we are assuming a gradual return of weather normalized load to pre-pandemic levels around mid-year.
In the event, the mass teleworking trend persists and/or we see an accelerated reopening of the Michigan economy, we can potentially see some upside from incremental, residential and commercial margin.
As always we'll adapt to changing conditions and circumstances throughout the year to mitigate risks and increase the likelihood of meeting our operational and financial objectives.
We're often asked whether we can sustain our consistent industry-leading growth in the long-term given the widespread concerns about economic conditions or potential changes in fiscal, energy and/or environmental policy?
And our answer remains the same, irrespective of the circumstances, we view it as our job to do the worrying for you.
Our familiar earnings per share chart on Slide 16 illustrates one of our key strengths, which is to identify and eliminate financial risk and capitalize on opportunities as they emerge to deliver additional benefits to customers while sustaining our financial success over the long term for investors, each year provides a different fact pattern.
And we've always risen to the occasion.
2020 offered some unique challenges resulting from the pandemic and more familiar source of risk in the form of mild winter weather.
And as usual, we didn't make excuses instead we offer transparency, devise our course of action and counted on the perennial will of our 8,500 co-workers to deliver for our customers, the communities we serve, and for you, our investors.
To summarize our financial objectives in the near and long term, we expect 6% to 8% adjusted earnings per share and dividend growth and strong operating cash flow generation.
From a balance sheet perspective, we continue to target solid investment grade credit ratings and we'll manage the key credit metrics accordingly.
One item I'll note in this regard is that we have slightly modified our FFO to debt targets to align better with the various rating agency methodologies.
Given the increase in our five-year capital plan, we anticipate annual equity need of up to $250 million in 2021 and beyond, which we are confident that we can comfortably raise through our equity dribble program to minimize pricing risk.
And two additional items I'll mention with respect to our financial strength as we kick off 2021 that are not on the page but no less important are that we concluded 2020 with $1.6 billion of net liquidity, which positions our balance sheet well as we execute our updated capital plan going forward.
And we have fully funded benefit plans for the second year in a row due to proactive funding.
The latter of which benefits roughly 3,000 of our active co-workers and 8,000 of our retirees.
Our model has served and will continue to serve all stakeholders well.
Our customers receive safe, reliable and clean energy at affordable prices while our co-workers remain engaged well trained and cared for in our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance.
As you'll note with the reasonable planning assumptions, rate orders already in place in our track record of risk mitigation, the probability of large variances from our plan are minimized.
And with that, I'll hand it back to Garrick for some final comments before Q&A.
Our investment thesis remains simple but unique.
It enables us to deliver for all our stakeholders year in and year-out.
We remain committed to lead the clean energy transition, excellence through the CE Way and delivering our premium total shareholder return through continued capital investment that benefits the triple bottom line.
With that, Racho, please open the lines for Q&A.
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raised guidance for 2021 adjusted earnings to $2.83 - $2.87 per share.
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I'm Rubun Dey, Head of Investor Relations.
And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.
During todays call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for our investors.
We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2022 slides.
We are now on slide four.
As always, Lloyd and I are pleased to share our latest financial results and to represent the great work of the more than 28,000 people of Booz Allen.
Our industry, in fact, the entire economy is transitioning to more in-person work as we recover from the COVID-19 pandemic.
And at Booz Allen, we are excited about the opportunities this presents to our people and clients.
After my remarks, I will give Lloyd the floor to cover the financials in more depth.
Let me start with an overview of the quarter.
On our last call in late May, we talked about our near and midterm priorities and our fiscal year 2022 outlook.
We said we expect another year of significant revenue growth with strong earnings growth, continued cash generation and strategic deployment of capital.
At the same time, we noted that the pattern for the year would likely look different from recent years with lower revenue growth in the first half and significant acceleration in the second half.
This pattern is due to several factors, including the recovery from the pandemic, the implementation of a new financial system and our acquisition of Liberty IT Solutions.
As such, we are pleased to reaffirm our guidance for the full fiscal year.
Operationally, we continue to move back to pre-pandemic business rhythms.
In our Defense and Civil businesses, we are aligned to our governments top priorities, have a robust pipeline and several great wins in the quarter.
These two parts of our portfolio represent three quarters of our revenue, and they continue to deliver solid growth.
In our intelligence business, hiring is going well, and the portfolio reshaping we have done has yielded some important wins.
The first quarter decline in revenue was largely due to low billable expenses, and we continue to expect a growth year in this business.
Global Commercial represents 2% of our revenue.
Continued declines are tied to our portfolio reshaping and the impact of the pandemic.
We do expect to see year-over-year growth in the second half of the fiscal year.
Taken together, our entire portfolio of business produced low single-digit revenue growth year-over-year, as we expected.
The relatively slow growth was driven primarily by a return to more normal staff utilization and PTO trends compared to the first quarter of first quarter of last fiscal year, when the country was largely in lockdown.
At the bottom line, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share were ahead of our expectations.
Book-to-bill for the quarter was also strong.
And we are excited about the quality mission center work we are winning.
Cash from operations came in light, primarily driven by one-time costs related to the Liberty transaction.
Lloyd will discuss all the numbers in detail in a few minutes.
As you may remember, on our last call, we spoke about a set of near and midterm priorities that are critical to our success.
The main reason for our optimism about the year is the great progress we have made to-date.
Let me go through them briefly.
Our top priority is recruiting.
And in the first quarter, we began to see results from our laser focus in this area.
We are seeing sequential month-over-month growth and believe momentum will build over the remainder of the year.
Second, the reshaping of our intelligence and global commercial portfolios continues.
We believe the tactical and strategic moves we are making will yield year-over-year growth.
Third, we are very pleased to have completed the Liberty acquisition in mid-June.
Our teams are working side-by-side and everything we have seen since the closing confirms that this was a great deal for Booz Allen and for Liberty.
We are very excited about the strategic opportunities we have to augment each others strengths.
Fourth, the NextGen financial system successfully launched on April 1st and is running very well to the great credit of the team.
After more than three years of preparation, launching the system and executing the first quarter closed without any major disruptions were critical milestones.
And fifth, we continue to invest in our people and capabilities as we carefully manage the transition to a post-COVID environment.
Consistent with that creating the best possible experience for our talent is a constant area of focus for us.
In that vein, I would like to take a few minutes today to share with you how Booz Allen is thinking about the future of work.
We are cautiously optimistic that the worst of the pandemic is behind us in the United States and most places that Booz Allen operates.
As such, we are preparing to fully reopen our offices the day after Labor Day, provided that health and safety allow it.
As we move toward that reopening, we intend to take the best of what we have learned over the past 16-months and create ways of working that better serve our talent, our clients and the critical missions we are part of.
Going forward, our workforce will have three operating models.
First, we have always had a small group of employees who are purely remote, and we expect that to continue and for that group to remain relatively small.
Second, we have a group of people who work full time at government and our facilities.
And that too will continue, although we expect it to proportionately decline from historical levels.
Our clients have shown a great deal of creativity over the course of the pandemic.
And based on this experience, many are interested in flexible models that better serve their missions while reducing the number of people who are 100% on-site.
The third workforce model is a hybrid.
And we expect overtime for this to be a majority of our people.
Employees in this group will spend less time in Booz Allen and client offices than previously and instead have a mix of telework and in-person collaboration.
This gives people much more flexibility in their personal and family lives while at the same time preserving our culture and the close connection to clients, our firm and each other.
What is most exciting about the future of work conversations we have been having internally and externally is the opportunity everyone sees for greater flexibility.
In fact, there is an expectation that we need to work in new ways because the technology allows it and the competition for talent simply requires it.
To succeed, today and in the future, employers, whether they are in the government or the private sector must foster a workforce that is more distributed, more digital and certainly more diverse.
Booz Allen is a leader in this area, working with our government clients to help them rethink and reshape the way they accomplish critical missions.
Many clients believe that the reality of todays world and the needs of the next decade demand fundamental change in how federal agencies execute their business on behalf of all of us.
And consistent with who we are we will lean into those change opportunities proactively.
And so as we look toward the fall and beyond, our firm has a lot to be optimistic and excited about.
We are working very hard to take care of our people, build our business, serve clients and position Booz Allen for the future.
As always, our overriding goal is to continue to create near and long-term value for our investors and all our stakeholders.
And with that Lloyd, over to you.
Before I jump into the financials, I want to note that this has been a truly busy quarter for us.
A few of the major highlights included closing our acquisition of Liberty and launching the integration process, replenishing our balance sheet through the bond market.
Investing in latent II, a highly strategic, rapidly growing company in the AI ML space.
Doubling down on our recruiting and hiring efforts with promising results.
Implementing our NextGen financial system.
And, of course, engaging across the firm on our strategic review and our next investment thesis.
We are energized by the pace of activity and look forward to sharing more in the months to come.
Now on to first quarter performance.
As we noted in May, we expected some early year choppiness in our top-line results as we move into a post-pandemic operating rhythm.
However, we were able to maintain strong performance at the adjusted EBITDA and ADEPS line through disciplined cost management.
Additionally, we are encouraged by our solid bookings performance as well as our pace of recruiting.
Operating cash flow was light of our initial forecast, but we view most of the moving pieces as either one-time or transitory.
Altogether, today s results are in line with the expectations we laid out last quarter, and we remain confident in our plan for the full fiscal year.
At the top-line, in the first quarter, revenue increased 1.7% year-over-year to $2 billion.
Liberty contributed approximately $16 million to revenue growth.
Revenue excluding billable expenses grew 1.9% to $1.4 billion.
Revenue growth was driven by solid operational performance, primarily offset by higher-than-normal staff utilization in the comparable prior year period.
Top-line performance for the quarter was in line with our expectations.
As a reminder, we forecast constrained low single-digit top-line growth in the first half of the year, driven by four dynamics: First, the need to ramp up on contracts and hiring; second, a more normalized utilization rate in the first half of this fiscal year compared to the high staff utilization in the first half of fiscal year 2021, which we believe to be worth roughly 300 basis points of growth.
Third, high PTO balances coming into the fiscal year with an expectation that our employees will take more time off; and fourth, minor timing differences in our costing of labor, resulting from implementation of our new financial system.
As we noted before, we expect growth to accelerate throughout the year.
Now let me step through performance at the market level.
In defense, revenue grew 4.4%, with strong growth in revenue ex billable expenses, partially offset by significant materials purchases in the prior year period.
In Civil, revenue grew 6%, led by strong performance in our health business and the addition of Liberty.
We expect momentum to build throughout the year.
As more administration priorities ramp up and we continue to capture opportunities, building on our strong win rates.
Revenue from our intelligence business declined 6.4% this quarter.
Revenue ex-billable expenses grew in line with our expectations, but were more than offset at the top-line by lower billable expenses.
We are excited by a number of critical recent wins in the portfolio.
And we believe we have the right leadership and strategic direction in place to execute a growth year.
Lastly, revenue in Global Commercial declined 27.4% compared to the prior year quarter.
We anticipate year-over-year growth in the second half, an outcome that is largely dependent on hiring additional talent to capitalize on growing demand as well as moving past challenging prior year comparables in international.
Our book-to-bill for the quarter was 1.3 times, while our last 12-months book-to-bill was 1.2 times.
Total backlog grew 16.5% year-over-year, including Liberty, resulting in backlog of $26.8 billion, a new record.
Funded backlog grew 1.6% to $3.5 billion.
Unfunded backlog grew 91% to $9 billion and price options declined 3.7% and to $14.3 billion.
We are proud of our bookings performance in the first quarter, coming off a seasonally strong fourth quarter results.
We believe that the stability of our longer-term book-to-bill demonstrates continued strong demand for our services as well as the high value placed on our understanding of client missions.
Pivoting to headcount as of June 30th, we had 28,558 employees, up by 1,177 year-over-year or 4.3%.
Accelerating headcount growth to meet robust demand for our services is our top priority for the year.
We are encouraged by how we closed the first quarter, and we expect to see progress throughout the year.
Moving to the bottom line, adjusted EBITDA for the quarter was $238 million, up 11.8% from the prior year period.
This increase was driven primarily by our ability to again build for fee within our intelligence business as well as the timing of unallowable expenses within the fiscal year.
Those items, along with continued low billable expenses as a percentage of revenue pushed our adjusted EBITDA margin to 12%.
We expect billable expenses and unallowable spend to pick up as we move throughout the year.
First quarter net income decreased 29% year-over-year to $92 million, primarily impacted by Liberty transaction-related expenses of approximately $67 million.
Adjusted net income was $146 million, up 12.3% from the prior year period, primarily driven by the same factors driving higher adjusted EBITDA.
Diluted earnings per share declined 27% to $0.67 from $0.92 in the prior year period.
And adjusted diluted earnings per share increased 15% to $1.07 from $0.93.
These increases to our non-GAAP metrics which exclude the impact of the transaction-related costs noted were primarily driven by operating performance and a lower share count in this quarter due to our share repurchase program.
Turning to cash, cash flow from operations was negative $11 million in the first quarter.
This decline was driven primarily by lower collections largely attributable to timing around receivables associated with the integration of our new enterprise financial system.
As our employees and clients adapt to the new invoicing system, we expect to return to a more typical collections cadence over the coming months.
Operating cash flow was negatively impacted by approximately $67 million of transaction costs paid in the first quarter, which includes approximately $56 million of cash payment at closing of the Liberty acquisition.
These cash payments represent a reallocation of a portion of the overall $725 million purchase price prior to adjustments from investing cash flows into operating cash flows.
Capital expenditures for the quarter were $9 million, down $11 million from the prior year period, driven primarily by lower facility expenses.
We still expect capital expenditures to land within our forecast range for the year.
During the quarter, we issued $500 million of 4% senior notes due 2029.
Additionally, we extended the maturity of our Term Loan A and revolving credit facility to 2026 and increased the size of our revolver by $500 million to $1 billion of total capacity.
Those moves are in support of our disciplined capital deployment strategy.
We will continue to use our balance sheet as a strategic asset.
During the quarter, we paid out $52 million for our quarterly dividend and repurchased $111 million worth of shares at an average price of $83.91 per share.
In total, including the close of the Liberty acquisition, we deployed $889 million.
Today, we are announcing that our Board has approved a regular dividend of $0.37 per share, payable on August 31st to stockholders of record on August 16th.
As our actions this quarter demonstrate, we remain committed to preserving and maximizing shareholder value through a disciplined balanced capital allocation posture.
Please move to slide seven.
Today, we are reaffirming our fiscal year 2022 guidance.
As we discussed last quarter, the first half, second half dynamics we laid out are still the guiding framework for our full-year growth expectations.
We expect total revenue growth to be between 7% and 10%, inclusive of Liberty.
Our contract and hiring ramp will determine where we land within that range.
We continue to expect revenue growth to accelerate throughout the year.
We expect adjusted EBITDA margin in the mid-10% range.
We expect adjusted diluted earnings per share to be between $4.10 and $4.30 based on an effective tax rate of 22% to 24% and 134 million to 137 million weighted average shares outstanding.
ADEPS guidance is inclusive of both Liberty and incremental interest expense from our $500 million bond offering.
We expect operating cash flow to grow to $800 million to $850 million, inclusive of the aforementioned $56 million of cash payments related to the Liberty transaction.
Due to these one-time payments, we expect to end the year at the lower end of our range, with partial offset through a combination of working capital management and operational performance.
And finally, we expect capex in the $80 million to $100 million range.
In summary, we are starting off the year just as we expected and look forward to a great year.
We were ambitious in trying to execute both a major acquisition and a companywide rollover of our financial systems in the same quarter.
With that, Rubun, let s open the line to questions.
Operator, please open the line.
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compname reports q4 net income of $0.82 per share.
compname reports q4-21 net income of $7.0 billion; earnings per share of $0.82.
qtrly fixed income currencies and commodities (ficc) revenue of $1.6 billion and equities revenue of $1.4 billion.
qtrly provision for credit losses improved by $542 million to a benefit of $489 million.
qtrly net interest income up $1.2 billion, or 11%, to $11.4 billion.
qtrly revenue, net of interest expense, increased 10% to $22.1 billion.
bank of america - qtrly noninterest income up 8% to $10.7 billion, driven by record asset management fees and record investment banking revenue.
fourth-quarter results were driven by strong organic growth, record levels of digital engagement, and an improving economy.
qtrly noninterest expense rose 6% to $14.7 billion.
in quarter, historically low net charge-off ratio of 0.15%, down 5 basis points from the prior quarter.
in quarter, wealth management had record client flows & strongest client acquisition numbers since before pandemic.
added $100 billion of deposits during the quarter.
bank of america - in quarter, global markets had highest sales & trading revenue in a decade, led by record equities performance as we invested in business.
bank of america - asset quality remained strong with loss rates at historically low levels as global economy continued to improve.
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Yesterday after the close of market, we announced that we have entered into a settlement with the U.S. Securities and Exchange Commission, resolving a previously announced investigation related to disclosure and the impact of certain pull-forward sales for the third quarter of 2015 through the fourth quarter of 2016.
This settlement is to our disclosures and does not include any allegations from the SEC that sales during these periods did not comply with GAAP.
It is important to note that the ongoing uncertainty related to COVID-19 and its potential impacts on the global retail environment could continue to impact our business results moving forward.
You may also hear us refer to amounts under U.S. GAAP.
And with that, may the fourth be with you.
With the continued disciplined execution of our strategic playbook, we're happy with our results, which marks a better-than-expected start to our year.
As with many companies, our year-over-year comparisons are affected by the significant COVID impacts we experienced in 2020.
Putting these dynamics aside for a moment, and perhaps what we're most encouraged to see at this early point in our year, is that on a two-year stack, that is skipping over 2020, we're running a better, higher quality, and more profitable business.
This is even more evident because of the strategies we've employed over the past couple of years, including significantly reduced sales to the off-priced channel, proactive supply constraints against demand signals to days of exiting undifferentiated distribution, and certainly, on an annual basis, the absence of MyFitnessPal, which we sold at the end of last year.
By staying focused on athletic performance, operational excellence, and connecting even more deeply with our consumers, these efforts are beginning to drive more consistent results, particularly in North America, our largest and most challenged business over the past couple of years.
At the highest level, we are executing well strategically, operationally, and financially.
Given these and other factors, including market dynamics, and continued strong momentum in fitness and wellness, we have meaningfully updated our outlook for the year with revenue now expected to grow at a high-teen percentage rate, bringing our business essentially back in line with our results in 2019.
As our transformation continues to translate into improved momentum for Under Armour, there are no changes to the strategies we outlined earlier this year: strengthening the brand, continuous operating model improvement, elevating a direct-to-consumer-focused approach and staying disciplined about returning greater profitability and value to shareholders.
Using this construct, I'll take a few minutes to highlight some of the progress we're making in these areas, starting with brand strength.
From a marketing and consumer engagement perspective, our global campaign, The Only Way is Through, is delivering a singular Under Armour voice with focused performers.
In 2021, we are evolving these efforts to bring the ecosystem of how we engage and inspire athletes across both physical and digital experiences into even better alignment.
These factors, driven by more robust data-driven decisions, a constant consumer insights feedback loop, and our meaningfully improved outlook, gives us confidence that this is an opportune time to amplify the momentum even more greatly in the second half of this year.
As such, we plan to make additional investments to support our marketing efforts to help drive awareness and increase conversion.
These accelerated investments will primarily focus on North America and critical countries like China and Germany, where we are still significantly underpenetrated from a brand awareness perspective.
As a premium athletic performance brand, the products that Under Armour delivers to the marketplace must meet and exceed the consumers' high expectation of performance, fit and style unfailingly to make them better.
So whether it's bringing newness and excitement to women with our crossback and Infinity bras and no slip waste band leggings, to the next generation of RUSH and Iso-Chill apparel for all athletes, our go-to-market process, storytelling, and operational excellence are helping to drive more robust consumer demand.
Taking a moment to talk about our run category.
We continue to be quite pleased with the success of our Under Armour HOVR franchise as it's broadened our appeal and preference among runners by offering multiple price points and seasonal newness to inspire loyalty.
During the first quarter, we saw strength in HOVR Sonic, Machina, and Infinite.
We also successfully launched our most pinnacle running footwear ever with the UA Flow Velociti Wind.
Priced at $160, this product is delivering well against our expectations.
It's also pushing performance with data from our MapMyRun digital app, telling us that runners wearing these shoes are, on average, going further and faster than any other UA running shoe.
So while still early, very exciting to see.
Switching gears to our second area of focus, which is continuous operating model improvement.
With the critical mass of our transformation now behind us, and appropriately rebased cost structure and optionality that scaled smartly with future growth, we believe we are firmly on a path to returning to double-digit operating margin over the long term.
This, of course, is not a one-and-done strategy, there is no finish line.
Yet instead an ever-present focus on getting better, better process, more optimal structure, more efficient systems and vigilance around our decision-making.
By region, channel or product, we are constantly challenging ourselves to leverage our foundational horsepower by being more precise and return-based on the investment choices we make as a global company to advance our strategic and financial goals.
Looking at our business by region.
Let's review how some of this is playing out.
I'll start with North America, which by many accounts, I believe to be in the healthiest position it's been in, in quite a few years from both a brand and financial perspective.
High-quality revenue driven by a sharp focus around tight inventory management, proactive demand constraints, improving segmentation, and servicing our customers well puts us in the sweet spot of our strategy to return to brand-right premium growth.
To support this confidence and recall in my earlier two-year stack example, we see our full-price wholesale business in North America in 2021 being meaningfully here than the same business in 2019.
Keep in mind, this is despite several headwinds in the comp set, including proactive demand constraints, exiting undifferentiated retail, a significant reduction in sales to the off-price channel and overall promotional activities.
So we've taken, in total, an encouraging sign as to the future of our business.
The other side of this equation is our great consumer business in North America, where we remain committed to reducing our promotional activity and driving improved store and digital productivity.
And while traffic challenges persist in our physical stores, the business is performing about plan, and we expect it to deliver solid growth in 2021.
Shifting next to Asia Pacific.
While short-term pandemic-driven impacts continue to present traffic challenges and higher promotional activities across the region, we remain confident in our ability to navigate these dynamics to emerge a stronger brand.
Opportunistically, given an accelerated shift to online purchase behaviors, investments into CRM and digital activations remain center stage in our playbook to driving better brand affinity in the long term.
From a direct-to-consumer perspective, we remain appropriately cautious concerning the right balance of return on those investments relative to the environment and staying premium.
Next up is EMEA.
And even though ongoing impacts from COVID-19 and related restrictions are tempering our near-term growth expectations a bit, there's no change to our expectations for this crucial market.
With stronger-than-expected bookings coming in for the fourth quarter, we remain encouraged by our strategies to tightly manage inventory while investing in brand awareness and consideration.
The reception to new products, combined with the strength of our go-to-market, is enabling us to build strong demand among key wholesale and distributor partners.
And within our direct-to-consumer business, while stores are a bit more challenged due to pandemic restrictions, like last year, our e-commerce business continues to serve as a healthy offset to drive growth.
And finally, our Latin America region.
As discussed on our last call, we have begun transitioning our business in certain countries to a strategic distributor model.
While we expect this change to negatively impact our revenue in 2021, over the long term, we believe it will help drive greater profitability and provide a better opportunity to increase brand awareness and affinity across this region.
Now moving to our third priority, elevating a direct consumer-focused approach.
Consumer shopping preferences continues to blur the lines between physical and digital, demanding that brands create unique personalized experiences that integrate seamlessly into their lives.
For Under Armour, we believe building out the capabilities to execute a powerful omnichannel strategy will enable us to create more connected shopping experiences across all consumer touch points.
From an owned store perspective, our first-quarter results, led by improved traffic trends and higher average order values, along with high gross margins due to reduced promotional activity, are encouraging signs for how we're thinking about our long-term opportunity in retail.
In the near term, however, even amid optimism from recent trends, we'll continue to keep an appropriate level of conservatism into mix.
Globally, our e-commerce business was up 69% in the first quarter, representing approximately 45% of our total direct-to-consumer business and included solid growth across all regions with better-than-expected conversion.
Given the outside strength of e-commerce in 2020 and the continued shift to online due to the pandemic, we are hyper-focused on better understanding the consumer journey and building greater digital capabilities to unlock even deeper connections with athletes.
And ultimately, while it's left to be seen about how sticky last year's e-commerce results are against this year's performance, we're confident that making additional investments in our sites, teams and processes to support our long-term growth expectations is money well spent.
Bringing all these strategies together leads us to our last focus, maintaining our discipline around profitability to drive sustainable shareholder value over the long term.
With our expectation of revenue being up at a high-teen rate for the full year, I am pleased with our progress and our expectation to deliver an adjusted operating margin in line with 2019.
This is a nice step up toward a double-digit rate over the long term.
So to wrap up, I'm pleased with the progress we are making.
Our transformational strategy to architect a global operating model capable of driving sustainable and profitable growth is on track.
With a solid start to the year, this is about continuing to execute the play with patience and allowing the processes, tools, and structure we've built to drive improved capabilities across Under Armour and then further enable our ability to compete for premium brand-right growth.
And with that, I'll hand it over to Dave.
Today's results are strong evidence that our transformed operating model can efficiently serve strong demand for the Under Armour brand against the continued backdrop of uncertainty due to the COVID-19 pandemic.
With an outstanding start to the year, let's dive right in with our first-quarter results.
Revenue was up 35% to $1.3 billion compared to the prior year.
This was better than expected due to higher demand across our wholesale and DTC businesses.
From a channel perspective, our wholesale revenue was up 35%.
Keep in mind, approximately two-thirds of this growth was due to a Q4 '20 to Q1 '21 shift related to COVID-19 impacts connected to customer order flow and changes in supply chain timing, as noted on our last call.
In addition, most of our Q1 wholesale over-delivery was due to stronger sell-through and higher demand from our North American customers.
Our direct-to-consumer business increased 54%, led by a 69% growth in e-commerce and 44% growth in our owned and operated retail stores.
Our DTC results were better-than-expected, primarily due to higher average order values in retail and higher e-commerce conversion rates.
Our licensing business was up 9%, driven primarily by North America.
By product type, apparel revenue was up 35%, driven by our train and run categories.
Footwear was up 47%, driven by our run and team sports categories.
And the accessories business was up 73%, with most of the growth being driven by sports masks.
From a regional and segment perspective, first-quarter revenue in North America was up 32%, driven by growth in our wholesale business, which was driven in part by Q4 to Q1 COVID-19-impacted order shifts.
Additionally, we saw strength in our North American DTC business with Factory House and e-commerce leading the way for growth.
In EMEA, revenue was up 41%, driven by growth in wholesale, led by our distributor business, including the Q4 to Q1 COVID-19-impacted order shift as well as strength in e-commerce.
It's important to note that EMEA continues to face significant impacts due to COVID with about one-third of our owned and partner mono-branded doors closed at the end of the quarter.
Revenue in Asia Pacific was up 120%, with balanced growth across all channels, including our wholesale business, which partly benefited from Q4 to Q1 COVID-19-impacted order shifts.
As a reminder, stores in APAC were closed through most of Q1 2020, so we are comping a more significant COVID-19 impact here than in our other regions.
In Latin America, revenue was down 9%, driven primarily by lower wholesale results, partially offset by growth in e-commerce.
First-quarter gross margin was significantly better-than-expected, with a 370 basis point improvement to 50%, driven by approximately 270 basis points of pricing improvements due to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale business.
In addition, we experienced 130 basis points of supply chain benefits, including improved inventory levels resulting in lower reserves and product costing improvements.
And finally, we realized 50 basis points of favorable channel mix due to a lower mix of off-price sales and a higher mix of DTC.
Offsetting these improvements was about 140 basis points of negative gross margin impact related to the absence of MyFitnessPal, a factor we expect to impact us throughout this year.
Overall, versus our previous outlook for first-quarter gross margin, we saw tighter inventories driven by stronger-than-expected demand and lower promotions, which resulted in a reduced requirement for inventory reserves, along with more favorable pricing.
SG&A expenses were down 7% to $515 million, primarily due to lower legal and marketing costs versus the prior year.
Relative to our 2020 restructuring plan, we recorded $7 million of charges in the first quarter, an amount less than we had anticipated due to slower-than-expected execution.
Including Q1, we've now realized $480 million of pre-tax restructuring and related charges.
As detailed last September, this plan contemplates total charges ranging from $550 million to $600 million.
It's important to note that all remaining charges are related to initiatives that we determined in 2020, meaning we are not adding anything new in 2021.
We expect to incur approximately $35 million to $40 million of charges in the second quarter as we work toward completing this program in the second half of 2021.
Moving on, our first-quarter operating income was $107 million.
Excluding restructuring and impairment charges, adjusted operating income was $114 million.
After tax, we realized net income of $78 million or $0.17 of diluted earnings per share during the quarter.
Excluding restructuring charges and the noncash amortization of debt discount on our senior convertible notes, our adjusted net income was $75 million or $0.16 of adjusted diluted earnings per share.
And finally, inventory at the end of the first quarter was down 9% to $852 million, a clear indicator of the improvements we have made to drive a more efficient operating model.
Now moving on to our updated 2021 outlook.
While recent consumer trends continue to be more positive than we anticipated, we remain cautious with respect to the demand and the overall marketplace due to the COVID-19 pandemic.
Therefore, as today's outlook is predicated on our business continuing under the same general macros we've seen most recently, with no significant shutdowns as well as moderate improvements within the greater retail landscape as the year progresses.
And with that said, let's start at the top with revenue, which we expect to be up at a high-teen percentage rate for the full year.
This reflects a high-teen percentage increase in North America and a low 30s percentage rate increase in our international business.
And while we see improvements just across our regions, more robust demand in North America is driving most of the gain relative to our last outlook.
From a channel perspective, our Q4 bookings have come in better within about the wholesale business than our initial expectations.
As discussed, we are focused on managing our inventory tightly, including constraining supply to meet demand and exiting undifferentiated retail, particularly in North America.
In DTC business, we also expect to see stronger results drive through the remainder of the year with retail store growth far outpacing that of e-commerce, given that business is up against the difficult comps in 2020.
For gross margin, on a GAAP basis, we expect the full year rate to be up approximately 50 basis points against the 2020 adjusted gross margin of 48.6% with benefits from pricing and supply chain efficiency partially offset by the sale of MyFitnessPal, which carried a high gross margin rate.
The gross margin improvement related to previous outlook is due to improving benefits within pricing, partially offset by changes in channel mix and increased freight expense related to port congestion and logistical costs, which remains a rapidly evolving situation.
From an SG&A perspective, as we stated on our last call, We believe we have appropriately rebased our cost structure to scale for future growth.
The improved discipline and processes we employ help ensure we stay return-based with the optionality to invest in critical areas like marketing in our DTC and international businesses.
As Patrik laid out, we intend to take advantage of some of our improved outlook in the second half of this year with incremental investments, particularly in marketing, to continue driving the underlying momentum we're seeing.
In this respect, we expect SG&A to be up at a rate that is approximately one-half that of our revenue growth.
In addition to these incremental marketing investments, the other significant part of the overall increase in SG&A relative to our prior outlook is higher incentive compensation when compared to a year that saw significant reductions against target levels.
When combined, these marketing investments and planned higher incentive compensation represent about three-fourth of the increase in our year-over-year SG&A dollars, meaning without them the underlying SG&A is panned up slightly at about 2% to 3% in absolute dollars, which is consistent with the initial outlook we provided earlier this year.
That said, remaining discipline about controlling costs and ensuring the right balance between growth, productivity, and profitability is our top priority.
After these factors, we now expect operating income to reach approximately $105 million to $115 million this year or about $230 million to $240 million on an adjusted basis.
Translated to rate, we expect to deliver an operating margin of approximately 2% for an adjusted operating margin of approximately 4.5% in 2021.
All of this takes us to a diluted loss per share of approximately $0.02 to $0.04, or excluding restructuring impacts, about $0.28 to $0.30 of adjusted diluted earnings per share.
To sum it up, we believe we have appropriately updated our outlook to reflect the improvements we see across the business.
And to reiterate some of the comments we made on our last call, headwinds should be taken into consideration for our full year outlook, particularly in the second half, including the absence of MyFitnessPal, continued supply and demand constraints, the exit of undifferentiated retail, which starts in the back half of this year; changes to our Latin American operating model, and lower expected sales of our sports masks.
For a little more color on the quarterly flow, we expect our second quarter revenue to be up approximately 70% as we lap last year's significantly shuttered retail world, with the highest regional growth seen in North America and Latin America.
Next, we expect Q2 gross margin to be down about 120 to 140 basis points primarily due to the following negative impacts: channel mix, with e-commerce being a considerably lower portion of the overall business when compared to last year; and within the wholesale channel, we expect a higher percentage of off-price sales versus the last year's second quarter when off-price was predominantly closed.
Additionally, the absence of MyFitnessPal will negatively impact the quarter.
And finally, we anticipate increased freight expense from a supply chain perspective relative to the prior year as we work through ongoing logistics and transportation challenges.
These negative factors are expected to be partially offset by an improvement in pricing due to lower planned promotional and discounting activities, along with some tailwinds from changes in foreign currency.
Bringing this to the bottom line, we expect second quarter adjusted operating income to be approximately $40 million to $45 million or about $0.04 to $0.06 of adjusted diluted earnings per share.
To close out, with an incredibly focused strategy led by a talented, passionate team and improved operations from our multiyear transformation, we believe Under Armour is well positioned to deliver on our expectations for 2021 and beyond.
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compname reports q1 earnings per share $0.17.
sees fy loss per share about $0.02 to $0.04.
q1 adjusted earnings per share $0.16.
q1 earnings per share $0.17.
q1 revenue rose 35 percent to $1.3 billion.
qtrly north america revenue increased 32 percent.
expects to realize approximately $35 million to $40 million in charges related to restructuring plan in q2.
given continued uncertainty related to covid-19, there could be potential material impacts on its full-year business results in 2021.
2021 revenue is now expected to be up at a high-teen percentage rate.
expects to realize about $35 million to $40 million in charges related to restructuring plan in q2.
2021 adjusted diluted earnings per share is expected to be in range of $0.28 to $0.30.
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Today I'll provide third quarter highlights and an update to our strategic initiatives.
Gary will discuss asset quality and Vince will cover the financials.
Third quarter operating earnings per share of $0.26 reflects strong fundamental performance as we continue to have success across many business units, despite a challenging operating environment and provision expense totaling $27 million.
This quarter's performance reflects growth in average loans and deposits of 2% and 4% respectively, as well as continued strength in our fee-based businesses with strong contributions from capital markets activity and record mortgage banking income of $19 million.
On a linked-quarter basis, tangible book value per share increased $0.18 to $7.81, as we continue our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week.
In addition, our CET1 and TCE ratios increased meaningfully.
And after adjusting for the indirect loan sale CET1 improves almost 20 basis points to the strongest level in the Company's history.
Our bolstered capital base should provide us with increased flexibility to deploy capital in the best interest of the shareholders.
Return on tangible common equity was again peer leading at 14% and the efficiency ratio equaled 55%.
These results illustrate the resiliency of FNB's business model and are truly remarkable given the challenges presented and unique circumstances the industry is facing, amid the global pandemic.
I'm extremely proud of our team for going above and beyond to support our customers in this challenging macroeconomic environment.
Their hard work was critical to providing timely assistance to our impacted customers through the Paycheck Protection Program, by offering loan deferral options and consumer relief, as well as other programs to help clients manage their finances during these difficult times.
Customer feedback has been overwhelmingly positive, and we are encouraged by the low-single digit level of second loan deferral requests as a percentage of total loan as of October 15th, 2020.
Lower demand for second deferral request is indicative of the quality of our customer base, our consistent approach to credit risk management, and FNB's dedication to disciplined underwriting standards throughout various business cycles.
Our bankers and credit teams will continue to actively evaluate and work with COVID-19 impacted borrowers as they manage through their pandemic related disruption.
Earlier in the third quarter, our organization was recognized as a 2020 Standout Commercial Bank by Greenwich Associates, with FNB being one of only 10 banks in the country to be recognized for its response to the COVID-19 pandemic.
If you look at the credit metrics on FNB's COVID-19 sensitive sectors, we are favorably positioned to peers on a relative basis.
Our disciplined approach to underwriting and portfolio management ensures granularity, diversification and appropriate credit structure within our loan portfolio.
On the deposit side, organic growth and government programs have resulted in increased liquidity in our customer base.
Looking at the recent FDIC data compared to 2019, FNB has successfully gained share and fortified top market share position in Pittsburgh, Baltimore, Cleveland, Charlotte, Raleigh and the Piedmont Triad, with our largest market, Pittsburgh, surpassing the $8 billion mark in total deposits.
Additionally, as of June 30 2020, FNB ranked in the top 10 in retail deposit market share across seven major MSAs, and when looking at our footprint in total, FNB has a top 10 market share in more than 80% of the 53 markets categorized by the FDIC.
Compared to June 2019, FNB continued to gain market share as total deposits increased nearly $5 billion or over 20% overall.
If you look back over the last six months, we've added thousands of new households and more than $4 billion in total deposits.
Diving deeper by examining the regional market share trends, FNB has five MSAs with greater than a $1 billion in deposits and 16 MSAs with greater than $500 million in deposits.
These market positions reflect successful execution of our deposit gathering strategy centered on attracting low cost deposits through household acquisition and deepening commercial relationships, thereby enabling FNB to eliminate our overnight borrowing position.
The surge in core deposits have strengthened our overall funding mix as the loan-to-deposit ratio further improved to 89.1%.
We continue to be absolutely focused on generating non-interest bearing and transaction deposit growth, given the impacts of the expected lower for longer interest rate environment.
To complement our deposit gathering strategy, we are focused on supporting our customers and expanding our relationships as their primary capital provider with value-added products and services, while staying true to our credit culture.
Looking ahead to the fourth quarter, we are encouraged by the current position of the balance sheet with ample liquidity to support growth opportunities and an expanded capital base.
Additionally, with our PPP efforts, we've added more than 5,000 prospects for non-customer PPP lending to pursue as long-term relationships.
Given our success and the quality of our bankers, we have firmly established ourselves as a formidable competitor across our seven state footprint, providing competitive financial products and services supported by technology, investment and the best personnel.
During the third quarter, our credit portfolio continued to perform in a satisfactory manner as we continue to work through this challenging economic environment.
Our key credit metrics have held up well with some slight increases noted during the quarter related to the COVID environment that is largely tied to borrowers in the hardest hit industries, which we have built loan loss reserves for accordingly.
I will now walk you through our results for the third quarter followed by an update on our loan deferrals and some of the proactive steps we are taking to manage the book.
Let's now discuss some key highlights.
During the third quarter, delinquency came in at a good level of 1.07%, an increase of 15 bps over the prior quarter that was predominantly COVID related tied to mortgage forbearances, while the commercial portfolio remained relatively level with the prior quarter.
When excluding PPP loan volume, delinquency would have ended the quarter at 1.18%.
The level of NPLs and OREO totaled 76 basis points, a 4 basis point increase linked-quarter, while the non-GAAP level excluding PPP loans stands at 85 bps.
This slight migration is attributable to some COVID impacted credits that were placed on non-accrual during the quarter, which is in line with our proactive risk management measures that we have in place to help identify potential pockets of softness.
Of our total non-performing loans at September 30th, 50% continue to pay on a current basis.
Net charge-offs came in at $19.3 million for the quarter, or 29 basis points annualized with the increase largely due to write downs taken against a few COVID impacted credits that were already showing weakness entering the pandemic.
On a year-to-date basis, our GAAP net charge-offs stood at 18 basis points through the end of the third quarter.
Provision expense totaled $27 million, which includes additional build for COVID related credit migration, driven by the hotel and restaurant portfolios, bringing our total ending reserve to 1.45%.
When excluding PPP loan volume, the non-GAAP ACL stands at 1.61%, a 7 basis point linked-quarter increase.
Our NPL coverage remains favorable at 210% at quarter-end, which reflects the reserve build for the COVID driven credit migration during the quarter.
When including the acquired unamortized loan discounts, our reserve position excluding PPP loan volume is 1.87%.
We continue to conduct a series of scenario analyses and stress test models under our existing allowance and DFAST frameworks as we work through this COVID impacted environment.
Under the final 2020 severely adverse DFAST scenario, the current reserve position, inclusive of unamortized loan discounts, would cover 77% of stressed losses, which does not include losses already incurred year-to-date.
As it relates to our borrowers requesting payment deferral 3.4% of our total loan portfolio, excluding PPP balances were under a COVID related deferment plan at quarter-end with remaining first requests representing 1.4% of the portfolio, and 2% being second deferrals.
As of October 16th, total deferrals have further declined by approximately $100 million to stand at 2.9%.
We continue to carefully monitor the credit portfolio as the pandemic evolves and borrowers work to overcome the uncertainty and challenging conditions that many currently face.
Our exposure to highly sensitive industries remains low at 3.5% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services, and energy space with deferrals granted to these borrowers totaling 29%, driven primarily by the hotel portfolio as we continue to work through these hardest hit sectors.
During the quarter, we conducted another thorough deep dive credit review of our commercial borrowers operating in these economically sensitive industries, which was led by our seasoned and experienced credit officer team.
Our portfolio review covered over 80% of our existing credit exposure in COVID sensitive portfolios, including travel and leisure, food services and retail related C&I and IRE.
As part of our review process, we assess the adequacy of cash flow, strength of the sponsors backing the deals, the collateral position and direct feedback from borrowers about their expected short and long-term outlooks.
This level of review has helped us to quickly identify potential credit deterioration and take appropriate action as we did during Q3 to better position us for the quarters ahead should this challenging economic environment continue.
In closing, we are pleased with the position of our portfolio entering the final quarter of 2020 relative to where we are in this COVID impacted economic environment.
Our credit metrics have held up well and continue to trend at satisfactory levels as we remain focused on proactively identifying risk in the portfolio and aggressively working through it.
The experience and depth of our credit and lending teams have been paramount to our success, and I would like to recognize these groups for their tireless efforts each and every day as we work through these challenging conditions.
Now I'll discuss our financial results and review the recent actions taken that have enhanced our overall balance sheet positioning, reduced interest rate risk and boosted capital levels.
As noted on Slide 4, third quarter operating earnings per share totaled $0.26, consistent with the prior quarter.
The level of PPNR remains solid and we continue to proactively manage our overall reserve position with provision expense totaling $27 million.
We feel good about the strength of the balance sheet and our current level of reserves based on what we know today after a comprehensive review of our loan portfolio.
Additionally, the quarter's results reflect the continued execution of our strategies focused on prudent risk management, supported by our recent actions.
For example, during the third quarter, we took proactive measures to strengthen capital and reduce credit risk.
We signed an agreement to sell $508 million of lower FICO indirect auto loans, closing Q4 with the proceeds being used to pay down a similar amount of high cost federal home loan bank borrowings, of which $415 million with a rate of 2.59% was prepaid this quarter for breakage fee of $13.5 million.
We also sold Visa Class B shares at a $13.8 million gain to fully mitigate the capital impact for the FHLB breakage costs.
Resulting transactions should add roughly 17 basis points to CET1, improve credit risk and be neutral to run rate earnings.
We continue to strengthen risk-based capital levels with our CET1 ratio increasing to 9.6% at the end of the quarter.
As I just noted, the pro forma CET1 ratio would increase by another 17 basis points after considering the impact of the upcoming loan sale.
The pro forma CET1 ratio marks the highest level in our history and will be in line with peer median levels from the most recent filings.
Our improved capital levels give us additional flexibility that is important at this stage of the economic cycle.
Looking at our TCE ratio, we ended September comfortably above 7%, increasing to 7.2%, which translates into 7.7% when excluding PPP loans.
On the expense front, we are progressing well toward achieving our 2020 cost savings goal, reducing run rate expenses via optimizing our branch network and reducing operational costs through ongoing vendor contract renegotiations.
On the revenue front, we are leveraging our new geographies to drive market share gains and fee-based businesses, notably mortgage banking, capital markets, wealth and insurance to offset net interest margin pressure in the current low rate environment.
Let's now shift to the balance sheet.
Limiting [Phonetic] spot balances, total loans were relatively flat compared to the prior quarter, excluding the transfer of $508 million of indirect auto loans to held for sale.
Looking ahead, it's important to focus on the position of the balance sheet after the loan sale and excluding PPP.
We remain focused on driving organic growth as the $2.5 billion in PPP loans enter the forgiveness process and those balances wind down in the future.
Compared to the second quarter, average deposits increased 4%, primarily due to 6% growth in interest bearing deposits and 7% growth in non-interest-bearing deposits.
It was partially offset by 6% planned decrease in time deposits.
As Vince noted, core deposit growth generated by building on our commercial and consumer relationships remains a focus for us, as we eliminated our overnight borrowing position and have ample liquidity to fund future growth objectives.
Let's now look at non-interest income and expense.
Non-interest income reached a record $80 million, increasing 3% linked-quarter, primarily due to significant growth in mortgage banking as well as strong contributions from wealth, insurance, and capital markets.
Mortgage banking income increased $2.3 million as sold production increased 9% from the prior quarter with sizable contributions from the Mid-Atlantic and Pittsburgh regions and a meaningful improvement in gain on sale margins.
Wealth management and insurance revenues each increased 10%.
These segments benefiting from increased organic commercial growth and greater activity in the Mid-Atlantic and Carolina regions.
Capital markets revenue, while down from a record level last quarter, was again at a very good level at $8.2 million with these products continuing to remain an attractive option for borrowers, given the environment.
Termination of $415 million of higher rate Federal Home Loan Bank borrowings resulted in a loss on debt extinguishment and related hedge termination costs of $13.3 million reported in other non-interest income.
Offsetting these charges was the $13.8 million gain on the sale of the bank's holdings of Visa Class B shares also reported in other non-interest income.
Turning to Slide 9, non-interest expense totaled $180.2 million, an increase of $4.3 million or 2.4%, which included $2.7 million of COVID-19 expenses in the third quarter compared to $2 million in the second quarter.
Excluding these COVID-19 related expenses, non-interest expense increased $3.6 million or 1.9%, primarily related to higher salaries and employee benefit expense; higher production related commissions; lower loan origination salary deferrals, given the significant PPP loan originations in the prior quarter; and an extra operating day in the third quarter.
FDIC insurance decreased $1.3 million due primarily to a lower FDIC assessment rate from improved liquidity metrics.
The efficiency ratio equaled 55.3% compared to 53.7% which is reflective of the higher production related expenses, noted previously.
Looking at revenue, net interest income totaled $227 million, stable compared to the second quarter as loan and deposit growth mostly offset lower asset yield on variable rate loans tied to the short end of the curve.
The net interest margin decreased 9 basis points to 2.79% as the total yield on earning assets declined 20 basis points to 3.34%, reflecting lower yields on fixed-rate loans originated at lower rates given the interest rate environment and the impact of a 19 basis point decline in one month LIBOR.
The benefit of our efforts to optimize funding cost was evident in a 17 basis point reduction in the cost of interest bearing deposits which helped to reduce our total cost of funds to 56 basis points, down from 67 basis points.
We're very pleased with the performance of our fee-based businesses as they have supported revenue growth amid the current low interest rate environment, demonstrating the importance of having diversification.
Turning to our fourth quarter outlook, we expect period-end loans to be generally flat at September 30th, assuming no forgiveness of PPP loans, given the current timing expectations for the SBA for process requests.
While we expect deposits to decline from third quarter levels, that's based on an expectation that customers increase their deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits.
I'll note that our assumptions do not include any further government stimulus programs or actions.
We expect fourth quarter net interest income to be down slightly from third quarter, inclusive of the impact of the loan sale.
We are not assuming any PPP forgiveness in the fourth quarter.
Absent the loan sale, we would have expected net interest income in the fourth quarter to be flattish.
We expect continued strong contributions from fee-based businesses with a similar level in capital markets and some reduction from record levels of mortgage banking.
We expect service charges to increase, continuing to rebound, given recent transaction volume trends.
Looking at fee income overall, we expect total non-interest income to be in the mid to high $70 million range.
We expect expenses to be stable to up slightly from the third quarter excluding COVID-19 expenses of $2.7 million.
We expect the effective tax rate to be around 17% for the full year of 2020.
Lastly, we are in -- we are currently in the early stages of budgeting for 2021.
Similar to 2019 and 2020, we will, again, seek to have meaningful cost saving initiatives, building on consecutive years of taking $20 million out of our overall cost structure to support strategic investments and manage the impact of the low interest rate environment.
It's taking considerable effort to bring our efficiency ratio down from over 60% in the past to the low-to-mid 50% levels we have been operating at currently.
In addition to the scale gain from prior acquisitions, we have consolidated close to 95 branches in the past five years, which is about 25% of our current branch network.
We have always been disciplined managers of costs, and it will be an important driver to return us to a position of generating positive operating leverage and mitigate growth and expenses in 2021.
We will share more details when we provide 2021 detailed guidance in January.
Overall, we are pleased with the performance of the quarter in a very challenging environment.
Next, Vince will give an update on some of our strategic initiatives in 2020.
Now, I'd like to focus on our progress regarding key strategic initiatives, since our last call.
In our Consumer Bank, we continue to focus on optimizing our delivery channels.
The deployment of our new website has translated into higher digital adoption through increased website traffic, increased mobile deposits, and exponential growth in the number of online appointments.
In the current environment, customer activity trends continue to shift toward digital channels with mobile enrollment up 40% compared to 2019 averages.
In fact, we have seen both monthly average mobile and online users increase by 50,000 each compared with the 2019 average levels.
Regarding website traffic, monthly visitors are up nearly 70%.
Looking at our physical delivery channel, we continue to execute our established Ready program to optimize our branch network, which included more than 60 consolidation since May of 2018 making FNB one of the more active banks for branch consolidation.
We will continue to thoroughly evaluate additional consolidation opportunities as well as select de novo expansion across our footprint as consumer behaviors evolve.
We recently announced plans to develop additional de novo locations, which will enhance our retail strategy and support our corporate banking efforts in these attractive new markets.
For example, our Charleston branches are performing exceptionally well with nearly $50 million of deposit growth compared to 2019 and these branches are currently ranked among the upper quartile for performance compared to FNB's entire retail network.
This consumer growth works in tandem with our successful corporate banking efforts, as the Charleston region has grown nicely with our South Carolina commercial loan balances approaching $200 million at the end of September.
We recently brought the Wholesale Bank and respective credit teams back into the offices on a rotational basis as we remain steadfast in supporting our customers while building momentum to carry into the next year.
Given the impact from the government stimulus programs, customers have increased liquidity with lower commercial line utilization rate, a more normal environment offers upside moving into 2021.
Our model is built on local decision-making and high touch relationship-based approach, coupled with consistent investment in technology.
This has served us well during the pandemic where our local bankers are in the market and working closely with our customers.
As we built out certain high value fee-based businesses such as treasury management and capital market we've embedded local specialists across all markets to support our commercial banker's efforts.
During this pandemic where travel, physical mobility, and face-to-face interaction is limited, having well informed decision makers directly located in our markets enables FNB to best support our customers.
Together with our efforts in the wholesale bank, FNB has also benefited from our long-term consumer strategy Clicks-to-Bricks, by investing heavily in our digital platform.
One key element necessary for FNB to continue to deliver attractive returns for our shareholders is our commitment to our employees.
I'm pleased to share that FNB was included for a tenth consecutive year as a Greater Pittsburgh Area top workplace by the Pittsburgh Post-Gazette, signifying the strength of our culture with a decade of excellence and consistency.
These results benefit our shareholders and we would like to recognize the hard work and dedication of all of our employees who have made these results possible.
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compname reports q2 revenue $308 mln.
q2 non-gaap earnings per share $0.31 excluding items.
q2 revenue $308 million versus refinitiv ibes estimate of $305.2 million.
corp quarterly net interest income $227.9 million versus $227.96 million.
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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.
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q2 revenue rose 12 percent to $894.9 million.
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Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
The resiliency of Barnes Group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and delivered adjusted earnings per share above the high end of our October outlook.
Given the historic challenges resulting from the global pandemic for most of 2020, I'm very proud of the many contributions of our 5,000 employees across the globe who stepped up to the challenge by going above and beyond to meet the needs of our customers and support our communities.
And while I am happy with our performance, given the significance of the disruption, we at Barnes Group, remain mindful and respectful of the personal and social hardships caused by the pandemic across the world.
From the onset, our response to the pandemic was structured around four phases.
First and foremost, the health and safety of our employees.
Second, adjusting the business for the stark realities of lower demand.
Third, anticipating and adapting to structural shifts in some of our end markets.
And fourth, making key strategic investments to position Barnes Group for an economic recovery.
While we moved our current -- while we have moved our current focus to Phase 4, we have not lost sight of the first three phases as they continue to be important.
Through 2020, one thing that has remained unchanged is our vision to be a leading global provider of highly engineered products, differentiated industrial technologies and innovative solutions serving our diversified end markets.
For the fourth quarter, organic sales were down 21%, primarily as a result of lower volumes given the pandemics' continuing impact on our end markets, especially at Aerospace.
The fourth quarter saw a 7% increase over the third quarter with both segments generating sequential sales improvement.
Adjusted earnings per share were $0.36, down 58% from last year.
Though, as mentioned, just above the high end of our October outlook.
Looking at the full-year, organic sales were down 22%, while adjusted earnings per share were $1.64, down nearly 50% from a year ago.
As difficult as those numbers are, early cost actions and a focus on cash generation, allowed us to maintain double-digit margins, positive earnings and strong cash flow throughout the year.
As we turn the page on 2020, our mindset is shifting and our focus has returned to driving growth, both organically and through acquisitions.
With a keen focus on our strategic filters, we continue to explore enabling technologies and market-leading businesses that would complement our current portfolio with several potential targets in the pipeline being analyzed.
We remain enthusiastic in our pursuit of value adding transactions, that strategically advance our transformation.
More immediately, an emphasis on organic investments will target growth-orientated capital expenditures, research and development efforts and further build out of our newly established innovation hub capabilities.
While these investments will influence margins in the short-term, they are instrumental to position the Company more favorably for the long run.
It's my expectation that we'll be talking frequently about our innovation and digital initiatives as we progress through 2021.
Moving now to a discussion of end market dynamics, beginning with Industrial.
At Industrial, we see the continuation of favorable trends discussed on our last call.
Manufacturing PMIs in our major geographic markets remain strong and correspondingly, we've seen fourth quarter organic orders at Industrial grow 10% over a year ago.
Sequential Industrial orders were up 9% over the third quarter and segment book-to-bill was slightly better than 1 times.
So, as we think about our Industrial expectations for the upcoming year, we feel bullish about the prospects for this part of our business.
Molding Solutions generated very strong orders in medical end markets, both year-over-year and sequentially, each with well over 50% growth.
Medical sales lagged a bit in the quarter given a very challenging comparable and the timing of deliveries.
We see that is normal given the nature of this business and expect sales to bounce back by the second quarter.
Packaging orders were very strong on both a year-over-year and sequential basis.
Sales were up over 20% from a year ago.
Meanwhile, personal care orders took a dip in the quarter and sales were slightly down versus a year ago.
However, sequential sales were strong increasing over 20%.
Our Synventive business, which is predominantly automotive hot runners, saw a modest increase in orders, both year-over-year and sequentially.
Although sales were relatively flat to a year ago, they were up 20% sequentially.
All-in, our expectations for 2021 is organic sales growth to be up in the low-double digits for Molding Solutions.
Sheet metal forming markets also continue to see a rebound, as Force & Motion Control orders were up high-single digits over last year and up high-teens over the third quarter.
While sales were down modestly from a year ago, sequential sales were up in the high-single digits.
We forecast Force & Motion Control to generate organic sales growth in the low-double digits for 2021.
At Engineered Components, organic orders were up nearly 20% on a year-over-year basis, with organic sales up mid-single digits versus a year ago.
Total sales were up high-single digits sequentially, continuing a rebound that we've seen over the last couple of quarters.
With General Industrial Markets on the upswing and global automotive production forecasted to be up meaningfully in 2021, we anticipate Engineered Components to grow high-single digits organically.
That said, we are very mindful about the current impact semiconductor shortages are having on automotive production and we will monitor that situation carefully as it unfolds.
Looking next at our Automation business.
It continues to demonstrate signs of a positive rebound as mid-single-digit orders growth over a year ago and third quarter were achieved.
Total sales growth was strong with both year-over-year and sequential growth of 20%.
Like last quarter, demand for our end-of-arm tooling solutions in automotive, and medical and pharma applications remain solid.
We expect 2021 to deliver low-double-digit organic growth as these markets remain healthy and as we launch new innovative products.
Speaking of new products, as I mentioned earlier, our investments in innovation and R&D are aimed at providing a solid foundation for organic growth.
As an example, we recently launched our comprehensive vacuum solutions product line with complete gripping solutions, advanced control systems and high-quality components.
The vacuum product range consists of about 1,100 items, including high-performance suction cups, vacuum pumps, sensors and related accessories that allow our customers to handle different objects in various industrial sectors with low energy consumption and reduce downtime.
Overall, for the Industrial segment, we see 2021 organic growth in the low-double-digit range with adjusted operating margins of 12% to 14%.
Moving now to our Aerospace business.
For the fourth quarter, Barnes Aerospace sales were down nearly 40% at OEM and nearly 50% in the aftermarket from the prior year.
Not surprising as commercial aviation remains significantly disrupted by the global pandemic, our outlook for Aerospace is certainly not as bullish as for our Industrial businesses.
That being said, we continue to believe the trough quarter of sales is behind us.
With OEM, production levels of narrow-body aircraft are expected to improve from here modestly, although wide-bodies will remain pressured.
The journey back to pre-COVID levels will most likely take a few years.
The OEM silver lining for the fourth quarter was book-to-bill of 1.6 times relative -- reflective of the strongest orders quarter since the third quarter of 2019.
One last point on our Aerospace business, OEM business, in particular, our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view except for the 737 MAX.
With the award of the long-term agreement with GE Aviation on the LEAP program, mentioned on last quarter's call, we now forecast approximately $100,000 of sales per aircraft, up from our previous estimate of $50,000.
For the aftermarket, many of the factors discussed last quarter, lower aircraft utilization, weakened airline profitability and government imposed travel restrictions are still affecting the industry.
Recovery will require more widespread vaccine distribution, allowing people to feel more comfortable about flying, combined with the lifting of the various travel restrictions that currently exist.
Only then will we see commercial flights return in earnest, likely led by domestic travel, while international flights are expected to take a little longer to resume.
Until then, we anticipate aftermarket volume to remain pressured.
However, we do expect aftermarket activity to gradually improve beginning in the second half of 2021.
With that as the backdrop, for 2021, we see OEM sales up mid-single digits over 2020, with MRO down mid-single digits and spare parts down in the mid-teens.
We anticipate 2021 segment operating margin to be in the range of 13% to 14%, surely compressed by the lower aftermarket expectation.
In line with our continued focus on addressing the various topics of interest to our stakeholders, you may recall that last quarter on the topic of ESG, I took a few moments to address our commitment to make Barnes Group a more sustainable, socially responsible and diverse and inclusive Company.
While we've made great progress, there's definitely more work to be done.
Related to our ESG efforts, I'm proud to highlight that Barnes Group was recently named as one of America's Most Responsible Companies by Newsweek.
This acknowledgment is a testament to our employees across the globe who embrace our Barnes Group values each and every day.
So, to conclude, the extraordinary disruption in 2020 required many businesses to play defense, including Barnes Group, securing employee safety, keeping our essential operations running, adjusting to the lower demand -- levels of demand, focusing on costs and preserving liquidity were of paramount importance.
Given the circumstances, the financial results achieved are indicative of the quick and decisive actions taken by the strong leadership team and talented workforce at Burns.
With the arrival of 2021, we now turn to a more offense minded view, increasing our investments in innovation, research and development and growth programs across the enterprise.
While the high level of economic uncertainty still exists, we are squarely focused on controlling our own destiny, seeking out new opportunities and setting the Company up for long-term profitable growth.
Let me begin with highlights of our fourth quarter results on Slide 4 of our supplement.
Fourth quarter sales were $289 million, down 22% from the prior year period, with organic sales declining 21% as continuing impacts from the pandemic affect our end markets.
The diversified Seeger business had a negative impact of 3% on our net sales for the fourth quarter, while FX positively impacted sales by 3%.
Operating income was $32.7 million versus $61.3 million a year ago.
Adjusted operating income was $32.9 million this year, down 48% from $63.5 million last year.
Adjusted operating margin of 11.4% decreased 580 bps.
Net income was $17.7 million, or $0.35 per diluted share, compared to $41 million, or $0.80 per diluted share a year ago.
On an adjusted basis, net income per share of $0.36 was down 58% from an $0.86 a year ago.
Adjusted net income per share in the fourth quarter of 2020 excludes $0.01 of residual restructuring charges from previously announced actions with most of the impact reflected in other expense not operating profit.
For the fourth quarter of 2019, adjusted net income excludes a favorable $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and an $0.11 non-cash impairment charge related to the divestiture of Seeger, both in our Industrial segment.
Moving to 2020 full-year highlights on Slide 5 of our supplement.
Sales were $1.1 billion, down 25% from the prior year.
Organic sales were down 22% for the year.
The Seeger divestiture negatively impacted sales by 3%, while FX had a minimal positive impact.
Operating income was $123.4 million versus $236.4 million a year ago.
On an adjusted basis, operating income was $144 million this year versus $244.1 million last year, a decrease of 41%.
Adjusted operating margin decreased 360 bps to 12.8%.
For the year 2020, interest expense was approximately $15.9 million, a decrease of $4.7 million as a result of lower average borrowings and lower average interest rates.
Other expense was $5.9 million, a decrease of $3 million, primarily as a result of lower FX losses this year as compared to last year, partially offset by higher pension expense.
The Company's effective tax rate in 2020 was 37.6% compared with 23.4% last year, with the increase largely due to a decline in earnings in jurisdictions with lower rates, the recognition of tax expense related to the completed sale of the Seeger business during the first quarter of 2020, the impact of the global intangible low-taxed income or guilty tax on foreign earnings in the US and tax charges related to prior year's stock awards.
For 2020, net income was $63.4 million, or $1.24 per diluted share, compared to $158.4 million, or $3.07 per diluted share a year ago.
On an adjusted basis, 2020 net income per share was $1.64, down 49% from $3.21 in 2019.
Adjusted earnings per share for 2020 excludes $0.27 of restructuring costs and $0.13 of Seeger divestiture adjustments.
While 2019 adjusted earnings per share excludes $0.03 of Gimatic short-term purchase accounting adjustments and an $0.11 non-cash impairment charge related to the disposition of the Seeger business.
Turning to our segment performance, beginning with Industrial.
Fourth quarter sales were $209 million, down 9% from a year ago.
Organic sales decreased 8%.
Seeger divested revenues had a negative impact of 5%, while favorable FX increased sales by 4%.
Sequential sales were up 6% from the third quarter.
Industrial's operating profit for the fourth quarter was $24.5 million versus $30.2 million last year.
As has been the consistent theme since the second quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts.
On an adjusted basis, which excludes a small amount of restructuring charges and Seeger divestiture adjustments, fourth quarter operating income was down 24% to $24.7 million and adjusted operating margin was down 230 bps to 11.8%.
For the year, Industrial sales were $770 million, down 18% from $939 million a year ago, with organic sales down 14%.
The Seeger divestiture had an unfavorable sales impact of 5%, while favorable foreign exchange had a positive impact of 1%.
Operating profit of $66.6 million was down 42% from the prior year.
On an adjusted basis, operating profit was $85 million, a decrease of 30% from last year.
Adjusted operating margin was 11%, down 200 bps.
Sales were $80 million for the quarter, down 43% from last year and operating profit was $8.2 million, down 74%, primarily driven by the lower sales volume.
Operating margin was 10.2% as compared to 22.3% a year ago.
All-in, especially considering the meaningful decline in the high-margin aftermarket, the Aerospace team continues to respond well in a challenged environment.
For the full-year, Aerospace sales were $354 million, down 36% from a record $553 million a year ago.
Operating profit was $56.8 million, down 54% from last year's record $122.5 million.
On an adjusted basis, which excludes $2.3 million in 2020 restructure charges, operating profit was $59 million and adjusted operating margin was 16.7%.
Aerospace OEM backlog ended the quarter at $572 million, up 7% from the third quarter and we expect to ship approximately 45% of this backlog in 2021.
2020 cash provided by operating activities was $215 million, a decrease of approximately $33 million versus last year.
Nonetheless, solid performance in the current environment, given our focus on driving working capital improvement.
Free cash flow was $175 million versus $195 million last year and capital expenditures of $41 million were down approximately $13 million from a year ago.
Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was approximately 3 times at quarter end.
The Company is in full compliance with all covenants of our credit agreements and maintained adequate liquidity to fund operations.
As a reminder, the Company amended on a temporary basis, the debt limits allowed under our credit agreement.
Through the third quarter of 2021, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA, as defined, to 3.75 times.
We anticipate leverage to peak with our first quarter 2021 results, though, well below the amended covenant level.
Our fourth quarter average diluted shares outstanding was 51 million shares and our share repurchase activity remains suspended.
Turning to Slide 6 of our supplement, let's now discuss our initial outlook for 2021.
We expect organic sales to be up 6% to 8% for the year.
FX is not expected to have a meaningful impact.
Adjusted operating margin is forecasted to be between 12% and 14%.
We expect a couple of pennies worth of residual restructuring charges to come through, likely split evenly in the first and second quarters.
Adjusted earnings per share is expected to be in the range of $1.65 to $1.90, approximately flat to up 16% from 2020's adjusted earnings of $1.64 per share.
We do see a higher weighting of adjusted earnings per share in the second half with a 40% first half, 60% second half split.
In particular, we see the first quarter of 2021 being the low quarterly point, given delivery schedules in our longer cycle business in the range of $0.27 to $0.32, significantly lower than last year's strong first quarter.
A few other outlook items.
Interest expense is anticipated to be between $16.5 million and $17 million.
Other expense approximately $8.5 million driven by pension, and effective tax rate of approximately 30%.
Capex of $55 million.
Average diluted shares of approximately 51 million shares and cash conversion of over 100%.
To close, 2020 certainly was historic in terms of business disruption.
The Barnes Group team rose to the occasion to rapidly adapt to the realities of the economic environment with a focus on cost management and cash generation.
As Patrick mentioned, it's now time to shift our mindset to growth with necessary investments in key initiatives like innovation and digital that are targeted to help us accelerate through the anticipated recovery.
Our balance sheet is supportive of such investments and our sales volume and, as our sales volume returns, we expect further margin expansion as well.
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compname reports q3 adjusted earnings per share $0.55.
q3 adjusted earnings per share $0.55.
q3 gaap earnings per share $0.55.
q3 sales rose 21 percent to $325 million.
2021 adjusted earnings per share outlook of $1.83 to $1.93.2021 organic sales growth expectation of up 11% to 12%.
industrial end markets, are experiencing some headwinds as supply chain issues remain a near-term challenge.
foreign exchange is anticipated to have an approximate 2% favorable impact on 2021 sales.
fy operating margin is now forecasted to be approximately 12.5%.
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I would start the call by briefly going through the highlights of the quarter.
Private Securities Litigation Reform Act of 1995.
The announced dividend of $0.15 per share represents a dividend yield of around 8% based on closing price yesterday, and this is our 67th consecutive quarter with dividends.
In light of the continued uncertainty surrounding Seadrill and outcome of their pending financial restructuring, the Board decided to adjust the dividend down to $0.15 and thereby effectively exclude all contribution from offshore rigs for the time being.
We believe that the market has already discounted this in the SFL share price as we, prior to this dividend adjustment, were trading at more than 13% yield based on the prior dividend, which is a very high number in the current low interest rate environment.
When the Seadrill situation is resolved, the Board will reassess the situation and possibly reinstate contribution from the rigs and the dividend again.
And our focus will be on building the portfolio with accretive transactions in order to build the distribution capacity also by adding new assets going forward.
Over the years, we have paid more than $27 per share in dividends or $2.3 billion in total, and we have a significant and fixed rate charter backlog, supporting continued dividend capacity in the future.
The total charter revenues of $157 million in the quarter was in line with the previous quarter, with more than 90% of this from vessels on long-term charters and less than 10% from vessels employed on short-term charters and in the spot market.
The EBITDA equivalent cash flow in the quarter was approximately $117 million.
And last 12 months, the EBITDA equivalent has been approximately $481 million, similar to the situation the last 12 months in the prior quarter.
Excluding cash in the rig owning subsidiaries, the consolidated cash position at quarter end was more than $200 million, up from around $150 million at the end of the second quarter.
In addition, we had $33 million in marketable securities at quarter end.
And after quarter end, we have used some of the cash to take out the financing of the drilling rig West Taurus, but we still have a strong cash position with more than $100 million remaining.
Our fixed rate backlog stands at approximately $3.2 billion after recent charter extensions and vessel sales, providing significant cash flow visibility going forward.
Of this, $2.4 billion relates to shipping assets alone and excludes revenues from 16 vessels trading in the short-term market and also excludes future profit share optionality.
The profit share contribution, which I mentioned, adds optionality value was around $6 million in the third quarter.
This was primarily from the two VLCCs on charter to Frontline, but also from fuel savings from container vessels with scrubbers and a small contribution from bulkers.
Following the immediate impact of COVID-19, some trades, including the car carrier market came to a virtual halt.
We have two vessels in this market, and they were due to come off charters in May and in August this year.
And consequently, we put them in lay-up in order to save costs as we believed at the time that it would take some quarters before the market would recover again.
We are very happy to see that it happened much quicker than anyone anticipated and both vessels are now trading out chartered out again on one on 100-day charter and one for 11 months.
And the charter rates are essentially back to pre-COVID-19 levels already.
While the Seadrill restructuring is pending, we have already addressed the bank structures on two of the rigs.
We have repurchased all the debt on the idle rig West Taurus at the discount essentially limited to the $83 million corporate guarantee, the cash in the rig owning subsidiary, which was already pledged to the banks anyway for some margin.
We have also agreed to guarantee the financing on West Linus in exchange for more flexible financing terms.
And with a large fleet of assets, it will always be acquisitions and disposals, and the remaining vessel on charter to the Hunter Group has been repurchased by them and delivered earlier this month.
The Hunter deal was designed to give us a very high return on a low-risk profile in exchange for flexibility on Hunter's part.
This is a good example of cost of capital arbitrage, where we could utilize our premium access to low-cost funding, and at the same time, give flexibility that Hunter was willing to pay for.
The delivery took place yesterday and net cash to us is more than $10 million after repayment of the associated financing, and the proceeds are expected to be reinvested in new accretive transactions.
Excluding the drilling rigs, which I will cover on the next page, the backlog from shipping assets was $2.4 billion at the end of the quarter.
Over the years, we have changed both fleet composition and structure, and we now have 81 shipping assets in our portfolio and no vessels remaining from the initial fleet in 2004.
We have gone from a single asset class chartered to one single customer to a diversified fleet and multiple counterparties.
And over time, the mix of the charter backlog has varied from 100% tankers to nearly 60% offshore at one stage to container market being the largest right now.
In addition, we have 16 vessels traded in the short-term market, which we define as up to 12-month charters and also from time to time, as I mentioned earlier, significant contributions from profit shares on assets.
We do not have a set mix in the portfolio.
Focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk-reward perspective.
Over time, we believe this will balance itself out, but we try to be careful and conservative in our investments and not invest just because money is burning in our pocket.
Our strategy has been to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the Seatankers group.
This gives us the ability to offer a wider range of services to our customers, from structured financings to full serve risk time charters, which is the bigger part of our portfolio.
But more importantly, we also believe it gives us unique access to deal flow in our core segments.
And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be passively owning vessels employed on bareboat where the customers may not always have an incentive to make such improvements.
So unlike most of the companies with a financing profile in the maritime world, more than three-fourths of our shipping charters revenues comes from vessels on time charter and a smaller proportion from bareboat chartered assets.
And even if we include the drilling rigs, which are all on bareboat charters, the time charter portion is still more than two-thirds.
SFL owns three drilling rigs chartered to subsidiaries of Seadrill.
All three rigs were employed on bareboat charters of Seadrill and generated approximately $24 million in charter hire in the third quarter.
Net of interest and amortization, the contribution was approximately $8 million or around $0.07 per share.
The harsh-environment jack-up rig West Linus has been subchartered to ConocoPhillips until the end of 2028, while the harsh-environment semisubmersible rig West Hercules is employed on consecutive subcharters to Equinor in the North Sea.
The semisubmersible rig West Taurus has been stacked since 2015.
Seadrill has disclosed that it is currently engaged in discussions with its financial stakeholders with regard to a comprehensive restructuring of its balance sheet and that such a restructuring may involve the use of a court supervised process similar to the 2017 restructuring.
At that time, the loan balance on the rigs was much higher and we have reduced leverage by more than 50% in this three-year period as we illustrate on this slide.
At the end of the second quarter, Seadrill reported a cash position of $1 billion, and while Seadrill did pay full charter hire in the third quarter, no charter hire has been received so far in the fourth quarter.
Seadrill has also not paid interest on its bank debt recently and announced a forbearance agreement with its financial banks and some other stakeholders in mid-September, which was subsequently extended through October.
The nonpayment of charter hire by Seadrill does constitute an event of default under the leases and in certain of the corresponding financing agreements.
Unless cured away, this could result in enforcement of such default provisions.
From the start of the transaction with Seadrill all the way back from 2008, all the revenues from the subcharters of these assets, and in this instance, more importantly here now from the two drilling rigs that are working, the West Linus and West Hercules, the revenues from the subcharter have been paid into accounts pledged to SFL's rig owning entities and refinancing banks.
As a result of the current event of default situation caused by Seadrill, Seadrill will need prior approval to access these funds to pay for operating expenses and other expenses, and we'll have to source this from their cost cash position until the situation is resolved.
The gross hire is significantly higher than the bareboat hire to us and keep accumulating on the pledged account for now.
We can, unfortunately, not make any further comments relating to the pending restructuring.
But our objective is, as always, to maximize long-term value for our shareholders.
In the meantime, we have adjusted the quarterly distribution to exclude all distribution from these offshore assets.
And when the Seadrill situation is resolved, the Board will reassess the situation and possibly reinstate contribution from the rigs in the future.
And with that, I will give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.
On this slide, we have shown a pro forma illustration of cash flows for the third quarter.
GAAP and also net of extraordinary and noncash items.
The company generated gross charter hire of approximately $157 million in the third quarter, with more than 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.2 billion.
And while the current charter backlog relating to our offshore assets may be impacted by the pending Seadrill restructuring, the backlog from our shipping portfolio stands at a solid $2.4 billion, providing us a strong visibility on our cash flow going forward.
At quarter end, SFL has a liner fleet of 48 container vessels and two car carriers.
The liner fleet generated gross charter hire of approximately $80 million.
Of this amount, approximately 98% was derived from our vessels on long-term charters.
At quarter end, SFL's liner fleet backlog was approximately $1.8 billion, with an average remaining charter term for approximately four and a half years or approximately seven years if weighted by charter revenue.
Approximately 84% of the liner backlog is the world's largest liner operators, Maersk Line and MSC, with a balance of approximately 16% to Evergreen.
Our tanker fleet generated approximately $24 million in gross charter hire during the quarter, including $4.8 million in profit split contribution from our two VLCCs on charters to Frontline.
The vessels are fixed on profitable subcharters until the end of the quarter, ensuring stability on a quarterly profit split also for the fourth quarter.
The net contribution from the company's two Suezmax tankers was approximately $3.3 million in the third quarter, and the vessels are traded in the short-term market for the time being.
On November 11, the company redelivered the last VLCC to the Hunter Group after declaration of a purchase option.
After repayment of associated financing, the transaction increased SFL's cash balance by approximately $10.7 million.
In the third quarter, our dry bulk fleet generated approximately $28.4 million in gross charter hire.
Of this amount, approximately 70% was derived from our vessels on long-term charters.
During the quarter, the company had 10 Handysize vessels employed in spot and short-term markets.
The vessels generated approximately $7 million in net charter hire compared to $2.4 million in the previous quarter.
At the end of the third quarter, SFL owned three drilling rigs.
All of our drilling rigs are long-term bareboat charters to fully guaranteed affiliates of Seadrill Limited and generated approximately $24.4 million in charter hire during the quarter.
This summarizes to an adjusted EBITDA of approximately $170 million for the third quarter or $1.08 per share.
We then move on to the profit and loss statement as reported under U.S. GAAP.
As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company.
And as our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing.
As a result, significant portions of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investments in finance leases and vessel loans, results in associate and long-term investments and interest income from associates.
So for the third quarter, we report total operating revenues according to U.S. GAAP, approximately $160 million, which is less than approximately $157 million of charter hire actually received for the reasons just mentioned.
In the quarter, the company reported profit split income of $4.8 million from our tanker vessels on charter to Frontline and $800,000 from profit split arrangements related to fuel savings on some of our large container vessels.
Beginning in 2020, assets classified as financial assets, including several of SFL's vessels and rigs on long-term leases, are subject to general credit loss provisions similar to those requirements for banks and financial institutions.
The net change in such provisions is recorded in the income statement each quarter.
In the third quarter, the credit loss provisions increased by approximately $6.2 million, primarily in wholly owned nonconsolidated subsidiaries.
Furthermore, the company recorded nonrecurring and noncash items, including negative mark-to-market effects relating to interest hedging, currency swaps and equity investments of $600,000 and amortization of deferred charges of $2.3 million.
So overall, and according to U.S. GAAP, the company reported a net profit of $16 million or $0.15 per share.
Moving on to the balance sheet.
At quarter end, SFL had approximately $206 million of cash and cash equivalents, excluding $22 million of cash held in wholly owned nonconsolidated subsidiaries.
Furthermore, the company had marketable securities of approximately $33 million, based on market prices at the end of the quarter.
This included 1.4 million shares in Frontline, four million shares in ADS Crude Carriers and other investments in marketable securities, in connection with the sale of 3 older VLCCs to ADS Crude Carriers back in 2018 as well to shares in the company as part payment.
ADS has now sold all the vessels at attractive prices.
And it's expected that the net proceeds from the vessel sales will be returned to investors.
When including the dividend received, the value is estimated approximately $12 million illustrating how SFL, from time to time, takes steps to maximize value for our shareholders.
At quarter end SFL had five debt-free vessels with a combined charter value of approximately $40 million based on average broker appraisals.
So based on Q3 2020 figures, the company had a book equity ratio of approximately 26%.
Then to summarize, the Board has declared a cash dividend of $0.15 per share for the quarter.
This represents a dividend yield of approximately 8% based on the closing share price yesterday.
This is the 67th consecutive quarterly dividend, and since inception of the company in 2004, more than $27 per share or $2.3 billion in aggregate have been returned to shareholders through dividends.
And while we continue to collect revenue from our fixed charter rate backlog, we also have upside from profit split arrangements from our VLCCs in addition to profit split arrangements related to fuel savings on some of the large container vessels.
Despite a relatively volatile market in 2020, we have added more than $250 million per fixed charter rate backlog over the last 12 months.
And we actively continue to explore new business opportunities.
And while risk premiums on energy and shipping investments have increased with the recent volatility in financial markets, SFL has, at the same time, with new attractive financing, has expanded its group of lending banks, especially in the Far East to now represent more than 40% of our lending volume.
SFL's business model has been continuously tested throughout its 16 years of existence and has previously been highly successful in navigating periods of volatility.
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compname reports preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
sfl - preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
board has decided to effectively exclude all cash flow earned from offshore assets for time being.
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During today's call, Bob and Eric will provide some corporate and strategic updates, and Mark will discuss our results.
Many of these factors are beyond the company's ability to predict or control.
As a result of these and other factors, the company's past financial performance should not be relied on as an indication of future performance.
During the course of today's call, words such as expect, anticipate, believe and intend will be used in our discussion of goals or events in the future.
We encourage you to read Safeguard's filings with the SEC, including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business.
With that, here's Bob.
The second quarter was a challenging period due to the COVID-19 pandemic and the follow-on impacts to our economy.
In a few cases, the pandemic has provided a tailwind and has accelerated certain trends which were under way prior to the outbreak.
Overall, we continue to assess the value and timeframe for our exits and work with the management teams to drive value regardless of the macro-environment.
Safeguard holds a value portfolio of ownership interest in companies operating in exciting sectors of our economy and where we remain dedicated to maximizing ultimate value for our shareholders.
I continue to be encouraged by the direction and activities of many of our ownership interests, which we believe will eventually lead to valuable exit transactions.
Eric and Mark will now review our recent activities and this quarter's results.
While the current operating environment has been heavily impacted by the pandemic, we are happy to report that our companies are by and large tracking ahead of their COVID-19 plans.
And in some cases, we're seeing pockets of strength and even tailwinds.
Overall, we are at the early stages of recovery, but are substantially more encouraged today than we were when we spoke to you in April.
We'd like to start by reviewing with you five areas we've been focused on since the last earnings call.
The first is making sure our companies have sufficient liquidity to operate in the current environment.
The second is working at the board level of our companies to drive operating and financial performance.
Three is helping the management teams position our companies for the most attractive exit opportunities.
Fourth is at the Safeguard level driving down our cost to operate and taking steps to ensure we can support our companies.
And fifth is, at the shareholder level, providing greater visibility engagement with Safeguard investors.
On the company liquidity front, our companies have been able to weather the COVID-19 storm reasonably well.
This was achieved through a combination of cost-cutting, improved working capital management, business model alignment, access to PPP funds and securing other sources of capital.
To provide greater detail, the majority of our companies are operating at cash flow breakeven or are funded with the expectations that they will get to cash flow breakeven.
The remaining companies are exploring capital raises at different stages.
Three of our companies are currently in the term sheet phase that may involve participation by Safeguard.
We are evaluating these opportunities and if we do participate in these financings, we expect total investments in 2020 to fall within the guidance range we previously provided.
Our second area of focus has been supporting our companies.
As you know, we take an active role with our companies and we have spent considerable time over the past few months with our management teams and co-investors.
We and they have had to make hard decisions, decisions that test the leadership and capabilities of management at all levels, headcount reductions, furloughs, product and market alignment, capital allocation, decisions on credit extension to customers, pushing to collect accounts receivables early, personnel issues and others.
These have required thoughtful consideration and deliberation at the Board level.
As mentioned at the outset, we are pleased with how the teams have performed and are looking forward to shifting our attention for managing crisis to focusing on growth.
The third area I'd like to touch on is exits.
We are working to exit our companies at fair values, which will drive shareholder returns and will allow us to return value to Safeguard's shareholders.
There are two basic ways to exit.
One is what we call a natural exit, and the second is secondary exit.
A natural exit is when the company is sold through a banker process and we sell a loan in the deal.
The secondary exit is when we sell our minority stake to a third party, but there is no control premium and there is usually an embedded discount in the transaction.
While natural exits generally provide greater values and secondary sales, we are open to exploring secondary deals as long as we can get reasonable value as compared to what we believe we can achieve in a natural exit, factoring in time and risk.
We had conversations with a couple of secondary buyers in Q2 but did not find their indicative interest levels attractive versus what we expect to get in a natural sale over a reasonable timeframe.
We had no exits in Q2, but we currently have one company under LOI with a PE buyer and another company about to launch a process after a robust banker selection.
We are cautiously optimistic on both of these processes, but deal risks obviously remain and these risks are magnified in the current M&A environment.
The fourth area is Safeguard's costs in our capital that we have to support our companies.
We continue to focus on bringing our cost to operate down, and we've made a lot of progress on this front.
We are currently running at mid-$5 million a year to operate with corporate expenses down 36% year-on-year.
We are not done and continue to look at both internal and third-party costs.
Mark will provide more detail in his section.
On the capital front, we believe we currently have sufficient funds to operate and support the expected needs of our companies over the next 12 months.
We expect sales of our companies will fund needs beyond that period.
Given the uncertainty of exit timing, we will prudently explore contingency plans to ensure we have sufficient liquidity to meet our needs as necessary.
On our shareholder engagement, we remain committed to improve the level of engagement and transparency with our investors as well as providing better exposure and insight into our companies.
We held our first fireside chat with Jan Bruce of meQuilibrium on July 30th, and the replay is on our website.
If you haven't listened to it, we would highly recommend you do so.
This was the first in a series of fireside chats that we are launching, where you can meet the CEO and you can ask questions via the Zoom webinar.
Beyond that, please feel free to reach out to Bob, Mark or me with questions or suggestions.
I'd like to provide some detail on our companies and provide some company level [Phonetic] highlights.
We selected five companies that are among the top 10 in expected exit values.
To be clear, these are not necessarily the top 5 positions in exit value, but they are among the top 10.
So they are meaningful for us, and we thought they'd be meaningful for you to learn more about them.
To walk you through them briefly, we've looked at these in four different categories.
We'll provide a very quick business subscription, what we like about the opportunity, the impact of COVID-19 on the business and some Q2 highlights that we can say publicly.
And just to run through these companies, we'll talk about meQuilibrium, Prognos, Zipnosis, Clutch and Flashtalking.
You heard about meQuilibrium on our webinar, so I won't go into too much detail, but meQuilibrium stock falls in our revenue bucket of $5 million to $10 million with SaaS talent development solution using predictive analytics to support resilient, engaged and agile workforce.
Their customers are Fortune 500s and SMBs, and we like the opportunity because they're well positioned in the growing HR tech and human capital management space.
The impact of COVID-19 on their business has been mixed to positive.
There has been some accelerated demand for talent development and employee engagement solutions, particularly among disrupted workforces.
In terms of highlights, they had very strong Q2 bookings with activity across renewals and new logos.
Company also closed a $4 million Series C extension funding.
The next company is Prognos.
Prognos falls in our $15 million to $20 million revenue bucket.
The company takes clinical and diagnostic data, and analyzes this information for pharma companies and payers to better track and predict disease activity.
We like the company because they're a leader in this emerging area of drawing insights from clinical and diagnostic test data.
COVID has had a mixed to positive impact on Prognos.
The sales process has been disrupted in terms of their ability to meet with pharma sales teams, but there has been increased interest in their digital marketing offering.
Some highlights over the quarter is, they launched a Prognos Factor platform, a new analytics platform for pharma customers, and they announced a partnership with Livongo to leverage Prognos's lab data capabilities.
The next company is Zipnosis.
Zipnosis falls in the $5 million to $10 million revenue bucket.
Zipnosis is a white-labeled virtual care platform offering patients convenient access to care while improving clinician efficiency.
We like the opportunity because they're obviously in a growing telehealth space and they enable health systems to improve the patient experience and decrease time to treatment decisions.
The impact of COVID-19 has been a positive.
It greatly expanded interest in telemedicine in the use of virtual care solutions.
Some Q2 highlights are that they've recorded their highest number of virtual visits in company history, and Zipnopsis launched a ZipCheck product, which is an end-to-end return to work solution for employees to test COVID-19.
The next company that we'll highlight is Clutch.
Clutch falls in the $10 million to $15 million revenue bucket.
And Clutch is a data-driven marketing and customer relationship management platform focusing on loyalty, gifts in channel marketing to marketers.
What we like about it is the platform that provides deep insights into customer behaviors, and they have a industry-leading product.
COVID-19 has had a negative impact on Clutch because many of their customers are in the retail, travel and hospitality sector, which is obviously in different levels of disruption.
The company is doing a good job to pivot to other sectors, and they are seeing growth in development with their channel partners.
In Q2, [Indecipherable] COVID-19 plan, they won two new strategic accounts and they have achieved SOC 2 compliance and completed a new release of the platform.
The last company I'll touch on is Flashtalking.
Flashtalking is the above $20 million revenue bucket.
They are an independent ad-serving identity management analytics platform.
What they do is, they drive ad relevance and campaign performance for major brands.
We like the opportunity because it's a large and growing addressable market at a strong ROI and they've been growing market share.
COVID-19 has had a mixed impact on their business.
They have some exposure to retail, travel and hospitality, but they have other -- they also have exposure to other sectors, which are more resilient through the pandemic.
They successfully rolled out the first of 14 countries for Procter & Gamble, a large new customer.
And as part of that rollout, they successfully launched an API-based trafficking integration with The Trade Desk and a division of Oracle.
After COVID dip in April and May, the company has returned to year-over-year revenue growth in June.
So we hope this helps frame our thinking on some of the companies, what we plan to do is, next quarter we will review the other five companies which sit within the top 10, and estimated exit values to provide you some greater insight into how we're thinking about the companies and what we like about these opportunities as well as how they're performing in the current quarter or, in this case, we'll be choosing Q3 highlights.
For the quarter ended June 30th, 2020, Safeguard's net loss was $9.9 million or $0.48 per share compared with a net income of $36.1 million or $1.75 per share for the same period of 2019.
Safeguard's cash, cash equivalents and restricted cash at June 30th totaled $13.6 million, and we have no debt obligations.
Our funding to existing ownership interest continued this quarter, including $3.8 million to Syapse, which resulted in $4.4 million during the year-to-date period with the Syapse [Phonetic] after considering bridge loans during the first quarter.
We made two other small deployments during the quarter, and we continue to expect that deployments for the full year of 2020 will be between $8 million to $12 million.
However, we expect to evaluate deployment activity for only three to four companies for the remainder of the year due to the circumstances Eric described earlier.
The quarter's results also included impairments of $5.7 million related to the lowering of our estimate of fair value for our ownership interest in Sonobi, T-Rex, Beta and in other ownership interest.
These declines in fair value were impacted by our outlook for transaction values as well as other company-specific factors.
Our general and administrative expenses were $2 million for the three months ended June 30th, 2020 as compared to $2.6 million in the second quarter of 2019.
Our G&A expenses benefited from lower employee compensation, lower professional fees, lower office rental cost, lower depreciation and other costs.
Corporate expenses for the second quarter, which represent general and administrative expenses, excluding depreciation, stock-based compensation, severance and retirement costs and other non-recurring or other items, were $1.2 million as compared to $1.9 million in 2019.
In addition to the G&A reductions mentioned above, corporate expense has benefited from the reflection of director fees as a stock-based compensation item as well as a change that will result in a portion of management's estimated incentive bonus compensation will also be paid invested equity instead of cash.
Note that we made this change in the second quarter, but it will be applicable for the year-to-date period.
So approximately $0.1 million of the decline is attributable to this catch-up of the first quarter's portion.
As we've mentioned before, we will continue to look for ways to reduce our cost structure.
Some of the steps that we are making now or plan to make are relatively small, but we understand every step counts.
So, as an example, we are continuing to seek to minimize our office-related costs as we've been able to effectively work remotely over the last few months.
As a result, we expect that our corporate expenses for the full year of 2020 will be at the low-end or below our previously disclosed range of $5.6 million to $6.0 million as compared to $7.1 million reported for the full year of 2019.
With respect to ownership interests at June 30th, 2020, we have an aggregate carrying value of $61.4 million.
As we've discussed before, this is a GAAP carrying value, which results from the application of equity method accounting.
It typically reduces the carrying value for our share of the losses of the underlying companies, and generally does not represent the fair value or expected exit value of those same ownership interests.
Only when the fair value declines below our carrying value would we consider making a downward adjustment to the carrying value of our equity method investments.
We also have a few ownership interests that are accounted for under the other method, which can have upward or downward adjustments resulting from observable price changes if there are transactions in their securities.
Our share of the losses of our equity method ownership interest for the three months ended June 30th, 2020 was $3.1 million as compared to $8.3 million for the comparable period in 2019.
The decrease is the result of fewer companies being accounted for under the equity method due to exits, changes in the basis of accounting in two companies that move from the equity method to the other method, as well as lower losses on a net basis from our equity method ownership interest.
There is also a benefit recorded resulting from a technical accounting change, the new revenue recognition standard, at one of our ownership interests.
This benefit essentially offset the cumulative effect of that same accounting change that was also required to be recorded directly to one of our ownership interests.
So while this accounting change resulted in an income statement benefit for the quarter, there was not a significant cumulative impact to our ownership interest balance as of the end of the quarter.
I would also like to remind everyone that we report our share of the losses from the equity method companies on a one quarter lag.
So, this quarter share of the losses reflect the calendar first quarter for those companies.
While many companies saw some impact from COVID-19 in the first quarter, their results in the second quarter will reflect the full quarter of operating in this environment, which we will report to you as part of our third quarter results due to the one quarter lag policy.
So now, it is time for us to turn to the Q&A segment of the call.
So, operator, please open the phones up, which I know you've already done, so we can answer a few questions.
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select medical sees fy earnings per share $2.91 to $3.08.
sees fy earnings per share $2.91 to $3.08.
q2 adjusted earnings per share $1.22.
sees fy revenue $5.85 billion to $6.05 billion.
q2 earnings per share $1.22.
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As we have done on our past calls, we'll be taking questions at the end of Craig's comments.
We will start on page 3 with recent highlights and first I'd just say we had a terrific quarter and we're significantly increasing our full year guidance as you saw.
Our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results.
Q1 adjusted earnings per share of $1.44 were solid 15% percent increase year-over-year and 18% above the midpoint of our guidance.
Our Q1 revenues of $4.7 billion were up 0.5% organically, which was well above the high end of our guidance range of down 3%.
This outperformance was driven primarily by the two electrical segments as well as our vehicle business.
We also posted a Q1 record for segment margins of 17.7%.
And looking at our incrementals, we generated $73 million of higher profits despite having $97 million of lower revenues.
This was the result of we'd say strong execution, ongoing improvements in the cost structure from the multi-year restructuring program that we announced in the second quarter of 2020 as well as closely managing price and inflation in the quarter.
Our cash flow was also very strong.
Our adjusted operating cash flow increased by 42% and our adjusted free cash flow increased by 62%.
And we had another successful quarter of M&A, closing three deals.
We're also making good progress toward the closure of the previously announced acquisition of Cobham Mission Systems as well as the divestiture of Hydraulics.
And finally, we recently announced the agreement to acquire 50% of Jiangsu YiNeng meaning electric's busway business in China, an important part of our growth strategy for the Asia Pacific region.
Having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these three recent deals.
We covered Tripp Lite and Cobham Mission Systems acquisitions in some depth on the investor meetings, but each of these three deals here certainly advanced our strategic growth objectives and our electrical business.
First, Green Motion, based in Switzerland, it expands our capabilities in the electrical charging market where we expect to see significant growth over the next decade linked to energy transition.
Their proven charter designs and advanced power management capabilities, billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything as a grid.
We also closed our previously announced investment in HuanYu.
HuanYu is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific.
They make cost-effective circuit breakers and contactors and that give us access to Tier 2 and Tier 3 markets in Asia Pacific.
And finally, last week we were pleased to announce the agreement to acquire 50% of Jiangsu YiNeng electric busway business in China.
YiNeng's strong busway capabilities in China combined with YiNeng's broad portfolio of products will really position us well to participate in the high growth data center, industrial and high-end commercial segments and allowing us to pull through related electrical products.
The HuanYu and YiNeng transactions, I'd also add, significantly expand our addressable market in China and in Asia Pacific, certainly allowing us to accelerate our growth rate in the region.
Moving to page 5, we summarize our Q1 financial results and I'll just note a couple of points here.
First, acquisitions increased sales by 1% but this was more than offset by the divestiture of Lighting which reduced sales by 5.5%.
You'll recall that we sold the Lighting business in March of 2020.
Second, segment margins of $831 million were 10% above prior year and this is despite a 2% decline in total revenue.
This is largely the result that I'd say of solid execution, restructuring savings and really our ability to effectively manage price and inflation during the quarter.
We expect the inflation impact to worsen certainly in Q2, but we will more than fully offset this for the full year.
And lastly, our adjusted earnings of 577 million, up 12% and when combined with our lower share count, we delivered a 15% increase in our adjusted EPS.
Turning to page 6, you see the results for our Electrical Americas segment.
Revenues were up 2% organically driven by strength in data centers, residential and utility markets which offset weakness in industrial and commercial markets.
The acquisition of Tripp Lite and PDI added 2% of revenues while the divestiture of Lighting reduced revenues by 14%.
Operating margins, as you can see, increased sharply, up 330 basis points to 20.5%, a quarterly record.
And as you can see, profits were $24 million higher on significantly lower revenues.
These results once again were driven by good execution, cost savings and really favorable mix due to the divestiture of Lighting.
We're also pleased with the 11% orders growth in the quarter.
This was driven by once again strength in data center and residential markets.
Our backlog was actually up 23% versus last year and due to ongoing strength in once again data center and residential markets.
We were also encouraged to see some very large orders in select commercial markets, perhaps a sign here that these markets too are beginning to turn positive.
And while it's difficult to judge, we do think the order strength could have been due to some concern about some of the supply chain shortages that you certainly have been reading about.
Next on page 7, we show the results for our Electrical Global segment.
We posted a 5% organic growth with 5% favorable impact from currency largely due to the weaker dollar.
Organic revenue growth was driven by strength in data centers, residential and utility markets, you can see the pattern here.
We also delivered 250 basis point increase in operating margins and posted a new Q1 record of 17%.
Our incremental margins in the segment were also strong, more than 40% and were also driven by good cost control measures, saving from actions taken from our multi-year restructuring program.
Orders grew 7% in the quarter, and like sales, the primary contributors to the growth came from data centers, residential and utility markets.
And I say dragged down by the earlier COVID-related declines, orders declined 12% -- 5% on a rolling 12 month basis.
And lastly here, our backlog was up 17% versus last year, driven by the same three end markets.
Moving to page 8, we summarize our Hydraulics segment.
Revenues increased 11% with strong 9% organic growth and 2% positive currency impact.
Operating margin stepped up significantly to 15%, a 420 basis point improvement over last year.
And our Q1 orders were also very strong, up 53% driven primarily by strength in mobile equipment markets.
As we anticipated, Danfoss did receive conditional regulatory approval from the EU to acquired the Hydraulics business, which is an important step in the process and this sale is still expected to close in the second quarter here.
Turning to page 9, we have the financial results for our Aerospace segment.
Revenues were down 24%, including 26% organic decline driven by the continued downturn in commercial aviation.
Currency, as you can see, added 2% to revenues.
And as you can also see, operating margins were down 310 basis points to 18.5%, down, but still at very attractive levels overall.
Our team, I give them a lot of credit, they moved quickly to flex the business and we're able to really deliver better than normal decrementals margins of approximately 30%.
Orders were down 36% on a rolling 12-month basis, once again due to the ongoing downturn in commercial aerospace markets.
However, I would add on a sequential basis, we are starting to see some improvement as orders were up 14% from Q4.
And lastly, our previously announced acquisition of Cobham Mission Systems remains on track and we expect the transaction to close at the beginning of Q4 2021, this year.
Next on page 10, we show the results of our Vehicle segment.
As you can see, revenues increased 9% and were much stronger than anticipated.
The strongest growth came from global commercial vehicle markets and from the Chinese light vehicle market.
Just is a point of reference here, NAFTA Class 8 production was up some 12%.
Operating margins also improved significantly here to 17.3%, another quarterly record and a 380 basis point increase with incremental margins of nearly 60%.
The strong margin performance was driven certainly by increased volume and also from savings from the multi-year restructuring program that we've undertaken.
And despite volumes that were still below pre-pandemic levels, this business is approaching our target segment margins of 18%.
So making very strong progress in our Vehicle segment.
And one additional noteworthy development in this segment was the introduction of the new automated transmissions for the heavy-duty truck market in China through our Eaton-Cummins JV.
This product, I'd say, is already getting great traction and seeing strong growth in the market.
Turning to page 11, we summarize our eMobility segment.
Here, revenues increased 15%, 13% organic and 2% from currency.
We experienced solid growth in global vehicle markets, which was driven here both by high and low voltage products.
Operating margins were a negative 8.4% as we continued to invest heavily in R&D.
And as I've reported in the past, we continue to manage I'd say a really robust pipeline of opportunities.
Of note, in Q1 we secured a multi-year agreement with a leading global automotive customer to buy our next-generation brake -- circuit protection technology for battery electric vehicles.
This award represents $33 million in material revenue sales and we hope to be awarded additional vehicle platforms using the same technology.
This win, I would say, it really does highlight the strength of our electrical pedigree and now we're able to leverage the strength to grow in the eMobility market.
And on slide 12, we've updated our organic revenue guidance for the year.
As you can see, we're significantly increasing our organic revenue growth for the year with our strong Q1 results.
We're optimistic about the remainder of 2021.
Our strong order book and growing backlog persist that markets and market demand is really increasing and improving across most of our end markets.
We now expect overall Eaton organic growth to be up 7% to 9% and this is up from 4% to 6% previously.
And while we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges.
As you can see, we've kept our forecast for Aerospace unchanged.
Vehicle has increased by 600 basis points.
Electrical Global has increased by 400 basis points and all other segments have increased by 300 basis points.
Encouragingly, I'd say here about our Electrical segment, we're seeing higher than expected demand across all of our markets with the exception of utility and that market remains in line with our original outlook which was for mid single-digit growth.
So really strong performance in the Electrical segment.
Moving to page 13, we show our updated segment margin guidance for the year where we're also significantly increasing our guidance.
For Eaton overall, we're increasing segment margins by 50 basis points at the midpoint with a range of 17.8% to 18.3% and we've raised our margin guidance in each of our segments with the exception of Aerospace and eMobility which are unchanged.
Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume.
I'd also note that for the full year, we continue to expect net price versus inflation to be neutral.
And on page 14, we have the balance of our 2021 guidance.
We're raising our full year adjusted earnings per share by $0.50 to $5.90 to $6.30, a midpoint of $6.10 and this is a 9% increase over our prior guidance and a 24% increase over 2020.
With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures, down from our prior outlook of 8%.
I'd say it's also worth noting here that our segment margin guidance of 18.1% to 18.5% is 190 basis point increase at the midpoint over 2020 and will be an all-time record.
It's also, just as a point of reference, above our pre-pandemic margins of 17.6% which we posted in 2019, which was also an all-time record.
So we're off to a strong start and I'd say well on our way to achieve our longer-term target of getting to 21% segment margins.
The remaining components of our full-year 2021 guidance remain unchanged.
And lastly for Q2, our guidance is as follows.
We expect to be between $1.45 and $1.55 on earnings for organic revenue to be up 24% to 28% and for segment margins to come in between 17.5% and 17.9%.
And if I could, just finally, on page 15, I'll wrap up with a kind of high-level summary of why we think Eaton remains an attractive long-term investment and I begin with first, our intelligent power management strategy really does position us to capitalize on these key secular growth trends that we've talked about for the last couple of years, electrification, energy transition and digitalization.
And we're gaining traction here in all of these areas with a number of new wins.
Our technology solutions, including our Brightlayer platform are being well received by customers.
As a result, we continue to expect higher than historical organic growth rate for the company over the next five years.
We're reaffirming our view that 4% to 6% outlook looks very much in hand.
This accelerated growth plus our, what I call, proven ability to deliver margin expansion will allow us to deliver on average 11% to 13% earnings per share growth per year over the next five years.
We will also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth, to add strategic acquisitions and to return cash to shareholders.
And our commitment to ESG remains strong.
We will continue to develop sustainable solutions for our customers, for our own businesses and then certainly for the environment that we all share.
Given our time constraint at only an hour today, really appreciate if you guys can limit your opportunity to just one question and a follow-up.
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eaton corp q1 operating profit rose 8% to $332 mln.
q1 operating profit rose 8 percent to 332 million usd.
quarterly adjusted earnings per share $1.44.
compname says raising adjusted earnings per share guidance for 2021 to $6.10 at midpoint, up 24 percent over 2020.
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COVID-19 remains a constant in our daily work and home lives.
Our team has been able to rapidly adapt to a very dynamic situation, and I sincerely appreciate their ongoing efforts to deliver the products and services we provide to our customers around the world.
For the third quarter of 2020, our combined adjusted EBITDA was $218.5 million as our Global Ingredients platform continues to be resilient.
Our health, nutrient and bio energy businesses continue to prosper and make the necessary adjustments to keep our momentum for a record 2020 and set the stage for even a better 2021.
Our fuel segment and our food segment showed improvement year-over-year and grew sequentially to the second quarter of 2020.
Overall, we continued to see an improving and positive trend on our gross margin percentages across our business lines.
As I talked with you back in May, we continue to work diligently on cost control measures and widening our gross margins, thus improving our returns.
Our USA team has done an exceptional job.
As expected, our Feed segment for the third quarter declined from the strong performance we had in the second quarter as protein prices in the third quarter moved lower sequentially compared to Q2 and prices for Q3 2020 were also lower when you compare them to 2019.
With the positive upward movement in the grain and oilseed complex, we are experiencing a better pricing environment for our protein products and for our fats and oil products in the fourth quarter.
And this should provide a positive catalyst heading into 2021.
In the food segment, there was a nice recovery of hydrolyzed collagen sales for the quarter.
We're in the process of commissioning our third new collagen peptide production facility in Presidente Epitacio, Brazil as we speak, which broadens our ability to supply this on-trend food ingredient to our customers worldwide.
The food segment, led by Rousselot, the Number 1 collagen provider in the world, is poised to provide meaningful earnings growth in 2021.
The fuel segment performance was significantly better than a year ago, both in our international green energy businesses and at Diamond Green Diesel.
Diamond Green Diesel achieved a $2.41 per gallon EBITDA margin on record sales of 80 million gallons for the quarter.
We recorded $96.4 million of EBITDA, which is Darling's share of the joint venture.
The energy market did show some improvements from a demand standpoint during the quarter.
Although oil and diesel prices remained significantly lower than the same time a year ago, diesel is currently trading $0.80 a gallon under Q4 of 2019.
On the positive side, the green premium we are able to capture for the renewable diesel has offset the majority of this downward price in the current environment.
And we expect that Diamond Green will sell between 55 million and 60 million gallons of renewable diesel in the fourth quarter and should average between $2.30 and $2.40 a gallon for those gallons sold.
On a year-to-date basis, Darling has generated $627 million of combined adjusted EBITDA for the Company, putting us on pace to finish what most everyone considers to be a challenging year with record results.
We currently believe that we can finish 2020 with combined adjusted EBITDA between $800 million and $810 million.
We certainly believe this gives us a solid platform as we move into 2021 for what we believe will be a transformative year as the 400 million gallon expansion, or what's known as DGD 2, comes online in late 2021.
If you've not had a chance to look at our refreshed corporate website or read our 2020 ESG report, I encourage you to do so.
Our ESG team did an excellent job in publishing our 2020 fact sheet, which gives us an exciting story to build on as we move forward.
It outlines our goals and initiatives and how Darling will play a significant role in the decarbonization of our planet.
For Darling, we take great pride in our green leadership position in the world, and we plan to do our part in conserving water, energy and reducing greenhouse gas emissions directly and indirectly by our DGD business producing more low-carbon renewable fuels for the world to consume.
I will touch base on a few of the highlights for this quarter and year-to-date.
Net income for the third quarter of 2020 totaled $101.1 million or $0.61 per diluted share compared to a net income of $25.7 million or $0.15 per diluted share for the 2019 third quarter.
For the first nine months of 2020, net income was $252.1 million or $1.51 per diluted share compared to $70 million or $0.42 per diluted share for the same period of 2019.
As Randy mentioned earlier, our gross margin continues to show improvement as we reported 24.9% for the third quarter of 2020 compared to 22.5% for the same period in 2019 as net sales increased $8.5 million and cost of sales and operating expenses decreased $14.6 million.
Operating income improved $67.7 million in the third quarter 2020 as compared to the prior year, reaching $127.5 million for the third quarter and totaled $356.6 million year-to-date 2020 compared to $182.5 million for the 2019 period.
In addition to the improved gross margin, the improvement in operating income benefited from a $59.1 million increase in Darling's equity and net income from Diamond Green Diesel.
SG&A expense was higher by $6.4 million in the quarter, partially attributable to the higher cost related to COVID-19, certain insurance increases as we recently renewed our coverages across the business, and higher benefits more than offsetting lower travel cost.
Interest expense was $18.8 million for the third quarter of 2020 compared to $19.4 million for the prior-year period.
We currently project quarterly interest expense to be approximately $15 million per quarter over the next several quarters.
The Company reported income tax expense of $4.8 million for the three months ended September 26, 2020.
The effective tax rate is 4.5%, which differs from the federal statutory rate of 21% due primarily to the biofuel tax incentives; the relative mix of earnings among jurisdictions with different tax rates and discrete items, including the recognition of a previously unrecognized tax benefit; and the favorable impact of certain US Treasury regulations issued during the quarter.
For the nine months ended September 26, 2020, the Company recorded income tax expense of $43.1 million with an effective tax rate of 14.5%.
Excluding discrete items, the year-to-date effective tax rate is 18.2%.
The Company also paid $24.9 million of income taxes as of the end of the third quarter.
For the remainder of the year, we project the effective tax rate to be about 20% with cash taxes for the year totaling approximately $35 million.
For the three and nine months 2020, Darling's share of Diamond Green Diesel's earnings was $91.1 million and $252.4 million as compared to $32 million and $94.4 million for the same period of 2019.
A reminder that there was no BTC in place to recognize during 2019 until the fourth quarter.
Capital expenditures of $184.9 million were made for the nine months of 2020 as we continue to take a disciplined approach during the pandemic prioritizing compliance and safety needs of the business and our reduced capex spend.
Now, turning to the balance sheet, in the third quarter, we were successful in amending and extending our $1 billion revolving credit facility with favorable terms.
The amendment extends the maturity date of the revolving credit facility under the credit agreement from December 16, 2021 to September 18, 2025.
In addition, we paid down our term loan balance by $145 million to a new balance of $350 million outstanding at the end of the quarter.
With our improved financial results and the paydown of the term loan B, our bank covenant leverage ratio for Q3 was 1.93 to 1.00.
We continue to make progress toward achieving an investment grade rating.
Our liquidity remains very strong with approximately $934 million available under our revolving credit facility at the end of Q3, providing strategic flexibility, while at the same time, maintaining a very solid capital structure.
As I mentioned earlier, our share of the 2020 DGD earnings should be approximately $330 million based on the ranges I laid out for you.
With the strong performance of Q3 and prices for our products improving as we work through the fourth quarter, we believe we can produce EBITDA of approximately $470 million to $480 million in 2020 in our Global Ingredients business.
That is back in line with the guidance we were anticipating back in February of this year pre-COVID.
The permitting process for these types of facility is no easy task.
Once approved, construction should begin immediately, putting DGD 3 in a position to be operational in early 2024.
We understand that there is concern with oversupply of renewable diesel and potentially a shortage of low-carbon feedstocks in the future.
Our simple answer is, we plan to take advantage of the first-mover position.
We have to be the largest low-cost producer of renewable diesel in North America.
While others are trying to figure out how to build or convert existing 80-year-old refineries to renewable diesel, we continue to focus on building new facilities with the lowest operating cost structure, the latest technologies, incorporating the trade secrets we've learned over the last seven years of operating our plants.
Darling's vertically integrated supply chain will continue to provide DGD with superior low-cost feedstock, which enhances that first-mover advantage for DGD.
This was especially challenging for diligence given COVID-19 protocols, but our Euro team did a nice job.
And we expect, even while small, this acquisition to strengthen our already successful Belgian system and immediately be accretive.
With that, let's go ahead, Matt, and open it up to Q&A.
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compname posts q2 earnings per share of $1.17.
q2 sales $1.2 billion versus refinitiv ibes estimate of $1.11 billion.
q2 earnings per share $1.17.
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Participating on the call today are Aaron Ravenscroft, our president and chief executive officer; and David Antoniuk, executive vice president and chief financial officer.
However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings.
During our last call, I outlined Manitowoc's three key priorities for managing through the COVID-19 pandemic, which are: one, manage the health and safety of our employees; two, strengthen our balance sheet; and three, position the company for long-term growth.
Orders for the quarter were $390 million and frankly, much stronger than we had anticipated.
This laid the groundwork for us to increase our factory production in certain facilities where we had an aggressive shutdown plan and allowed us to deliver on a strong quarter.
We generated $21 million of free cash flow during the quarter and ended the quarter with $101 million of cash on hand.
Our total liquidity of $397 million at the end of September positions us well for the cyclical nature of the Crane business and to execute on our strategic growth initiatives.
With that, I'll ask Dave to take us through the details of the financial results, and I'll close with some more color on the market outlook and our strategy.
Let's move to Slide 3.
Our third-quarter orders totaled $390 million, an increase of 10% compared to $353 million of orders last year.
The year-over-year increase was driven by improved crawler crane demand in the Americas segment, partly offset by declines in other product lines due to the continued effect of COVID-19 on our end markets.
In addition, we secured a couple of large mobile crane project orders in the MEAP segment, which contributed to the year-over-year increase.
Favorable changes in foreign currency exchange rates positively impacted our year-over-year orders by approximately $6 million.
The book-to-bill in the quarter was $1.1 million.
Our third-quarter ending backlog of $465 million was essentially flat over the prior year and up $35 million or 8% on a sequential basis.
Improved backlog in the MEAP and EURAF segments were fully offset by a decline in the Americas.
On a currency-neutral basis, backlog decreased 4% year over year.
Net sales in the third quarter of $356 million decreased $92 million or 21% from a year ago.
market for most mobile crane products during the first half of the year due to the impact from COVID-19, resulting in a lower shippable backlog entering the quarter.
Net sales were favorably impacted by approximately 2% from changes in foreign currency exchange rates.
Our aftermarket revenue in the quarter declined slightly over the prior year.
Gross profit decreased $23 million year over year, mainly driven by the lower volume in the Americas.
Gross profit percentage decreased to 140 basis points to 18% from the same period in 2019, primarily due to the impact of lower production levels.
Third-quarter engineering, selling, and administrative expenses of $50 million decreased by approximately $5 million year over year.
The decrease was primarily due to lower employee-related costs, including short-term incentive compensation costs and reduced discretionary spending.
As a result, third-quarter adjusted EBITDA amounted to $25 million or 7% of net sales.
Our flow-through on the year-over-year sales decline was approximately 19%, reflecting excellent performance in managing our costs in this uncertain environment.
Restructuring costs in the quarter totaled $4 million and were mainly due to headcount reductions in the Americas.
Our GAAP diluted earnings per share in the quarter was a loss of $0.01 per share versus income of $0.51 per share in the prior year.
On an adjusted basis, diluted earnings per share was income of $0.10 compared to $0.54 in the comparable period.
The primary driver of the lower adjusted diluted earnings per share was the impact of reduced year-over-year sales volume.
In the third quarter, we generated $28 million of operating cash flows, which was primarily driven by a reduction in working capital of $19 million.
On a currency-neutral basis, we reduced inventories by approximately $18 million during the quarter.
We continue to closely manage our working capital needs to current demand levels and remain on track to achieve our planned $80 million inventory reduction on a currency-neutral basis.
During the third quarter, total liquidity increased approximately 12% from a year ago.
In the quarter, we repaid the $50 million draw on our ABL facility and ended the period with zero borrowings on our ABL facility.
Our liquidity remains sufficient to meet our obligations for the foreseeable future.
Additionally, we do not have any significant debt maturities until 2026.
And as stated in previous calls, our 2019 debt agreement simplified and eased covenant compliance, affording us greater flexibility to access our liquidity.
Our net debt leverage ratio is 2.6 times, providing us with sufficient runway to deploy capital for growth initiatives.
Due to the significant uncertainty regarding the impact that COVID-19 would have on our end-market demand and supply chain, on March 27, 2020, we suspended guidance for 2020.
Although significant uncertainty continues to persist in the markets we serve, our line of sight to fourth-quarter results have improved.
Accordingly, our forecast for revenue is between $425 million and $450 million and between $18 million and $23 million for adjusted EBITDA.
Please move to Slide 4.
The third quarter was a refreshing recovery from the steep decline that was experienced in the first half of the year, but we are not out of the woods yet.
The COVID pandemic continues to create uncertainty and industry confidence remains weak.
In the Americas, we still face headwinds, including COVID, presidential election dynamics, challenging oil prices, and elevated dealer inventory.
Demand for crawler cranes has been better.
However, when speaking to our customers and dealers, the consensus is that we won't see a broad recovery until mid-2021 at the earliest.
In Europe, we saw good orders during the third quarter, reflecting a bounce back after business grounded to a halt in the second quarter, although looking forward we are most concerned with this region.
The recent spike in COVID cases is weighing heavily on the general sentiment, even more so than in the United States as certain countries have implemented severe lockdowns.
And if you recall, the tower crane business in this region was already cycling down before COVID hit.
In MEAP, I would describe customer sentiment as mixed.
China and South Korea have been relatively strong for us in 2020, and we've landed a couple of nice sized projects in the Middle East.
That said, we have to see structural improvements in the Middle East economies that would give us confidence that a sustainable recovery is imminent.
Southeast Asia and India remain very slow.
Lastly, while Australia has been strong throughout the summer, we have seen some signs of a slowdown as the geopolitical situation with China evolves.
There is no question that we are operating in unprecedented times.
While we continue to manage the business closely during these challenging market conditions, we are also proactively taking actions to accelerate our growth when the market recovers.
Our investment in new product development remains on track, and we are developing new strategies to get closer to our customers to grow the business.
This slide breaks down the different revenue streams that are derived from a tower crane.
Historically, we've primarily focused on the sale of new cranes, which serves us well in markets where we have strong distributors and partners.
However, there are certain geographic territories such as Germany, where some of our partners don't have the balance sheet to take advantage of rental fleet of large top-slewing tower cranes.
In addition, large international construction companies rely on crane rentals to help manage their fleet, and they are beginning to shift their preferences to rent from OEMs as part of bundled deals.
Beyond the obvious benefits of having a rental fleet to run cranes, this business model helps facilitate greater service revenue and use equipment sales.
Moreover, many customers prefer to rent a crane for two years to work down the acquisition price prior to the actual purchase.
We see this approach as an opportunity to diversify our revenue streams and generate attractive returns in markets where we have opportunity to grow our share.
We quietly trialed this initiative during 2020 with good success and intend to expand this initiative in 2021.
We will continue to share more on this initiative as it matures.
But we want to give you some insight on how we are changing our mindset around growth.
In closing, improvement in our financial performance in the current down market is proof that we have created a sustainable stand-alone crane company.
We have significantly transformed our cost structure with the implementation of the Manitowoc Way.
Over the next five years, we will need to approach growth with the same rigor that we attacked safety, quality, and cost over the last five years.
We will continue to utilize the Manitowoc Way as our platform for driving our company culture.
We believe there are plenty of opportunities for organic and inorganic growth in segments of the crane business that are less volatile and offer a better margin profile.
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q3 adjusted earnings per share $0.10.
q3 loss per share $0.01.
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I will be presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer.
For those who would like to follow along, slides accompanying our remarks are available on our website at www.
These statements are based on estimates and assumptions made by the Company in light of its experience, historical trends, current conditions and expected future developments as well as other factors that the Company believes are appropriate under the circumstances.
As we reflect on 2020, I'd like to begin by recognizing our nation's essential workers who are bravely serving us on the front lines during this extraordinary time.
From the public safety employees consisting of police, fire, emergency response, and healthcare professionals to our grocery store and other critical supply chain workers, they all deserve our recognition and appreciation for their dedicated service.
Our appreciation and recognition also extends to our 700 plus employees and their utility industry peers across the nation, who we consider to be essential as they continue to deliver safe and reliable service.
Our dedicated and passionate water professionals met the challenges of 2020 head on to provide a reliable supply of safe drinking water to more than 1.6 million people in our local service communities in California, Connecticut, Texas and Maine.
In my 38 years in this profession, it never mattered more.
So while COVID-19 dominated 2020, it did not dominate our people.
I'm especially proud of our teams and their commitment to protect the health of their customers, communities and coworkers.
They knew that delivering safe, clean drinking water to their customers and communities was essential to public health.
They developed protocols and procedures that protected their coworkers, so they can safely carry out their essential work.
And they did it by collaborating across our expanded national footprint to support each other and build on our strengths for the good of the entire organization.
And it also reminded us that human life is precious and fragile and that there is no higher calling than to serve others.
We also responded to the needs of customers and communities who were financially impacted by COVID-19.
Since the beginning of the pandemic, we've worked with customers throughout -- through our assistance programs to help them keep their accounts current and suspended shut offs for non-payment, consistent with each state's requirements.
And we increased our donations to local service organizations in 2020 to help them meet the basic needs of people in the community.
It is clear that our transformative combination with Connecticut Water Service, Incorporated in 2019 made for a stronger SJW Group in 2020, which benefited shareholders, customers and employees.
Our 2020 corporate sustainability report, coast to coast, documents our commitment to environmental, social and governance matters.
As that report was telling our story, the Company was recognized with prime status by ISS ESG.
Prime status is awarded to companies with an ESG performance above the sector-specific prime threshold where we were tied for the top ranking among US utilities.
We saw significant improvements in our environmental and social scores and ranked second among our utility industry peers for our combined environmental and social quality scores.
Our governance quality score was already at the highest level and placed us among the top within our industry.
We're especially proud of the human rights policy adopted by our Board in the fourth quarter.
The policy affirms our conviction, the human rights are fundamental rights, freedoms and standards of treatment to which all people are entitled.
It also reflects our values and commitment to diversity, equity and inclusion.
A team of employees with the full support of senior leaders and the Board serve on our national diversity, equity and inclusion council, DEI, to support and advocate for DEI initiatives.
We're also determined to be a force for good in the communities where we live, work and serve.
For example, in 2020, San Jose Water was responsible for $28.8 million of diverse supplier spend, representing 30.1% of our addressable spend there.
And following Connecticut Water's adoption of a supplier diversity plan in early 2020, both Texas and Maine approved formal plans later in the year that are being implemented in 2021.
We are fully committed to our diverse supplier program, and we'll continue to share our progress in the years to come.
Other highlights of 2020 include investing more than $199 million in our water and wastewater systems across our multistate footprint, achieving world-class customer satisfaction on a composite basis across the Company and another successful year of meeting drinking water and environmental regulations, delivering on our commitment to public health and environmental stewardship.
After Jim's remarks, I will address regulatory, water supply and other business matters.
Our 2020 operating results reflect our first full year of combined activity with CTWS.
One key attribute of our merger was the diversification we achieved by expanding our geographic footprint into New England.
The strength and importance of our diversification strategy were tested almost immediately by the drier than normal winter we experienced in our Northern California service area, severe weather events in our Texas and New England service areas and COVID-19 and its impact on our customers, operations and construction activities across the United States.
In each case, the impacts of these events on SJW Group's combined operating results were diminished due to our geographic diversification in the case of weather events and diversification of our regulatory and operating platforms in the case of COVID-19.
Diversification, coupled with our strong local operations, supported by our national framework enabled us to safely deliver water service to our customers and communities, protect our employees and deliver solid results for our shareholders.
Fourth quarter revenue was $135.7 million, a $9.9 million increase over reported fourth quarter 2019 revenue.
Net income for the quarter was $13.3 million or $0.46 per diluted share.
This compares with a net loss of $5.5 million or $0.19 per diluted share for the fourth quarter of 2019.
Diluted earnings per share for the quarter reflects lower CTWS merger expenses of $0.36 per share, higher customer usage of $0.22 per share and lower administrative and general expenses of $0.19 per share due to lower integration costs.
These increases were partially offset by an increase in production costs due to higher usage of $0.10 per share and a decrease of $0.05 per share due to lower local surface water availability in Northern California.
Turning to our comparative analysis for the quarter, our $9.9 million revenue increase was primarily due to increased customer usage of $6 million and $1.4 million in cumulative rate increases.
In addition, we recorded $2.8 million in customer rate credits in the fourth quarter of 2019 as a result of regulatory commitments we made in connection with the merger.
No such rate credits reoccurred in 2020.
Water production expenses increased $3.6 million compared to the fourth quarter of 2019.
The increase included $2.6 million in higher customer usage and $1.5 million for the purchase of additional water supply necessary to supplement California surface water.
Other operating expenses decreased $12 million during the quarter, primarily due to lower merger-related expenses of $9.7 million and lower general and administrative expenses of $5.1 million due to lower merger-related integration costs.
These decreases were partially offset by $2.5 million in higher depreciation expense.
The effective income tax rate for the fourth quarter was a negative 7% compared to 6% for the fourth quarter of 2019.
The effective tax rate decrease was primarily due to the capitalization of non-deductible merger expenses, which resulted in a decrease of tax benefits in 2019.
No similar tax benefit reduction occurred in 2020.
Turning to our annual results, 2020 revenue was $564.5 million, a 34% increase over the same period last year.
Net income in 2020 was $61.5 million or $2.14 per diluted share compared to $23.4 million or $0.82 per diluted share during the same period in 2019.
The change in diluted earnings per share for the year was due to many of the same factors noted for the quarter.
CTWS customer usage contributed $2.83 per share and customer usage from our other operations increased $0.59 per share.
Due to the timing of when the merger transaction closed in 2019, we only recorded $0.01 per share of earnings from CTWS in 2019.
As such, essentially all of CTWS 2020 customer usage is reflected as an increase as compared to the prior year.
In addition, 2019 non-recurring merger costs contributed $0.48 per share and the WCMA write-off in 2019 contributed $0.29 per share.
These increases were partially offset by increased production costs of $1.04 per share due to higher usage, a net increase in interest on long-term debt of $0.86 per share due primarily to merger-related debt, and 2020 note issuances and a decrease in local surface water availability in Northern California of $0.58 per share.
Our 2020 increase in revenue was primarily due to $111.2 million in increased customer usage, $12.2 million in cumulative rate increases and $2.7 million from new customers.
These increases were primarily the result of the addition of CTWS and higher usage due primarily to drier weather in our service areas.
Water production expenses increased $50 million in 2020.
The increase was primarily due to $33.9 million in higher customer water usage from the addition of CTWS and drier weather, and a $19 million increase due to lower surface water supplies.
This increase was partially offset by $3.4 million of increase in California cost recovery balancing and memorandum accountants.
Other operating expenses increased $33.9 million in 2020, primarily due to a $23.7 million increase in depreciation expense, $13.4 million in higher general and administrative expenses and $10.8 million in higher property and other non-income taxes.
The increases were primarily a result of the inclusion of CTWS operating activities.
In addition, in 2019, we incurred $15.8 million in merger expenses related to the merger transaction.
No similar expenses were incurred in 2020.
Other income and expense for the year included $13 million of new interest on SJW Group's $510 million senior notes, which were issued in October of 2019 and a $50 million senior note issued by SJW Group in August of 2020, as well as $8 million of interest expense on CTWS financings.
Other expense and income in 2019 included $6.5 million of interest income earned on the proceeds of the Company's December 2018 equity offering.
No similar income was earned in 2020.
Turning to our capital expenditure program, we added approximately $65 million in Company-funded utility plant in the fourth quarter of 2020, bringing total Company-funded additions to $199.3 million.
Our 2020 cash flows from operations decreased approximately $25.9 million over the same period in 2019.
The decrease was primarily due to the authorized collection of $45.3 million of balancing and memorandum accounts in 2019, a decrease in collections of previously billed and accrued receivables of $15 million, a decrease in other non-current assets and liabilities of $12.4 million and a $50 million upfront payment we made to the city of Cupertino in connection with our service concession agreement.
These decreases were partially offset by a $51.8 million increase in net income adjusted for non-cash items.
We continue to monitor customer payment activity at each of our four operating utilities.
And specifically, the impact COVID-19 is having on our customers' ability to remain current with their accounts.
In our Northern California service area, where we have seen the largest increase in past due accounts, the California Public Utilities Commission has authorized water utilities to activate their catastrophic emergency memorandum account or their SEMA.
The account track savings and costs from COVID-19 related activities as well as uncollectible account balances beyond the authorized bad debt in our most recent general rate case.
SJWC has determined that future recovery of the account is probable and recognized a regulatory asset of $2.3 million in the SEMA-related to COVID-19 for the year ended December 31, 2020.
At the end of 2020, we had $84.9 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities.
The average borrowing rate on line of credit advances during 2020 was approximately 1.78%.
SJW Group continues to deliver on our core growth strategy of investing in high-quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments.
In the last decade alone, more than $1 billion has been invested in the local water systems of the communities that we serve.
It's well documented that our nation's water and wastewater systems are in need of significant investments.
Utility regulators have historically recognized this need and have enabled regulated water utilities to make such investments.
In 2021, SJW Group's subsidiaries plan to invest $239 million in infrastructure improvements to serve our customers in California, Connecticut, Maine and Texas.
Over $1 billion is planned across the organization over the next five years.
Accordingly, in January, both San Jose Water and Connecticut Water filed general rate cases.
San Jose Water's GRC application proposes a $435 million capital program for the years 2021 through 2023, supported by our award-winning enterprise asset management plan.
The process is expected to take about 12 months, and new rates are anticipated in January 2022.
California employs a future test year, and thus, the level of capital spend is authorized during each general rate case cycle.
Connecticut and Maine employ a historical test year, where capital investments and expenses are recovered after they have been incurred and subsequent general rate case filings.
Connecticut Water's GRC is the first it has filed since 2010.
A primary driver of the case is the $266 million in infrastructure investments that have been completed and are providing a benefit to customers but are not yet covered in rates.
The Connecticut Public Utilities Regulatory Authority, PURA is expected to issue a decision in Q3.
Earlier this year, PURA approved a 1.1% increase in infrastructure surcharges through the water infrastructure and conservation adjustment program, or WICA, this request covers $8.7 million in qualified infrastructure investments with incremental annual revenue of about $1 million.
It will become effective on April 1, 2021.
Maine Water received approval in December 2020 for infrastructure surcharge increases in five divisions for eligible projects through the water infrastructure surcharge program, or WISC.
The increases were effective on January 1, recognizing $3.5 million in critical infrastructure investments and increasing revenues by about $300,000.
These various filings include proposed capital investments that, over the long term, benefit customers, communities and shareholders as they enhance SJW's ability to deliver safe, high quality, and reliable water service while increasing rate base, the earnings engine for the Company.
In January 2021, San Jose Water, along with the three other Class A water utilities, requested a one-year deferment on their cost of capital filings, which would otherwise be due on May 1 of this year.
Postponing the filing for one more year would alleviate administrative processing costs on the utilities as well as the commission staff and provide relief for both commission and utility resources, already strained by numerous other proceedings and COVID-19.
We will let you know if the commission approves this request.
Turning to water supplies in California, we are seeing less precipitation than normal, both locally as well as in the Sierra Nevada Snowpack, California's largest reservoir.
The rainy season typically ends in late March, and we will have a complete picture of our supply status when we report Q1 earnings.
At that time, we also plan to issue 2021 guidance.
Difficult situation in Texas.
The combination of what has been described as a once in a century cold spell, coupled with an ice storm, a snowstorm, and rolling blackouts across the state has resulted in a real crisis affecting millions of people.
Our operation located in the fast-growing region in between Austin and San Antonio, serves 20,000 customer connections.
Like our utility peers, we've suffered significant operating challenges during the crisis, owing to energy disruptions, broken water mains and roads that have remained nearly impossible since Sunday.
We are focused on restoring normal service to our customers as rapidly as possible while protecting the safety of our employees.
If we're able to do that before other water utilities in the region, we will do our best to come to their aid as well.
Looking ahead, I remain optimistic about SJW Group's future success.
COVID-19 and our shared commitment to serving customers, communities and each other has brought our four companies together in a way that we would never have imagined a year ago.
Our geographic workforce and regulatory diversity has strengthened our Company and positioned us well for 2021 and beyond.
To achieve our goals, we are working diligently to support the growth of our Texas Water Utility, which has more than tripled in size through organic growth and acquisitions since 2006, increased our capital investments to deliver safe and reliable service to our local communities and grow the rate base for all of our operating entities and continue to seek acquisition opportunities that create value for our stakeholders.
The prudent management of our business and financial resources continues to be fundamental to our growth and ability to return capital to shareholders, demonstrating the Company's strong commitment to our shareholders in January 2021, the Board authorized a 6.3% increase in SJW Group's 2021 dividend to $1.36 per share as compared to the total dividends paid in 2020.
We're proud to have continuously paid a dividend for over 77 years and to have increased that annual dividend in each of the last 53 years, delivering value to our shareholders.
We look forward to working with commissioner Houck and her colleagues and their staff to address the many water-related issues facing California's regulated utilities.
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compname says q2 earnings per share $0.69.
reaffirms fy earnings per share view $1.85 to $2.05.
diluted earnings per share were $0.69 for quarters ended june 30, 2021.
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As always, we appreciate your interest in Central Pacific Financial Corp.
I'd like to comment on some exciting news we sent out yesterday regarding some key executive management promotions to be effective January 1, 2022.
They are as follows: Catherine Ngo, currently President of CPF and President and CEO of CPB, will become Executive Vice-Chair of the bank and the holding company.
Arnold Martinez, currently EVP and Chief Banking Officer, will be promoted to President and Chief Operating Officer of the Bank and the holding company.
David Morimoto, currently Executive Vice President and CFO, will be promoted to Senior Executive Vice President and CFO of the Bank and the holding company.
And Kevin Dahlstrom, currently EVP and Chief Marketing Officer, will become EVP and Chief Strategy Officer of the Bank and the holding company.
Catherine will continue to serve on the CPB Executive Committee responsible for the management of the bank.
Working collaboratively with Catherine and myself, all three of the individuals promoted have played a key role in our financial success the past several years, and I am pleased that they will continue to be part of the team.
Our focus on our four key business pillars will continue as before.
These include residential lending, small business, Japan market development and digital expansion.
We will also continue to be active in the commercial real estate, C&I and consumer segments, with a focus on driving digital solutions to provide an exceptional customer experience.
Our transformation to become a digital first bank is underscored with the upcoming launch of Shaka Checking, Hawaii's first and only digital bank account from a local financial institution.
We are proceeding the November 8th launch with the state's largest ever social media influencer marketing campaign.
We have over 2,000 people on the wait list who are looking to be the first to sign up for Shaka.
Product benefits include the opportunity to get your paycheck up to two days early, a reimbursement of ATM fees up to $20 a month and a higher than average return on funds in the account.
We feel this product and other digital products like it will help to galvanize our position as the digital banking leader in Hawaii.
We will, however, continue to leverage our branch network, updating and modernizing our facility and investing in the talent required to deliver these products to market with the strong customer service we are known for.
Like the rest of the country, the state of Hawaii experienced the spike in COVID case counts in August and September related to the Delta variant.
To address this, our state put in place certain measures to curb further spread of the virus and we are pleased the state has been able to get the Delta variant under control, as we have seen a rapid decline in case counts in recent weeks.
Given this positive trend, earlier this month, the Governor implemented the easing of restrictions on gatherings and events on Oahu.
And last week, the Governor announced welcoming back fully vaccinated domestic travelers for business or pleasure, starting November 1st.
Our statewide vaccination rate has risen to over 70%, as many employers in the state have mandated vaccinations to protect their employees, their customers and the community in general.
With these positive developments, local economists are projecting that visitor numbers will once again continue to rise and Hawaii will have a strong holiday travel season.
The state of Hawaii unemployment rate declined to 6.6% in the month of September and is forecasted by the Department of Business Economic Development and Tourism to decline further to 6.4% in 2022.
The housing market in Hawaii remained very hot with our median single-family home price surpassing the $1 million mark this past quarter.
Overall, the Hawaii economy remains on track for recovery.
Our financial results for the third quarter were very strong with quarterly pre-tax income again reaching a new record high.
Our core loan growth picked up as anticipated and we are on track for a strong second half of the year.
Our successful PPP effort continues to deliver strong fee income as forgiveness continues.
Our asset quality continues to be strong with non-performing assets at just 10 basis points of total assets as of September 30th.
Additionally, total classified assets were less than 1% of total loans.
Nearly all of the loans we granted, COVID related payment deferrals have returned to pay status.
As of September 30th, we have just $1.3 million in loans remaining on deferral.
Finally, net charge-offs declined to just $0.2 million in the third quarter.
Shifting to our employees, we are very pleased that 95% of our employees are now fully vaccinated against COVID-19.
To protect our employees and customers, we started weekly COVID testing in September with a small group of un-vaccinated employees.
We also offered a $500 cash incentive for un-vaccinated employees who got vaccinated after September 1st.
In the third quarter, our loan portfolio increased by $184 million or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $216 million.
Year-over-year, our core loan portfolio increased by 7%.
The core loan growth was broad-based across all loan categories except construction.
Approximately $58 million or 32% of the quarter's loan growth came from Mainland consumer loans.
Our residential mortgage production continue to be very strong with total production in the third quarter of nearly $245 million and total net portfolio growth in residential mortgage and home equity of $72 million from the previous quarter.
PPP forgiveness continues to progress well with 93% of the loan balances originated in 2020 and 40% of the balances originated in 2021, already forgiven and paid down through September 30th.
During the third quarter, we purchased an auto loan portfolio for about $20 million from one of our Mainland auto loan origination partners, and we continued consumer unsecured purchases on an ongoing flow basis based on our established credit guidelines.
The purchase during the quarter had a weighted average FICO score of 750.
As of September 30th, total mainland consumer, unsecured and auto purchase loans were approximately 5% of total loans.
Both our Mainland and Hawaii consumer portfolios continue to perform well.
Our target range for total Mainland loans, including commercial and consumer is around 15% of total loans.
With Hawaii's steady economic recovery, we continue to see a healthy loan pipeline in all loan product categories.
As such, we anticipate ending the year with strong loan growth.
On the deposit front, we continue to see strong inflow of deposits with total core deposits increasing by $267 million or 4.6% sequential growth.
On a year-over-year basis, total core deposits increased by $1.1 billion or 21.6%.
Additionally, our average cost of total deposits dropped in the third quarter to just 5 basis points.
Finally, as the Hawaii economy continues to recover and investment activity increases, we are focused and prepared to help our customers meet their financial objectives.
Net income for the third quarter was $20.8 million or $0.74 per diluted share, an increase of $2.1 million or $0.08 per diluted share from the prior quarter.
Return on average assets in the third quarter was 1.15%, and return on average equity was 14.83%.
Net interest income for the third quarter was $56.1 million, which increased by $4 million from the prior quarter due to core loan and investment portfolio growth, loan and investment yield improvements and slightly higher PPP fee recognition.
Net interest income included $8.6 million in PPP net interest income and net loan fees compared to $7.9 million in the prior quarter.
At September 30th, unearned net PPP fees was $7.9 million.
The net interest margin increased to 3.31% in the third quarter compared to 3.16% in the previous quarter.
The NIM normalized for PPP was 2.96% in the third quarter compared to 2.93% in the prior quarter.
The normalized NIM increase was driven by the increase in the investment portfolio yield, partially offset by an increase in excess balance sheet liquidity.
Third quarter other operating income remained relatively flat at $10.3 million.
During the quarter, there was a decrease in bank-owned life insurance income of $0.7 million driven by market fluctuations.
This was offset by higher service charges and fees.
Other operating expense for the third quarter was $41.3 million, which was in line with the prior quarter.
The efficiency ratio decreased to 62.3% in the third quarter due to higher net interest income.
We remain focused on driving positive operating leverage with our strategic investments to continue to improve our efficiency.
As part of our ongoing efficiency initiatives, we recently announced the consolidation of our Kapiolani [Phonetic] branch into a nearby branch in Honolulu at the end of this year.
We expect annual future savings of approximately $800,000 from this consolidation.
With the continued migration of transactions to digital channels, we will continue to evaluate our branch network and consider both consolidation as well as expansion opportunities in 2022.
At September 30th, our allowance for credit losses was $74.6 million or 1.55% of outstanding loans, excluding PPP loans.
In the third quarter, we recorded a $2.6 million credit to the provision for credit losses due to improvements in the economic forecasts and our loan portfolio.
The effective tax rate was 24.7% in the third quarter.
Going forward, we continue to expect the effective tax rate to be in the 24% to 26% range.
Our capital position remains strong and during the third quarter we repurchased 234,700 shares at a total cost of $5.9 million or an average cost per share of $25.12.
Finally, on October 26, our Board of Directors declared a quarterly cash dividend of $0.25 per share, which was an increase of $0.01 or 4.2% from the previous quarter.
In summary, Central Pacific had a solid third quarter and we will continue to leverage our investments and innovate to progress toward our strategic targets, at the same time we maintained our strong credit, liquidity and capital position.
Further, we remain committed to providing support to our employees, customers and the community as we continue to progress through the economic recovery.
Finally and perhaps more importantly, we approach the future with a highly motivated management team with optimism and a sense of purpose.
This team worked together to lead the implementation of RISE2020, a multi-faceted initiative designed to strengthen our position in the market by investing in our branches, ATM and our digital product offerings as well as continued focus on our four primary lines of business.
The results of these efforts are becoming increasingly apparent.
With this team, we are well positioned to build on our past accomplishments and success as we continue to focus on service and value to customers, employees and shareholders.
At this time, we'll be happy to address any questions you may have.
Over to you, Betsy.
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compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24.
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It has been a very busy eight weeks.
Along with Bryan, our CFO, Sherry Buck, is joining me in today's call.
During the call, I will provide a brief overview of our third quarter operating results and then share some of my early impressions of the company and the opportunities that I see.
Sherry will then review our financial results in detail and provide comments on our fourth quarter financial outlook.
Let's start with the third quarter.
Our teams have worked tirelessly during the pandemic to stay close to our customers.
We've seen a cautious return to work by our customers and this is reflected in our results.
After steep declines in the second quarter, third quarter sales were up 2% year-over-year on a constant currency basis and adjusted earnings per share grew 1%.
First, from a customer perspective, our largest segment, Pharma, was the primary growth driver in the quarter with 4% organic growth, followed by Industrial, which grew 3% and Academic and Government, which declined 7%.
From a product perspective, our Waters branded products and services grew 3% organically, while TA declined by 8% on a constant currency basis.
Improving access to labs, especially in pharma, continued to help drive growth in the recurring revenues.
Services grew 4%, while consumables business grew approximately 7% organically, driven largely by pharma.
Consumables remained a growth area for us.
In fact, earlier this month, we introduced our ACQUITY PREMIER Columns, which reduce variability risks and save time when analyzing metal-loving analytes, ranging from oligonucleotides, peptides, glycans and phospholipids.
The chemistry on the surface reduces unwanted analyte to surface interactions to produce real improvements in sensitivity, peak shape and recovery.
The third quarter was strong for our mass spec systems with double-digit growth.
We were encouraged by the demand of our high-resolution mass spec systems in pharma and biomedical research, particularly in the U.S. and Europe and the demand for our tandem quad systems in food safety in China.
BioAccord also grew nicely in the quarter.
However, it still does not represent a material portion of our revenue.
With its simplicity and dedicated workflows in peptide mapping, glycan analysis, intact mass and oligonucleotide analysis, we believe it is the right instrument to bring LC-MS into the manufacturing in QA/QC space.
I have spent time with several of our customers who are using BioAccord instruments and many of them highlighted its ease of use and a robust feature set that can be utilized across multiple lab applications.
So, I think BioAccord has a good future, but I also think it will take longer than originally anticipated to significantly impact our core growth.
This is a dynamic Waters has seen with prior new product launches, such as ACQUITY, which took almost four years to reach its peak sales.
LC Instruments also saw a better quarter after double-digit declines in the first half of the year with a modest decline in Q3.
Some of this improvement can be directly attributed to Arc HPLC, which was launched in June.
Finally, to TA, revenues continued to decline in the high-single digits due to constraint capital spending at our industrial customers.
Pharma and electronics revenue saw a nice double-digit increase, but this was not enough to offset the industrial declines.
Turning to our key geographies, both the Americas and Europe grew mid-single digits, while Asia was flat.
In the U.S., the growth was driven by pharma, food and academia, partially offset by declines in material science and clinical.
We saw especially strong engagement with customers who are assisting the fight against the pandemic.
Latin America remained soft, mostly due to the continued impact of closures due to COVID-19.
Europe also experienced a recovery with mid-single digit growth, largely driven by biologics, CROs and genetics, including strong growth at large pharma accounts.
After very significant declines in the first half, China grew at low-single digits, driven by an acceleration in food and pharma as well as strength in TA Instruments driven by investments in 5G networks across the country.
This was partially offset by continued weakness in academia and government.
India also recovered with double-digit growth.
The third quarter benefited from some catch-up of revenues, which was delayed from the first half of the year.
And looking ahead, while customer activity and access are improving, we remain cautious.
We continue to face variability in our end markets and macroeconomic concerns prior to COVID-19, and academic customer trends remain depressed.
Moreover, we are uncertain on the level of capital spending in the fourth quarter, particularly by our pharma and industrial customers.
Now, let me share with you some of my early thoughts on the company.
As a former researcher who have used Waters products in the lab, as an engineer who has modified rheometers and DSCs, and as a former customer, I believe my 25-year experience at pharma and tools has prepared me well to work with my colleagues to transform Waters.
Indeed, it is a transformation to return a champion to where it belongs.
Since the announcement in mid-July, I spent most of my time listening and learning.
I met with investors and shareholders, including many of you; talked with and visited customers; read and researched and conducted many deep dives with my colleagues around the globe.
My learning is far from done.
But today, I can share with you few ideas that resulted from this deep transparency phase.
First, Waters has built a solid foundation with exposure to a number of attractive end markets.
Second, despite the strong foundation, our momentum has stalled in the last few years.
Third and finally, we are already developing a transformation plan with tangible short-term actions.
Let's take each of these in turn.
First, we have a solid foundation in attractive markets.
Our largest end market, pharma, is benefiting from growth of biologics and continued development of novel modalities.
Moreover, our strong base of small molecules, which represents approximately 75% to 80% of pharmaceutical industry sales will benefit from the growth of CROs, oligonucleotides and mRNA therapeutics, as well as the increasing potential for repatriation of small molecule manufacturing.
We have a global footprint with 25% of our sales coming from China and India.
We have a solid base in these markets that is characterized by trusted brands, deep customer relationships and a culture that is rooted in science and engineering.
In my customer meetings, Waters' employees are acutely aware of the issues facing our customers and are so tightly integrated with them that I often had a tough time distinguishing between our employees and that of our customers.
Second, despite the strong foundation, we have underperformed both our historical growth and that of the market for the last few years.
Our performance has trailed the market in LC, mass spec and thermal analysis.
We were slow to respond to the transition of food testing from government labs to contract testing labs in China.
Our product launches have not met expectations that we set.
BioAccord, while a product that clearly meets the need, has been slower on the uptake than anticipated.
Our culture is one that appreciates deep scientific insights, but one that has lacked focus and urgency.
Strategically, the focus on our portfolio on LC, LC-MS and thermal analysis has limited our ability to keep up with the emerging trends like bioprocessing, contract manufacturing and testing or diagnostics.
This is evident in our lack of exposure to tailwinds from COVID-19 as compared to some of our peers.
Third, where to from here?
While we are still continuing an in-depth analysis and developing our transformation strategies, some teams are already emerging.
And let me break these into three.
First, in the near term, we're focused on making changes to regain commercial momentum.
Second, in the mid-term, the focus is on the pipeline and organic growth with intense focus and urgency.
And finally, as we strengthen our organic growth, we will start to examine strategic investments.
Let me give you some concrete examples in the near term.
First, we are squarely focused on regaining our footing in healthy instrumentation.
For instance, we've identified all the units in both our installed base and in the larger and power network and implemented a specific program to upgrade and replace older systems with Waters HPLC instrument portfolio, including with the new Arc HPLC.
For example, there are thousands of Alliance Systems in service that are more than 20 years old and in need of an upgrade.
Second, approximately 20% of our consumable sales go through the e-commerce channel.
For many of our competitors, this number is over 50%.
In the near term, we're implementing actions to increase traffic to these channels, such as increasing paid search and improving search engine optimization.
Third, our penetration in CRO channel trails our competition.
We will increase our commercial presence to penetrate this growing channel at a level that better aligns with our peers.
Fourth, as I mentioned earlier, we still have a lot of faith in the success of BioAccord.
Customers in QA/QC are conservative, and we need to spend a lot more time developing methods in collaboration with them and further developing enterprise-level software to help them deploy the system seamlessly.
As you can see, they are near-term actions that are backed by detailed targets and KPIs.
However, I want to be clear, these changes will take time and will not significantly impact our results overnight, especially as we implement these initiatives on the background of COVID-19.
However, I can assure you the team is very engaged and have seen an impressive increase in drive and ambition in the eight weeks that I've been here.
With that, I'd like to pass the call over to Sherry Buck, for a deeper review of the third quarter financials.
In the third quarter, we recorded net sales of $594 million, an increase of approximately 2% in constant currency.
Currency translation increased sales growth by approximately 1%, resulting in sales growth of 3%, as reported.
In the quarter, sales into our pharmaceutical market increased 4%, sales into our industrial market increased 3%, while academic and governmental markets declined 7%.
Looking at our product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue, increased by 5% in the quarter, but instrument sales declined 1%.
As we noted last quarter, there was no year-over-year difference in the number of calendar days during the third quarter.
Industry revenues were up 7% in the third quarter, driven by strong pharma market growth.
On the service side of our business, revenues were up 4% as on-demand service bounced back to mid-single digit growth along with continued growth in service plan revenues within the Waters product line, bringing third quarter product sales down further.
Sales related to Waters branded products and services grew 3%, while sales of TA branded products and services declined 8%.
Combined LC Instrument platform sales and LC-MS Instrument platform sales were flat and TA's instrumentation system sales declined 10%.
Looking at our growth rates in the third quarter geographically and on a constant currency basis, sales in Asia were flat with China up 3%, sales in Americas grew 2% with U.S. growing 5%, and European sales grew 5%.
Before I comment on our third quarter non-GAAP financial performance versus the prior year, I'd like to update you on the progress of our cost actions in response to the COVID-19 pandemic.
We are on-track to achieve cost savings of approximately $100 million for the year relative to our pre-COVID internal plan.
We achieved approximately 25% of our planned annual savings in the third quarter, bringing our year-to-date savings against our internal plan to 85%, with the majority recognized in the second quarter.
We expect to realize remaining 15% in the fourth quarter.
Returning to our third quarter non-GAAP financial performance, gross margin for the quarter was 55.8% compared to 58.2% in the third quarter of 2019, primarily as a result of unfavorable FX as well as fixed cost absorption and sales mix.
Moving down the third quarter P&L, operating expenses increased by approximately 1% on a constant currency basis and foreign currency translation increased operating expense growth by approximately 2% on a reported basis.
The increase was primarily attributable to the timing of variable costs in the prior year quarter and FX.
In the quarter, our effective operating tax rate was 15.8%, which was about flat for the prior year.
Net interest expense was $7 million, a decrease of about $1 million.
Our average share count came in at 62.3 million shares, a share count reduction of approximately 7% or about 4 million shares lower than in the third quarter of last year as a result of shares repurchased through the end of the first quarter of 2020, subsequent to which we paused the share repurchase program.
Our non-GAAP earnings per fully diluted share for the third quarter increased to $2.16 in comparison to $2.13 last year.
On a GAAP basis, our earnings per fully diluted share decreased to $2.03 compared to $2.07 last year.
Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our third quarter results and activities.
We define free cash flow as cash from operations, less capital expenditures and excluding special items.
In the third quarter of 2020, free cash flow grew 53% year-over-year to $190 million, after funding $28 million of capital expenditures.
Excluded from free cash flow was $7 million related to the investment in our Taunton precision chemistry operation and a $38 million transition tax payment related to 2017 U.S. Tax Reform.
In the third quarter, this resulted in $0.32 of each dollar of sales converted into free cash flow and $0.31 year-to-date.
Our increased free cash flow is primarily a result of our cost savings actions and improvements in our cash conversion cycle.
We continue to make good progress on our working capital improvement plans.
Accounts receivable days sales outstanding came in at 76 days this quarter, down four days compared to the third quarter of last year and down 11 days from the second quarter.
Inventories decreased by $42 million in comparison to the prior year quarter, reflecting stronger revenue growth and revised production schedules.
Waters maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile.
We ended the quarter with cash and short-term investments of $397 million and debt of $1.6 billion on our balance sheet at the end of the quarter.
This resulted in a net debt position of $1.2 billion and a net debt-to-EBITDA ratio of about 1.6 times at the end of the third quarter.
We also have $1.2 billion available on our bank revolver for total available liquidity of $1.6 billion at the end of third quarter.
Our capital deployment priorities remain consistent: invest for growth, balance sheet strength and flexibility and return of capital to shareholders.
We remain committed to deploying capital against these priorities.
Our future capital structure target of approximately 2.5 times net debt-to-EBITDA remains unchanged, while our near-term focus is maintaining financial flexibility and variability in the macro environment.
While our share repurchase program is paused during the fourth quarter, it still remains an important part of our capital deployment priority.
We will provide an update on our capital deployment plans during our Q4 earnings call in February of 2021.
Lastly, I would like to make a few comments on our outlook.
Market conditions remain variable, largely due to the COVID-19 pandemic.
As a result, we're not in a position to provide detailed guidance.
However, I'd like to provide you with color on how we're viewing market conditions in the fourth quarter.
We assume similar levels of customer access as we saw in the third quarter, which reflects the challenging macro environment.
Our outlook does not anticipate a return to lockdowns seen earlier in the year at the height of the pandemic.
And in addition, we believe that some delayed purchases from the first half of the year were realized during the third quarter and there is limited visibility into year-end capital budgeting plans for both pharma and industrial customers in the fourth quarter.
In light of these dynamics, we anticipate that fourth quarter revenue, on a constant currency basis, will most likely decline at a low- to- mid-single digit range.
In addition, I'd like to provide a few other assumptions that will be helpful for modeling purposes.
Recurring revenue benefits from two additional calendar days in the fourth quarter of 2020 compared to 2019, which is factored into our outlook.
We now expect full year operating expenses to be in the range of down 1% to flat year-over-year in constant currency.
For the full year, at current rates, currency translation is expected to be about neutral to sales growth to positively impact operating expense growth by less than 1 percentage point and to negatively impact earnings per share by about 3 percentage points.
For the full year, net interest expense is expected to be in the range of $38 million to $40 million primarily due to lower debt levels.
In summary, we're pleased with the third quarter results, but market conditions remain variable amid ongoing macroeconomic uncertainty, lingering concerns around fourth quarter capital spending by both pharma and industrial customers and academic customer trends.
Overall, I believe that we have a solid foundation.
But to return to our deserved place in the tools industry, we need to improve our operational execution in the short-term and focus our teams on what matters.
And then in the mid-term, our focus will return to strategically building our portfolio.
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compname reports q3 non-gaap earnings per share $2.16.
q3 non-gaap earnings per share $2.16.
q3 gaap earnings per share $2.03.
q3 sales $594 million versus refinitiv ibes estimate of $546.5 million.
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There is an inherent risk that actual results and experience could differ materially.
You can find a discussion of our risk factors, which could potentially contribute to such differences, in our Form 10-K filed earlier today.
My first two official months back at Fluor have been extremely busy.
The immediate priority was to reset and communicate our longer-term strategy and the corresponding organizational structure.
As you know, we announced the new Fluor management team in January.
Our collective focus is on the end markets where we have the right technical expertise to add value for our clients, while earning a suitable return for our shareholders.
The recent changes that have been implemented align our business around the strategic priorities identified for Fluor in the near term.
As a reminder, our four strategic priorities are to: number one, drive growth across the portfolio; two, pursue contracts with fair and balanced terms; three, foster a high-performance culture with purpose; and four, reinforce financial discipline.
For a longer-term view of Fluor's opportunities and key focus areas, please tune in to our Strategy Day from last month if you haven't had a chance to view it yet.
Strategy Day kicked off one of the more exciting eras of change and growth in Fluor's long history.
And we are confident that the strategic plan as outlined will deliver a directional earnings range between $3 and $3.50 per share by 2024.
We ended the year with a backlog of $25.6 billion and full year new awards of $9 billion.
New awards clearly reflected the impact of the pandemic and its pressure on our clients.
They also reflect our stringent pursuit criteria and strategy to reduce risk.
Across our end markets, we saw clients delay capital spending plans while they waited for uncertainty from the pandemic to subside.
Based on conversations with our clients, we are starting to see positive momentum and expect to see new awards pick up in the second half of 2021.
We continue to see good prospects across our portfolio and are completing front-end work scopes to populate our future backlog.
However, lower awards in 2020 will create a headwind for 2021 earnings.
Before talking about what we are seeing for 2021, I want to reinforce that the people of Fluor have tackled the challenges of 2020 with a resilience and energy that was unmatched.
These challenges have made us all more adaptive, and I believe that the organization is truly motivated to successfully take the company forward into its next chapter.
Now let's turn to our business lines and how we are aligning our priorities with the opportunities ahead.
Turning to Slide 4.
As we move into 2021, our urban solutions end markets are gaining momentum, specifically, in mining.
We are seeing high demand for metals such as copper and iron ore.
Last year, we booked a significant North American steel project as well as several front-end studies that we expect will convert to follow-on EPCM awards in late 2021 and beyond.
Late last year, we achieved patent completion for the BHP Spence copper project in Chile.
We've had a long-term relationship supporting BHP's capital efforts, and we are proud to be completing another successful project for them.
We are also encouraged by the opportunities we are seeing in our advanced technologies and life sciences end markets.
Here, we are pursuing data centers and semiconductor opportunities in North America and major life sciences prospects in Europe.
In addition, Fluor has just been selected for a large biotech project in Europe, and we are finalizing contract details now.
This confirms our strategy to leverage front-end technical solutions into full EPC awards.
Contract signature is expected by the end of Q1 2021, and we look forward to sharing more specifics at that time.
Advanced technologies and life sciences is well positioned to support our clients for advanced manufacturing projects.
This includes opportunities arising from the U.S. government's executive order that is focused on the domestic supply chain for critical materials, including semiconductors, batteries, pharmaceuticals and rare earth elements.
Moving to Slide 5.
In Infrastructure, we are well positioned for select opportunities in the U.S. due to urbanization and an aging infrastructure system.
Furthermore, we believe these opportunities could be enhanced with the introduction of a federal infrastructure spending bill.
As a reminder and as messaged previously, infrastructure margins will be under pressure as legacy zero-margin projects are worked down through the year.
Approximately 35% of our infrastructure revenue will come from zero-margin work in 2021.
As we discussed during Strategy Day, we will be very selective in the infrastructure projects we pursue in the future.
Each pursuit must have the right scope, the right client, the right location, the right contract terms, the right size and, importantly, the right execution team and resources.
Our goal is to deliver predictable earnings and not chase top line growth.
This will be especially apparent in our infrastructure pursuits going forward.
Turning to Slide 6.
The management team is very excited about the work we are doing in Mission Solutions and the opportunities we see in supporting our government clients going forward.
As you know, we are keenly focused on growing our presence in the intelligence, cyber and mission-critical infrastructure and operations markets.
Furthermore, we continue to support the DOE and the National Nuclear Security Administration with its nuclear security, environmental remediation and energy projects and operations.
We expect that work to be a strong baseload for Fluor in the coming years.
While we are optimistic about our prospects in Energy Solutions in 2021, we don't expect our clients to resume capital spending at a meaningful pace until later in 2021 and beyond.
We are having productive conversations with our energy clients and are well positioned to meet their growing needs.
Importantly here, we are living in an ever-changing world, and Fluor continues to enhance its capabilities in the energy transition space.
We fully expect this market to begin a larger part of our prospect pipeline as clients pivot themselves toward a lower carbon economy.
Next, our chemicals clients see recovery in key sectors of the market, which are anticipated to translate into additional capital expenditures.
This includes the specialty chemicals market, where we continue to see positive signs of investment with our existing clients and significant activity with ongoing pursuits.
Also, future consumer demand in the battery market is translating into additional client investments associated with lithium and related battery chemicals.
Now let me give you a brief update on some of our key projects, starting with LNG Canada.
Moving to Slide 8.
At our Strategy Day, Project Director Phil Park gave a full update on the good progress at LNG Canada and Kitimat.
Earlier this month, the project received approval for its construction ramp-up plan from the Office of the Public Health Officer and Northern Health.
We are coordinating with government and health authorities as our workforce on site increases, and we focus on our spring and summer construction program.
Moving on to the Purple Line project.
As mentioned on the third quarter call, a settlement was reached between our Purple Line JV and the Maryland Transit Authority.
We received the first payment in the fourth quarter and expect a second payment in the second half of 2021.
This month, the design-build team for the Tappan Zee bridge filed a lawsuit against the New York State Throughway Authority for unapproved change orders.
As a team, we agreed we had exhausted all other options for resolution and believe we are owed compensation.
While we don't have a timeline for the resolution of these legal actions, we will keep you updated as the situation proceeds.
With respect to our two challenged government projects, I'm pleased to report that on the Radford project, we have turned overall 113 systems to our clients, and we are essentially complete.
The F.E. Warren project continues to make steady progress.
Finally, we remain confident in the viability of our NuScale initiatives.
And as stated last month, we are currently evaluating new investors and looking to reduce our ownership stake and capitalize on this clean energy investment.
I'm very encouraged by the levels of interest we are seeing and believe that NuScale can provide sizable returns for Fluor over time.
The main topic I'll discuss today are: One, an overview of our 2020 financial performance; Two, an update on our liquidity and financial position; Three, an update on our initiatives; and Four, our outlook for 2021.
You'll see that today's results are presented in alignment with our old reporting segments and includes Stork as part of continuing operations.
Starting with our Q1 2021 results, we will be presenting our financials aligned with our three new business segments: Urban Solutions, Mission Solutions and Energy Solutions.
At that time, we also expect to report Stork as discontinued operations.
We will maintain another segment which will principally represent NuScale.
Our Radford and F.E. Warren projects will move back into Mission Solutions.
As David said, Radford is essentially complete with all 113 systems turned over to BAE, while Warren will flow through at zero margin until its completion.
Turning to Slide 10.
For 2020, Fluor reported a net loss from continuing operations attributable to Fluor of $294 million or a loss of $2.09 per diluted share.
During the year, we recognized the following significant charges, most of which were recorded in quarter one: $298 million for impairments of goodwill and tangible assets, investments and other assets; $60 million for current expected credit losses associated with Energy & Chemicals clients; $146 million for impairments of assets held for sale included in discontinued operations, of which $12 million related to goodwill; as well as significant forecast revisions for project positions due to COVID-19-related schedule delay and associated cost growth.
Corporate G&A expenses for 2020 was $241 million, up from $166 million a year ago.
For the full year, $47 million was due to foreign exchange currency losses predominantly driven by the weakening of the U.S. dollar, and $42 million was attributable to the professional fees associated with the 2020 internal review.
Our increased compensation expense of 2020 was primarily due to the impact of a higher price on stock-based compensation as our share price increased from the date of the grant to the end of the year.
We achieved an estimated run rate savings of $140 million annually in our overhead expenses due to actions taken in 2020.
It's important to note that these savings are spread across the business lines and in corporate overhead.
As I mentioned last month, we expect to achieve an additional $100 million of annual savings over the next three years as we rationalize overhead to the new shape of our business.
During the fourth quarter, we exited two of our European infrastructure P3 investments and received cash of approximately $20 million.
We also have two North American joint ventures that we expect to exit later in 2021.
Moving to Slide 11.
Our ending cash balance was $2.2 billion, up from 2019.
Domestic available cash represented 32% of this total.
We expect to see our cash holding steady around $2 billion through the year, with debt retirement being offset by divestitures and the liquidity improvement measures we have discussed in the past.
Operating cash flow for the full year was $186 million, which included approximately $375 million of cash to fund our legacy projects.
Additionally, our debt-to-capitalization requirement on this amendment facility was expanded to 0.65 times, which gives us more flexibility in current borrowing capacity as we assess our capital needs moving forward.
We believe this is the appropriate size facility we need to support our business given the shift in our strategy as well as another good example of our efforts we are making around the organization to make Fluor fit for purpose.
In 2020, we continued the process of monetizing our investment in AMECO, an equipment rental business; earlier in the year, we sold our operations in Jamaica, closed our operations in Mexico and sold the equipment rental business owned by Stork.
We announced on our Strategy Day call that we have received a letter of intent for our AMECO North America business and are now reviewing options for the remaining South America business.
Our two main financial priorities in 2021 are further stabilizing our capital structure, which we plan to primarily do with debt retirement and divestitures, and booking a pipeline of work that fits our revised pursuit criteria and our strategies.
We are introducing our 2021 adjusted earnings per share guidance of $0.50 to $0.80 per diluted share for continuing operations.
This excludes NuScale-related expenses and any impact from foreign currency gains or losses, restructuring or impairments.
This also reflects Stork being a discontinued operation.
As David said, we expect to see new awards begin to pick up in the back half of 2021 with significant earnings per share growth in 2022 as we begin to work these projects.
Though we do not give quarterly guidance, Q1 results have historically reflected higher G&A expenses.
While we are seeing green shoots around the business, the lingering effects of the pandemic will continue to keep awards depressed for the next few months.
Furthermore, our existing backlog is still being impacted by the pandemic.
Though our projects are back online for the most part, government restrictions have slowed down our progress and the rate at which we are able to grow our clients.
Turning to Slide 13.
Our assumptions for 2021 include: a slight decline in revenue as compared to 2020, adjusted G&A expense of approximately $40 million to $50 million per quarter and a tax rate of approximately 28%.
We anticipate average full year margins of 2% to 3% in Urban Solutions, 2.5% to 3% in Mission Solutions and margins of 2.5% to 3.5% in Energy Solutions and improving as the year progresses.
These margins include the remaining impact of zero-margin work flowing through the business.
We also anticipate 2021 capital expenditures to be below $100 million as we divest our AMECO business this year.
As David reaffirmed, we maintain our long-term guidance of $3 to $3.50 of earnings per share by 2024.
We are taking the necessary first steps by strengthening our balance sheet and focusing our growth on end markets where we see the best opportunities for revenue and margin expansion.
With the COVID headwinds starting to subside, we will see a resumption of project awards to drive our profits over the next several years.
Operator, we're ready for our first question.
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sees fy adjusted earnings per share $0.85 to $1.00.
q3 adjusted earnings per share $0.23 from continuing operations.
q3 adjusted earnings per share $0.23.
q3 new awards of $3 billion with ending backlog of $21 billion.
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Joining in the Q&A after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Before I get into the detail -- into the quarterly details, I want to start by recognize our Agilent India team.
Despite the challenging COVID-19 situation, our India team is working closely with our cause of do while we can to help in this time of extreme need.
In addition our Agilent India customer support, finance and IT teams have worked tiredlessly to help us close out the second quarter and keep us moving forward.
I could not be more proud of how the team has worked together in true one Agilent fashion.
Our thoughts go out the entire Agilent India team and their families during this difficult time.
In Q2 the strong momentum in our business continues against the backdrop of a recovering market.
The Agilent team delivered another outstanding quarter exceeding our expectations, both revenue and earnings are up sharply versus a solid Q2 last year when revenue and earnings per share were relatively flat.
Our growth is broad-based across all business groups, markets and geographies.
We are also expanding margins driving faster earnings-per-share growth.
Revenues for the quarter are $1.525 billion.
This is up 23% on a reported basis and up 19% core.
COVID-19 related revenues accounted for roughly 2% of overall revenues as expected and contributes about 1 point to our overall growth.
Our revenue growth is not a one quarter or easy compare story, but one that sustained above market growth.
For example, our Q2 revenues are up more than 17% core from two years ago.
Q2 operating margin of 23.9%.
This is up 150 basis points.
EPS of $0.97 is up 37% year-over-year.
Like our recent acquisitions in Cell Analysis, Resolution Bioscience an example of our build and buy growth strategy in action.
The Agilent story remains the same.
It is a story of one team outpacing the market to deliver strong broad-based growth in an environment of continuing market recovery.
Moving onto our end market highlights, we do strongly in all markets.
Our growth is led by 29% growth in pharma and 22% in food.
We are seeing improving growth in the chemical and energy market with 14% growth.
We also posted low-teens growth in diagnostics and over 20% growth in academia and government.
Lastly, environmental forensics grew 8%.
Bob will provide end market detail later in his comments.
Geographically, the Americas led the way with 27% growth.
Strength in China, Europe and the Rest of Asia continues with all growing in the mid-teens.
The 30% growth in China is on top of 4% growth last year when the business started to recover from the pandemic.
As we look at our performance by business group, the Life Sciences Applied Markets Group generated revenues of $674 million during the quarter.
LSAG is up 28% on reported basis and up 25% core off a 7% decline last year.
LSAG's growth is broad-based across all end markets and geographies.
Our focus in investments in fast growing end markets continues to pay off.
The LSAG Pharma business is very strong, growing 41% with strength in both biopharma and small molecule.
From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in Cell Analysis.
During the quarter, Cell Analysis grew 34% with our BioTek business growing close to 40%.
During the quarter the LSAG team also contribute to our long-term companywide focus on sustainability in advance and important ESG initiatives.
LSAG announced several new products that have earned the highly respected accountability, consistency and transparency, ACT label from My Green Lab.
My Green Lab is a non-profit organization dedicated to improve the sustainability of the scientific research.
LSAG products will also receive two Scientist Choice Awards and now for the Select Science Virtual Analytical Summit.
Our Cell Analysis business during the quarter -- in our Cell Analysis business during the quarter, excuse me, we launched our Cytation C10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity.
This product builds on the BioTek cell imaging leadership with the Cytation multimode leader and expands our reach in the strategic business.
While still early, customer feedback has been extremely positive.
We are also very pleased with the progress and trajectory of our Cell Analysis business overall and see a very positive future for this space.
The Agilent Cross Lab Group posted revenues of $536 million.
This is up a reported 19% and up 15% on the core basis versus a 1% increase last year.
ACG's growth is driven by demand for consumables and services across the portfolio as lab actively continues to increase for our customers.
This is leading to more on-demand services and parts consumption.
Revenues from our contract business continues to drive strong growth due to the high level of contract renewals seen in the previous quarter.
Our strong instrument placements and the increase in installed base will benefit the ACG business going forward.
At the same time our digital investments continue to pay off with continued strong customer uptake and consumables and our digitally enabled services offerings.
Our LSAG and ACG businesses come together in the iLab.
This is where we believe we are well positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization and outstanding customer service.
For the Diagnostics Genomics Group revenues were $315 million, up 20% reported and up 16% core versus the 5% increase last year.
Growth is broad-based, led by our NASD oligo and genomics businesses.
Demand for our NASD offerings remains strong and our capacity expansion plans for a high-growth NASD business remain on track.
We're very pleased with the acquisition of Resolution Bioscience during the quarter with our liquid biopsy technology, Resolution Bioscience is the key player in a very exciting area of cancer diagnostics.
We are very glad to have them on the Agilent team.
I'm confident as time goes on.
, You'll be hearing more and more from us on this business and its contributions.
I would now like to recap the second quarter and take a look forward.
The strong momentum in our business continues.
This is being driven by our relentless customer focus, the strength of our portfolio and the execution capabilities of the one Agilent team.
Our build and buy growth strategy is delivering as intended of above market growth.
Over the last year, I've often said, that Agilent's focused on coming out of the pandemic even stronger as a company.
I believe you're seeing the impact of this approach in our current results.
As we look ahead we do so with a sense about optimism and confidence.
We are optimistic, because of the continued market recovery and the strength of our portfolio.
We are confident, because we have the right team, customer focused, operationally excellent and driven to win.
As a result we are once again raising our full-year revenue and earnings guidance.
Bob will share more details, but we expect that a continuation of excellent top line growth.
We also expect to compare this strong top line into excellent earnings growth and cash generation.
During our Investor Event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins.
Six months into fiscal 2021 we are well on our way to achieving those objectives.
Our build and buy growth strategy is delivering.
The one-Agilent team continues to demonstrate its execution prowess and strong drive to win.
We raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services.
While we are yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence.
I will now hand the call off to Bob.
In my remarks today, I'll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics.
I'll then finish up with our updated outlook for the year and the third quarter.
Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%.
Core revenue growth was 19%, while currency contributed just under 4 points of growth.
We are very pleased with our second quarter results as we saw strong broad-based growth with all three business groups posting mid-teens growth or higher and all end markets growing strongly.
From an end market perspective, our focus on fast growing markets is paying off.
Pharma, our largest market, again led the way delivering 29% growth.
This is on top of growing 5% last year.
Growth was led by Cell Analysis LC and mass spec.
These tools are delivering critical capabilities to our biopharma customers as they continue to make investments to develop new therapies and vaccines.
Our Biopharma business grew roughly 40% and represented over 35% of our Pharma business in the quarter.
Our Small Molecule segment also has momentum, growing in the mid 20s in the quarter.
Overall, we are well positioned within Pharma and expect the Pharma market to continue to be the strongest end-market as we enter the second half of the year.
The food market continued its strong performance, growing 22%.
We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply chain.
And we were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter, growing 13% as routine doctor visits return closer to pre-pandemic levels.
We posted a very strong month in the diagnostics and clinical market as we came to anniversary, the weak April we experienced in our large markets at the onset of the pandemic last year.
And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic level.
The chemical and energy market continues to recover as we grew 14% of a decline of 10% last year.
Our results were primarily driven by continued strength in the chemicals and materials markets and in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong leading us to believe this trend will continue.
We also saw a nice recovery in the academia and government market as non-COVID related labs resume operations in a strong funding environment.
With the increase in activity, our business grew 21% against the weakest comparison of the year.
We would expect the academia and government market to continue to recover throughout the rest of the year.
And lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables at Atomic Spectroscopy.
On a geographic basis, all regions grew led by the Americas at 27%, the pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%.
Europe experienced 16% growth led by food, academia and government and C&E.
Those three markets all grew more than 20%.
And as Mike noted, China grew 13% after growing 4% last year.
This was driven by pharma growth in the high 30s.
Our growth in orders outpaced revenue growth by mid single-digits during the quarter.
Now turning to the rest of the P&L.
Second quarter gross margin was 55.4% flat year-on-year, despite a headwind of more than 30 basis points from currency.
Our operating margin for the second quarter came in at 23.9%, driven by volume, this is up a solid 150 basis points from last year, even as we saw increased spending as activity ramped and we invest in the future.
Strong top line growth coupled with our operating leverage helped deliver earnings per share of $0.97, up 37% versus last year.
Our tax rate was 14.75% and our share count was 307 million shares.
Now on to cash flow and the balance sheet.
Our performance translated into very strong cash flows.
We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year.
The strong cash flow has continued to help drive our balanced capital deployment strategy.
During the quarter we returned $254 million to our shareholders, paying out $59 million in dividends and repurchasing 1.55 million shares for $195 million.
And as Mike mentioned, we also continue to strategically invest in the business, We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures.
Year-to-date, we returned $657 million to shareholders in the form of dividends and share repurchases, while reinvesting in the business by spending $619 million on M&A and capital expenditures.
And we ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward.
During the quarter, we raised $850 million in long-term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense.
We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1 time.
Now turning to the outlook for the full year and the third quarter.
We see a great opportunity to build on our strong first half results.
Looking forward, while the pandemic is still with us, we continue to see recovery in our end markets and have solid momentum in all of our businesses.
As a result, we are again increasing our full year projections for both revenue and earnings per share.
This reflects our strong Q2 results an increasing expectations for the second half of the year.
We are also incorporating the Resolution Bioscience into our guidance.
For revenue, we are increasing our full-year range to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%.
Included is roughly 3 points of currency and 0.5 point attributable to M&A.
This increased outlook also reflects continued growth in our end markets.
We see sustained momentum in the second half of the year in pharma, food and environmental and forensic markets.
End markets that we expect to continue to recover in the second half include the Diagnostics and Clinical, academia and government and C&E.
As Mike mentioned during our Investor Event in December, we provided a long-range plan of annual margin expansion in the range of 50 to 100 basis points.
Our updated guidance for the year exceeds the top end of that range.
And in addition, we are increasing our fiscal 2021 non-GAAP earnings per share to a range of $4.09 to $4.14 per share.
This is growth of 25% to 26% for the year.
Now for the third fiscal quarter, we're expecting revenue to range from $1.51 billion to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%.
And we expect third quarter non-GAAP earnings per share to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%.
We believe our strategies and our execution of driving the strong results we've achieved and put us in a great position to continue to drive strong results for the remainder of the year.
With that Ruben back to you for Q&A.
Gabriel, if you could please provide instructions for the Q&A.
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azz inc reaffirms fiscal year 2022 guidance.
azz inc - reaffirms fiscal year 2022 guidance.
azz inc - sales for the fourth quarter of fiscal year 2021 were $195.6 million, compared to $245.4 million for the prior year.
azz inc - net income for the quarter was $16.2 million, or $0.63 per share on a diluted basis.
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By way of introduction, I have been with Avista since 2009, working in our accounting group.
I'm very excited to be taking over from John for my first earnings call, and I look forward to working with all of you in the coming year.
, President and CEO, Dennis Vermillion; Executive Vice President, Treasurer, and CFO, Mark Thies; Senior Vice President, External Affairs and Chief Customer Officer, Kevin Christie; and Vice President, Controller and Principal Accounting Officer, Ryan Krasselt.
Our consolidated earnings for the third quarter of 2021 were $0.20 per diluted share compared to $0.07 for the third quarter of 2020.
For the year-to-date, consolidated earnings were $1.38 per diluted share for 2021 compared to $1.04 last year.
Now I'll turn the discussion over to Dennis.
As you heard, this is Stacey's first call today, and we're just so happy to have her in this role, and she's going to be with us at EEI too.
So you'll -- everybody will have a chance to meet Stacey and get to know Stacey a little bit.
And unfortunately, looks like we still have a ways to go.
We will, no doubt, face more challenges as we move forward.
Our region and our nation, we're recovering and rebuilding from this, and we're ready for the challenge.
I continue to be extremely proud of our employees, and I'm just so grateful for the resolve and resiliency that they've all demonstrated and the flexibility they've displayed.
And then the commitment and concern they have for our customers and communities just really fantastic.
And just so proud of our team.
I'm confident that no matter what the future brings, that we have the team and we have what it takes to manage through whatever the future may bring.
Now, let me turn to our earnings results at Avista Utilities.
Our earnings were above expectations primarily due to the timing of the recognition of income taxes.
And over at AEL&P, their earnings remain on track to meet the full year guidance.
And in our other business, we've had a great year so far, and we are pleased with our investments.
They produced significant gains in 2021, exceeding expectations.
We continue to expect these investments to contribute $0.05 to $0.10 per diluted share going forward.
In regards to regulatory matters during the third quarter, we concluded our Idaho and Washington general rate cases with rates effective September one and October 1, respectively.
We are pleased with both Commissions' support of our ongoing investments in the infrastructure that serves our customers and offers us the opportunity to continue to provide our customers with safe and reliable and affordable energy without immediately impacting customer bills.
However, we did get -- we did not get recovery of certain operating expenses through the Washington general rate cases.
In October, we filed our general rate case in Oregon.
We have proposed that the increase in base revenues included in the rate case be fully offset for a 2-year period with tax customer credits of the same amount, resulting in no impact to customer bills.
Early in the first quarter of 2022, we expect to file general rate cases in Washington, both electric and gas.
They will be multi-year rate plans as required under the new law, and we will seek to include in rates all capital investments and expected operating expenses through the end of the rate plan period in an effort to earn our allowed return by 2023.
In other regulatory filings, we were the first utility to file its Clean Energy Implementation Plan with the Washington Commission in October.
Our plan sets the course for an equitable transition to clean energy and provides a road map for specific actions to be taken over the next four years to show the progress we're making toward achieving clean energy goals established by the Clean Energy Transformation Act or CETA.
And that plan is available on our website under the Clean Energy Future tab, and there's a good executive summary there if you have interest in checking that out.
Focusing back on earnings, we are confirming our consolidated earnings guidance for 2021 and 2023 of $1.96 to $2.16 per diluted share for 2021, and $2.42 to $2.62 per diluted share for 2023.
We are lowering our consolidated guidance by $0.10 per diluted share in 2022 to a range of $1.93 to $2.13 per diluted share.
We look forward to seeing everybody down at EEI as well and talking about our company, which we're excited about.
For everybody's reference, the Blackhawks are on a one game winning streak.
I can only say that because it's the only game they won this year.
We've had a tough start.
But for us, at Avista, the third quarter has been a good quarter for us.
As we mentioned, Avista Utilities is up, we have $0.13 a share compared to $0.08 in the prior years.
But this is really primarily due to income taxes and how we record the timing of such income taxes, and we expect that outperformance to offset in the fourth quarter to back to normal performance for Avista Utilities.
The ERM, the energy recovery mechanism in Washington had a pre-tax expense of $3.8 million in the third quarter compared to a benefit in the prior year.
And for the year-to-date, we've recognized an expense of $7.1 million compared to a benefit of $5.9 million.
But when we look at it for the year compared quarter-over-quarter, last quarter, we expected for the full year to be a negative $0.08, and we currently expect it to be a negative $0.09.
So it's really just a slight move in our expectations over the year, within the year, and we had a big recognition in the quarter though.
For capital expenditures, we continue to be committed to investing the necessary capital, as Dennis mentioned, in our utility infrastructure.
We currently expect Avista Utilities to spend about $450 million in 2021 and $445 million in '22 and '23 to continue to support customer growth, and maintain our system to provide safe, reliable energy to our customers.
To fund that capital, we expect to issue approximately $140 million of long-term debt and $90 million in equity in 2021.
$70 million of the debt has already been issued.
We issued that and also $61 million of the common stock has been issued through September.
During 2022, we expect to issue $370 million of long-term debt, which is really covering a $250 million maturity and then also $90 million of common stock, which will help us fund our capital expenditures and maintain a prudent capital structure.
As Dennis mentioned, we are confirming our '21 and '23 guidance, but we're lowering '22.
And as we look at it, for lowering '22, there are a few factors.
As he mentioned earlier, we didn't get all the recovery.
We believe we had a fair order in our Washington rate case and our Idaho rate case, and we had many big projects that Kevin will be able to answer questions on in the order in Washington, but we didn't -- so we got our capital, we believe in a fair way, but we had some operating expenses that we were not allowed to recover.
We believe that we'll be able in our next case.
We expect to file our next case in -- early in the first quarter of '22, and we expect that case to be completed by the end of '22 if the normal timing works.
And we believe we'll be able, as Dennis mentioned, to get our capital and our operating expenses for the rate period in that rate case.
With respect to our guidance range at Avista -- we expect Avista for '21, we expect Avista Utilities to contribute in the range of $1.83 to $1.97 per diluted share.
And primarily due to the impact of the ERM, as I mentioned earlier in my comments, we expect to be down about $0.09.
We expect to be near the bottom of the range at Avista Utilities.
Our current expectation is to be in a surcharge position in the 90% customer/10% company band, which is expected to decrease earnings by $0.09.
In addition, based on our year-to-date results, we expect to be above the top end of our range with respect to our other investments.
We had, as Dennis mentioned, significant gains.
We've had strong performance in our investments that we've been investing for the last several years.
A number of different investments, not just one, a number of different investments had positives, and we expect to be above the top end of the range.
So when you add that together with AEL&P matching their expectations, we expect to be near the middle of our range for 2021, including the negative impact of the ERM.
For 2022, we are lowering our guidance due to the lower recovery of certain costs.
And those costs really included insurance costs, increases in labor as we've seen inflationary pressures impacting labor and other costs, IT costs and certain Colstrip-related costs.
Early in -- in the first quarter of '22, we do expect to file our general rate case, and it will, as Dennis mentioned, be a multi-year plan as required by our new law, and we will seek to include all of our capital and projected operating expenses for the planned period to allow us to have the opportunity to earn our allowed return by 2023.
As always, our guidance assumes, among other things, timely and appropriate rate relief in all of our jurisdictions as well as normal operating conditions and does not include any unusual or non-recurring items until they're known and certain.
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compname posts q2 earnings per share $0.20.
q2 earnings per share $0.20.
confirming 2021 consolidated earnings per share guidance with a range of $1.96 to $2.16.
lowering our 2022 consolidated earnings guidance to a range of $2.03 to $2.23 per diluted share.
for 2023, confirming earnings per share guidance with a consolidated range of $2.42 to $2.62.
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Before we begin I would like to direct you to our website www.
To start the call I'd like to provide a brief recap of our quarterly performance and cover the highlights of both our MPC segment and the Seaport.
Our Head of Operations Dave Striph will cover the results of our operating assets segment; followed by our President Jay Cross who will provide details on our development activity and speak to the results at Ward Village.
And finally our CFO Correne Loeffler will conclude the call with a review of our financial results before we open the lines for Q&A.
Before we dive into the results of the quarter I would first like to highlight the release of Howard Hughes 2020 annual ESG report which was published just a few days ago and can be found on the Sustainability portion of our website.
This report displays the impactful ESG results we have produced so far and reflects our commitment to environmental and social best practices which are integrated throughout our communities across the country.
Now on to the highlights of the quarter.
We closed out the third quarter of 2021 with strong results across all segments as Howard Hughes continues to capitalize on the high levels of demand that exist throughout our various mixed-use communities.
To put our performance in perspective most of HHC's year-to-date results in 2021 have surpassed the year-to-date pre-COVID activity of 2019.
MPC EBT is up 29%.
Operating asset NOI is higher by 1% even with lingering impacts from the pandemic.
And Ward Village condo sales were just shy of 2019 levels despite having limited available inventory.
And this was all accomplished while reducing our G&A cost by 30%.
During the third quarter we saw healthy land sales driven by superpad sales in Summerlin.
Our operating asset NOI grew for the fourth consecutive quarter.
Condo sales in Ward Village accelerated despite a shrinking supply of available units under construction and the Seaport saw steady improvements from the return of the concert series at Pier 17 and the growing popularity of our unique restaurants.
We expect these results to grow stronger especially with the recent addition of Douglas Ranch our latest MPC spanning 37000 acres in Phoenix West Valley.
In October we announced our $600 million all-cash acquisition of this fully entitled shovel-ready MPC which further adds to our depth of opportunities.
By strategically redeploying the net proceeds from our noncore asset dispositions we now have the ability to transform this blank canvas into a leading community focused on sustainability and technology a community that is entitled for 100000 homes 300000 residents and 55 million square feet of commercial development.
Following this transaction we are still left with a healthy cash position to continue executing on our existing development pipeline to meet the growing demand within our MPCs.
While we have already had approximately two million square feet of development underway we're pleased to announce new commercial projects in the medical office and single-family for rent sectors which Jay will touch on in a moment.
But we're not stopping there.
We've long believed that Howard Hughes trades at a steep discount relative to its net asset value.
As such we are pleased to announce our recent Board-approved share buyback program amounting to $250 million.
We believe there is great value that is yet to be reflected in our stock price and view this buyback initiative as an excellent use of capital that when coupled with our development projects will help deliver meaningful value.
All of these recent announcements put a significant amount of capital to work to unlock tremendous value for our dedicated shareholders.
Now let's turn to the performance of our master planned communities.
Our MPCs had another great quarter despite encountering headwinds including supply constraints the Delta variant and weather delays particularly in Houston.
Housing supply still remains low throughout Houston and Las Vegas while demand continues to persist at elevated levels which leaves us well positioned to deliver residential land at appreciating prices.
Homebuilders are currently sitting on record low inventory and they will need to replenish their depleted landholdings in order to meet its outsized demand.
During the third quarter our MPCs recorded earnings before taxes of $54.1 million a 48% increase compared to last year largely driven by the robust superpad sales activity in Summerlin as well as the strong performance of our Summit joint venture.
In addition to these impressive results we continue to see a steady pace of new home sales.
Proving the strength of our communities remains clearly intact.
So far in 2021 there have been 2163 new homes sold in our MPCs a 6% increase over last year indicating further demand lies ahead.
Overall we're seeing a lot of positive momentum when it comes to land sales.
And looking ahead we expect our fourth quarter to be the strongest quarter yet.
As such we are raising our full year 2021 MPC EBT guidance by $60 million at the midpoint to a range of $275 million to $285 million primarily due to stronger-than-expected superpad sales in Summerlin.
This is our second time raising MPC guidance in 2021 as this segment continues to exceed our expectations.
Speaking of Summerlin this MPC drove a substantial portion of the positive results for the quarter selling 47 acres mostly made up of superpads.
This MPC generated $45.6 million in EBT a staggering 130% increase compared to the prior year period.
Additionally year-to-date new home sales have eclipsed over 1200 units and are 20% higher over the same period in 2020 which if you recall was one of the strongest years in Summerlin's history.
Another significant driver to Summerlin's results has been our joint venture at the Summit our exclusive 550-acre community in Summerlin.
The total earnings from our share of equity during the quarter totaled $8.3 million driving year-to-date earnings to $54.6 million versus only $4.4 million during the first nine months of 2020.
The activity at the Summit over the last year has been tremendous and these positive results have been primarily attributed to an influx of California buyers purchasing these custom lots and built product.
Turning over to Houston.
Our Bridgeland MPC experienced a decline in land sales as supply constraints continues to have an impact.
As we highlighted last quarter a majority of the homebuilders have extended their lead times for home deliveries due to ongoing supply disruptions that have resulted in higher material costs and delayed delivery times.
We've started to see some of these bottlenecks subside and expect a more normalized environment heading into next year.
This quarter's land sales were also impacted by inclement weather as significant rainfall in the Houston area delayed horizontal development resulting in slower lot deliveries to homebuilders.
Despite these factors demand in the area remains incredibly strong.
We view the significant imbalance between undersupply and robust demand as a strong catalyst for elevated activity as we move into 2022.
Lastly in the Woodlands Hills despite lower quarterly land sales due to the similar impacts experienced in Bridgeland the residential price per acre grew 18% over the prior year period to $353000 while new home sales were up 15% which points to future growth ahead as we accelerate activity across this MPC.
Moving over to the Seaport.
We saw heightened activity throughout the quarter as events and concerts at Pier 17 helped draw in spectators.
During the quarter NOI improved 43% compared to the same period in 2020 indicating the return to normalcy is near.
In July we launched our 11-week summer concert series on the Pier 17 rooftop.
Of the 30 concerts hosted 20 were fully sold out.
The turnout for these contracts proved to be very strong with approximately 74000 guests in attendance representing 90% of our available ticket inventory.
In addition to concerts we hosted several other major events including the SPs in July and the world tour for the Fujis who debuted at Pier 17 for their first show together in 15 years.
It's these type of special events that continue to set the Seaport apart from other destinations in Manhattan.
All of these events help drive substantial traffic to our restaurants.
We saw an uptick in activity as more and more locals and tourists experience our variety of cuisines from acclaimed New York City chefs.
As a result our restaurant saw their average monthly sales increased 65% versus last quarter.
While labor constraints have marginally improved we continue to see improvements in this space quarter after quarter.
Many of our restaurants are now closely approaching their stabilization targets as higher volume has contributed meaningfully to the growth of our bottom line.
Overall we see the Seaport heading in the right direction and the upcoming completion of the Tin Building followed by its grand opening in the first half of 2022 will help bring the Seaport closer to stabilization.
With that I'm going to stop and hand the call over to Dave Striph.
Our operating assets had a standout quarter as our portfolio delivered strong sequential and year-over-year NOI growth.
For the third quarter we reported $60.6 million of NOI.
When you layer in the activity from our three hotels that were sold in September this segment generated $62.9 million.
This marks the fourth consecutive increase in quarterly NOI as our portfolio of income-producing assets continues to expand.
As the economy continues to reopen and activity within our regions improves we have seen a corresponding increase in our retail NOI.
These assets generated $16.1 million of NOI during the third quarter the highest level since the first quarter of 2019.
This is in large part due to a stronger tenant base coming out of the pandemic in addition to consistent increases in collections.
For the third quarter we collected 83% of our retail rents with Summerlin leading the charge for the highest collections in our portfolio.
As we have highlighted previously our retail at Ward Village has been materially impacted over the last several quarters due to sharp declines in tourism as a result of the pandemic.
However as travel restrictions to Oahu have been recently eased we've seen a corresponding improvement in our retail performance.
In fact Ward was the largest contributor to the sequential increase in retail NOI partly as a result of a onetime payment of deferred rent of approximately $1.4 million.
We expect our retail portfolio to continue on this path of growth as collections work back to pre-pandemic levels coupled with the continuous lease-up of our remaining space to creditworthy tenants.
At the Las Vegas Ballpark we were able to host the remainder of the aviator season at 100% capacity.
This resulted in $5.4 million of NOI a 74% increase over the last quarter where the beginning of the season was limited to 50% capacity to comply with COVID-19 protocols.
This is a stark comparison to the same period in 2020 where the ballpark lost nearly $1 million as the season was canceled entirely due to the pandemic.
Our multifamily assets produced $9.2 million of NOI during the third quarter a 24% sequential increase almost exclusively attributable to strong leasing momentum at our most recent developments.
In 2020 we completed construction on three multifamily projects between the Woodlands and Columbia.
And during the third quarter these new developments made up 2/3 of the increase in sequential NOI growth.
In addition to this robust leasing velocity we've been able to push rents higher and are currently commanding some of the highest rents compared to our surrounding metro areas.
In addition to our existing product we have three more multifamily developments underway in Downtown Columbia Bridgeland and Summerlin to meet this ongoing demand which will drive our NOI even higher.
Our office assets have experienced steady increases in NOI over the past few quarters despite a sluggish recovery in the return to office environment.
For the third quarter we generated $27.8 million in NOI a 6% increase sequentially and a 17% increase compared to the same period last year.
The bulk of this increase was driven by the roll-off of free rent at select assets including 6100 Merriweather our latest office building in Downtown Columbia.
Overall we are seeing a noticeable increase in leasing activity and expect our pipeline of opportunities to accelerate into 2022 as tenants look for additional space and folks continue to return to an office setting.
To build on the momentum we are seeing within our operating asset portfolio we are pleased to announce some new product types in addition to our traditional mix.
Recently we have expanded into the medical office space to continue to provide residents with the highest quality convenient medical care.
We have noticed a growing need for this type of asset as the volume of residents in our communities continues to grow.
With that we are pleased to announce the launch of two medical facilities spanning 106000 square feet throughout Downtown Columbia and the Woodlands.
In Downtown Columbia we will launch our first medical office building on the shoreline of Lake Kittamaqundi.
This new development will sit adjacent to our successful Whole Foods in the former Rouse headquarters building helping to establish Downtown Columbia as a prominent health and wellness destination.
Encompassing approximately 86000 square feet we have already secured an anchor tenant for roughly 20% of the entire space.
We expect to break ground on this project during the first half of 2022 and this will kick start our major development pipeline in the Lakefront District.
In The Woodlands we will launch development on a 20000 square foot build-to-suit medical office building for Memorial Hermann.
This project will serve as a primary local facility to cater to the medical needs of nearby residents and is expected to break ground by the end of this year.
Lastly in Bridgeland we will be constructing our first single-family for rent community which will commence in the first half of 2022.
These 263 homes will span a combined 328000 square feet and offer a unique hybrid between single-family homes for sale and multifamily for rent adding yet another new product to our operating asset portfolio.
Given this is an extension of multifamily we plan to leverage the expertise of the property managers who oversee our existing portfolio in Houston to assist in managing this build-to-rent community.
In total these three projects represent over 430000 square feet and $114 million of development as we continue to put our capital to work and enhance our stream of recurring income.
We have already had a number of developments under construction in Summerlin Columbia and Bridgeland so the announcement of these additional developments demonstrates the immense demand we are seeing throughout all our regions.
Moving to the Seaport.
Construction of the Tin Building is now in the final stages and will be substantially complete by the end of the year.
The launch of the Tin Building has been highly anticipated and our team has been working in close partnership with the Jean Georges team to prepare for the grand opening of this 53000 square foot food hall in the first half of 2022.
Lastly we continue to make great strides through New York City's ULURP process to obtain the necessary approvals for the development of a 26-story mixed-use building at 250 Water Street.
In October the City Planning Commission granted us approval for this project another hurdle passed through this rigorous land use process.
We are nearing the end of our review which we expect to conclude before the end of the year at the New York City Council.
The prospective development would replace the one acre parking lot with market rate and affordable residences commercial and community space further enhancing the character and vibrancy of this neighborhood.
We look forward to updating you on our continued progress as we continue to close in on the final stages of this process.
At Ward Village the pace of condo sales continues to exceed all expectations.
Despite having less inventory under construction the number of condos contracted during the quarter has only grown.
Across our three recent towers 'A'ali'i Koula and Victoria Place we were 90% presold as of the end of the quarter with Koula and Victoria Place still under construction.
This robust velocity has led to the presales launch of our eighth tower The Park.
Presales activity at The Park began in July.
And as of the end of October we have already contracted 64% of the total units.
The sales activity across these four towers just in the third quarter translates to 316 contracted units secured by hard deposits during a period of time when travel to the island of Oahu was discouraged surrounding Delta variant concerns.
The pace of these sales is truly remarkable.
We've been able to establish a mark on this community where residents want to live and our historical sales pace has reflected increasingly faster sellouts with the launch of each new tower.
Subsequent to the end of the quarter we completed construction on 'A'ali'i and began welcoming residents to their new homes in October.
As of November two we closed on 495 units totaling $332 million in net revenue revenue that will be recognized on our fourth quarter income statement and will contribute meaningly to our bottom line.
With that I'd like to now hand the call over to our CFO Correne Loeffler who will review our third quarter financial performance.
The results of the third quarter clearly demonstrates the strength of our business as we continue to benefit from the strong demand throughout our communities across the country.
In summary our MPCs produced $54.1 million of earnings before tax or EBT during the third quarter a 22% decrease compared to the last quarter and a 48% increase compared to the prior year period.
It's important to note that while EBT decreased from the last quarter it was largely attributed to nonrecurring costs such as the early extinguishment of debt upon the retirement of our Woodlands and Bridgeland credit facility.
In addition the top line only declined slightly due to the lack of commercial land sales in Summerlin compared to the last quarter.
Our operating assets recorded a $62.9 million of NOI when including the contribution from the three Woodlands-based hotels which represented a 9% increase compared to the last quarter and a 65% increase compared to the prior year period.
As Dave touched on earlier the strong performance was due to a continued improvement across our retail portfolio a strong Minor League season at our ballpark robust lease-up activity at our multifamily assets and the roll-off of free rent at select office assets.
At Ward Village we contracted 316 condo units which were made up of 61 units from our three towers under construction and 255 units at the park which launched presales during the quarter.
Combined sales at 'A'ali'i Koula and Victoria Place were up 36% compared to the prior quarter and increased 154% compared to the prior year period.
Finally at the Seaport we recorded a $3.6 million loss in NOI resulting in a 19% improvement over the last quarter and a 43% improvement compared to the prior year period.
Taking a look at GAAP earnings for the third quarter.
We reported net income of $4.1 million or $0.07 per diluted share compared to net income of $139.7 million or $2.51 per diluted share in the prior year period.
The decrease in net income from the prior year was attributed to a onetime noncash gain of $267.5 million for the third quarter of 2020 which was related to the deconsolidation of our 110 North Wacker office tower in Chicago.
If we remove this onetime gain our quarterly earnings were substantially higher than our prior year period due to strong activity to play throughout the entire business.
With only one quarter remaining to finish out the full year we remain on track to meet or exceed all previously disclosed guidance targets for 2021.
As David mentioned earlier our MPC segment has done particularly well which has led us to raise our EBT target for the second time this year.
Our previous guidance range for 2021 was $210 million to $230 million.
We are now raising our guidance by $60 million at the midpoint thus revising our range to $275 million to $285 million as we are expecting a strong end to the year.
Given the recovery we are experiencing in our operating assets we are raising our full year NOI guidance by $5 million to a range of $200 million to $210 million.
We are raising this segment's guidance despite the fact that we will not receive any hospitality-related NOI during the fourth quarter as we just sold our Woodlands hotels in September for $252 million.
The sale of these assets generated $120 million of net proceeds and brings our total net proceeds from noncore asset sales to $376 million since the announcement of our strategic transformation plan in late 2019.
We are also revising our full year condo profit guidance at Ward Village by $7.5 million at the midpoint.
Our previous guidance range for 2021 was $100 million to $125 million.
With elevated condo sales following the completion of 'A'ali'i in October we are expecting condo profits to range between $115 million to $125 million.
Please note that this target excludes the $20 million repair cost incurred at Waiea during the first quarter which we fully expect to be reimbursed for.
Lastly we remain on track to meet our previously disclosed G&A guidance of $80 million to $85 million for 2021.
Now let's take a look at our balance sheet for the quarter.
We ended the third quarter with $1 billion of cash on hand leaving us plenty of runway to execute on the recent capital initiatives we discussed earlier.
Additionally we closed on several financings at attractive rates while at the same time extending our maturity profile.
A couple of our recent financings include two construction loans for our latest project in Downtown Summerlin a $75 million loan for our 1700 Pavilion office development and a $59.5 million loan for our Tanager Echo multifamily development.
In addition we refinanced The Woodlands and Bridgeland credit facility into a new $275 million loan secured by Bridgeland notes receivables and land to support future horizontal development.
Lastly subsequent to quarter end we closed on a $250 million loan for 1201 Lake Robbins resulting in net proceeds of $248 million which helps elevate our overall cash position.
Additional activity following the close of the quarter include the repayment of 'A'ali'i construction loan upon the completion of the project.
We continue to push out our near-term maturities and remain focused on executing new financings to support our latest development projects as well as securing long-term funding for our stabilized assets.
We're going to open up the lines for Q&A.
But before we do I just want to hit on a few key points.
First we remain committed to driving our net asset value higher on a per share basis and are laser-focused on closing the gap between our stock price and the true inherent value of Howard Hughes.
And the actions taken over the last quarter to deploy capital into projects that we believe will achieve outsized risk-adjusted returns reflects that strategy.
We acquired a new fully entitled shovel-ready MPC.
We announced the launch of three new development projects and we announced the $250 million share buyback.
All of these initiatives will unlock tremendous value for our shareholders in the near medium and long term.
Second our balance sheet remains strong even after allocating capital to the various projects I just mentioned.
Our disciplined capital allocation approach has allowed us to conserve capital and leaves us with sufficient excess liquidity to evaluate additional opportunities to further expedite growth.
In addition the cash flow generated by future land sales condo sales and recurring NOI combined with the proceeds from our remaining noncore asset sales will only drive our cash position higher.
Third our financial results through 2021 represents the strength of our business as we are now exceeding pre-COVID levels and the guidance targets we have established for the full year points to an even stronger fourth quarter ahead.
With that we'd now like to begin the Q&A section of the call.
We will answer the first few questions that have been generated by Say Technology and will be read by John Saxon.
John can you please read the first question?
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qtrly earnings per share $0.09.
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Our conference call slides have been posted on our website and provide additional information that you may find helpful.
Sales were $454 million in the quarter, an increase of 22% from the first quarter of last year and an increase of 18% at consistent translation rates.
The effect of currency translation added 4 percentage points of growth or approximately $11 million in the first quarter.
Reported net earnings totaled $105.7 million for the quarter or $0.61 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $101.6 million or $0.58 per diluted share.
Gross margin rates were strong in the quarter, up 120 basis points from the first quarter of last year as the favorable effects from currency translation, realized pricing and factory volumes were partially offset by the unfavorable impact on material costs and mix related to the significant growth in the lower margin contractor segment.
We saw material cost increase throughout the quarter, which negatively impacted our gross margin rate.
At current factory volumes, we expect that pricing and strong factory operating performance will continue to offset higher material costs for the remainder of the year.
We also experienced supply chain disruptions in the quarter with regards to logistics capacity and component availability across most of our factories.
The purchasing and manufacturing teams are working to address these disruptions and we are not currently losing orders or have had any of our manufacturing lines shutdown.
We expect these challenges to continue in the second quarter.
Operating expenses increased $10 million in the quarter, including $2 million related to currency translation, $5 million of increases in sales and earnings based expenses and $2.5 million in new product development as we continue to invest in our growth initiatives.
Other non-operating expenses decreased $5 million due to an improvement in the market valuation of investments held to fund certain retirement benefit liabilities.
The effective tax rate was 16% for the quarter, which is 5 percentage points higher than the first quarter of last year, due to a decrease in excess tax benefits related to stock option exercises.
Cash flows from operations totaled $102 million, compared to $54 million in the first quarter of last year.
The majority of this increase was due to an increase in earnings in the quarter.
Capital expenditures were $21 million and dividends paid were $31.6 million.
A few comments as we look forward to the rest of the year.
Based on current exchange rates, the effect of currency translation will continue to be a tailwind for us with the full year effect estimated to be 2% on sales and 5% on earnings with the most significant impact occurring in the first half of the year.
We expect unallocated corporate expense to be approximately $30 million and can vary by quarter.
Our 2021 full year tax rate is expected to be approximately 18% to 19%, excluding any effect from excess tax benefits related to stock option exercises.
Capital expenditures are estimated to be $140 million, including $90 million for facility expansion projects.
Finally, 2021 will be a 53 week year with the extra week occurring in the fourth quarter.
Q1 was a solid quarter as we delivered growth in every segment and every region with the exception of process in EMEA which was down low-single-digits.
In addition to good performance by our commercial teams, I want to specifically recognize our manufacturing, purchasing, warehousing and logistics folks for successfully dealing with both external supply chain issues and rising material prices.
Contractor continued strong performance with record Q1 sales and earnings as revenue growth in all regions exceeded 30% for the quarter.
Residential construction activity remains solid and the home improvement market is robust.
Contractor North America continues to see strong out-the-door sales in both propane and home center and we're working hard to keep up with the demand.
Favorable volume and continued discretionary expense management drove solid operating earnings during the quarter.
The outlook for the Contractor business remains positive for the year, however, comparisons do get much tougher in the second half.
The Industrial segment grew low teens during the quarter, with improvement in all regions.
Order rates were strong throughout the quarter, with growth in all major product categories.
Overall demand in this segment remains broad-based with many of our key end markets improving as customer facilities begin to reopen to outside vendors.
Process segment sales grew in Q1 with improving end market conditions, particularly in the Americas and Asia Pacific.
All major product categories were up with the exception of oil and gas and incoming order rates accelerated throughout the quarter.
Similar to industrial end market growth was broad-based and benefited from improved factory access.
A couple of comments on our outlook as we head into the second quarter.
Incoming orders remain solid and last year's second quarter was our trough.
So we expect a good Q2.
Second half comparisons will get significantly more difficult as our business accelerated in Q3 and Q4.
Although the second half economic environment is uncertain, we will continue to aggressively pursue our key long-term growth strategies and investments.
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compname reports qtrly diluted net earnings per common share, adjusted $0.58.
qtrly diluted net earnings per common share $0.61.
qtrly diluted net earnings per common share, adjusted $0.58.
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Kessel Stelling, chairman and chief executive officer, will begin the call.
He will be followed by Jamie Gregory, chief financial officer; and Kevin Blair, president and chief operating officer.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now here's Kessel Stelling.
Before I move to the financials, I just wanted to share a few comments and reflections on our industry and our company.
The defining characteristic of our industry has changed and I have certainly seen my share of change in my four and a half decades in this business, including this unprecedented pandemic and period of social unrest.
And although things are relentless, I've never been more convinced of the ability and responsibility of our industry to be a trusted resource for our customers and for the communities we serve.
Synovus, in particular, is built for times like these embedded in our markets, close to our customers, and able to quickly assess and anticipate needs.
And that continues to ring true as challenges linger even as we see glimpses of a slow and steady recovery.
The story we'll tell today is largely shaped by our model that has allowed us to respond to, plan for, and do our best to control the things we can control.
Adjusted diluted earnings per share was $0.23, compared to $0.21 last quarter and $1 a year ago.
Loan balances increased $1.7 billion or 4.3%, compared to the prior quarter.
Growth in Paycheck Protection Program loans of $2.7 billion was offset by a reduction in C&I line utilization of $775 million.
In the consumer book, loans were down approximately $700 million as reductions in lending partnership balances were partially offset by mortgage balance increases of $200 million.
Total deposits grew $4.4 billion or 11% from the prior quarter.
Growth was largely split between DDA and interest-bearing core deposits, which grew $2.9 billion and $1.2 billion, respectively.
We continued the strategy of allowing higher-priced CDs to run off, which led to a decline of $655 million in time deposits.
Net interest income was up $3 million for the quarter.
This included a full quarter of the 150-basis point reduction in short-term rates from March along with offsets, including over $9 million in fee recognition associated with P3 loans.
The net interest margin declined 24 basis points to 3.13%.
Adjusted non-interest revenue of $95 million was greater than expected largely due to outperformance in mortgage.
Net mortgage revenue was $24 million, up $11 million from the prior quarter led by secondary mortgage production of $635 million, up $380 million from the prior quarter.
Adjusted non-interest expense totaled $276 million, up $5 million from the previous quarter.
This included $7 million of COVID-related expenses and $7 million in fees associated with the implementation of certain Synovus forward initiatives.
Commission expense was $7 million higher than the prior quarter, largely resulting from record mortgage production.
These increases were offset by reductions in other areas, including seasonal employment fees and travel.
Provision for credit losses was $142 million and resulted in an allowance for credit losses ratio of 1.74%, excluding the P3 balances.
That's an increase of 35 basis points from the previous quarter and incorporates a more stressed economic outlook.
Credit quality metrics remain stable with the nonperforming loan ratio and net charge-off ratio of 37 basis points and 24 basis points, respectively.
Our CET1 ratio increased 20 basis points to 8.90% and our total risk-based capital ratio increased 41 basis points to end at 12.70%, a two-year high.
The 90-day deferral program we outlined on the last call has done exactly what it was intended to do by providing much needed support and assistance for our customers.
While it's too early to know exactly how deferrals will play out in the second half of 2020, reviews of customer cash flows, client surveys, and conversations and interactions with customers to date lead us to believe that somewhere between 3% to 5% of total loans will have a round two deferral granted for a 90-day deferment of principal and interest.
Jamie will now share more detail about the quarter.
As Kessel noted, this was a very eventful quarter for our company with considerable progress on a number of fronts despite headwinds.
The resulting impact on our balance sheet has been significant starting with loans on Slide 4.
As we shared in May, we funded $2.9 billion in P3 loans for approximately 19,000 customers, quite an undertaking, which required a coordinated effort across our bank.
The average P3 loan was approximately $150,000 and the customers that received those loans employ over 335,000 employees.
An offset to the C&I growth from P3 loans, which ended the quarter with a balance of $2.7 billion was a decrease in loan balances from C&I line utilization.
We ended the second quarter at a record low of 41% that resulted in balance sheet declines of $775 million.
We expect C&I line utilization to normalize in the mid- to upper 40% range as the economy improves.
Highlights in the consumer portfolio include mortgage loan balance increases of over $200 million on a production of a record $800 million.
As was disclosed during the quarter, we restructured our GreenSky relationship in a way that is mutually beneficial.
Our total exposure limit remains $1 billion for the relationship, but you'll see a shift of loan balances from held for investment to held for sale.
In the second quarter, we moved $266 million in loans to held for sale under this new arrangement.
Going forward, you'll see a shift in geography on the income statement from our GreenSky loans as we realize more non-interest revenue from transactions and servicing fees, as well as, a reduction in net interest income and non-interest expense.
The other meaningful item to highlight within partnership lending is a disposition of approximately $535 million in student loans.
In June, we moved those loans to held for sale, which contributed to the decline in consumer balances and resulted in an allowance release of approximately $12 million.
We have closed that transaction since quarter end realizing a modest gain which will be recorded in the third quarter.
We believe that the strength of the market for these loans is a testament to the quality of these loan portfolios and we remain committed to those relationships while also acknowledging their core customer base takes priority as we focus on managing our balance sheet in these uncertain times.
We continue to expect loans to be flat for the remainder of the year, excluding the impact of P3 forgiveness.
On Slide 5, you can see that we had unprecedented growth in deposits with DDA balances, up $2.9 billion and total deposits, up $4.4 billion in the second quarter.
Much of this growth occurred in conjunction with our P3 lending effort.
However, we also saw broad-based growth across interest-bearing transaction balances with money market and NOW up 11% quarter-over-quarter while savings balances increased by 14% quarter-over-quarter.
While lower cost transactional deposit growth has accelerated since late in the first quarter, we have continued to experience strategic declines within our core time deposit portfolio.
As you are aware, much of these declines have been intentional over the last several quarters as we've reduced exposure to higher cost CDs and public funds in certain markets.
One of the benefits of having a sizable time deposit portfolio is the ability to reprice as rates decline and that portfolio turns over.
With our transactional interest-bearing accounts approaching the lowest rates experienced since the great financial crisis, we expect further declines in rate paid on deposits to be led by strategic turnover within our core and brokered time deposit portfolios.
As a simple means of comparison to the prior cycle, Synovus achieved its lowest deposit cost in the third quarter of 2014.
At that time, total interest-bearing deposit costs were roughly 35 basis points.
While our deposit mix has evolved from that time, we believe a return to comparable levels is achievable in the coming quarters with continued pricing and balance sheet discipline.
We expect deposits to decline in the second half of 2020 as excess liquidity is deployed.
Slide 6 shows net interest income of $377 million, an increase of $3 million from the previous quarter.
This benefited from $9 million in fee accretion from our P3 loan portfolio.
In the coming quarters, P3 forgiveness may have a meaningful impact on our net interest income as unearned fees associated with that program are recognized into interest income.
P3 processing fees totaled $95 million.
In terms of net interest margin, we ended the quarter at 3.13%, down 24 basis points from the first quarter.
Beyond the anticipated impact associated with the lower rate environment, the significant inflow of deposits throughout the quarter resulted in an excess cash position, which while not impactful to net interest income, diluted the margin by approximately 8 basis points, as compared to the prior quarter.
Although we expect to maintain an elevated level of liquidity within the current economic environment, we also anticipate some reversal in that elevated position in the second half of the year, which should support the margin.
Balance sheet management activities in the second quarter, including securities portfolio sales, the student loan sale, and the GreenSky strategy change, will serve as a headwind to net interest income beginning in the third quarter and will put some additional downward pressure on the margin.
The impact of these recent transactions is approximately 9 basis points to the margin.
After adjusting for these impacts and excluding the impact of P3 loans, we expect the margin to remain relatively stable in the second half of 2020.
We were pleased with non-interest revenue of $173 million or $95 million adjusted, shown on Slide 7.
The transaction activities, including capital markets activities, mortgage originations, and credit card transactions exceeded our expectations.
And we had one of our strongest quarters in fee revenue.
We realized investment gains of $78 million which includes $70 million from repositioning the securities portfolio.
While these transactions were primarily focused on agency mortgage-backed securities, part of the repositioning included the disposition of our remaining $150 million in collateralized loan obligations in the investment portfolio.
Total net mortgage revenue was $24 million which was $11 million more than the previous quarter.
This is the result of an all-time high of $635 million in secondary mortgage production and an elevated gain on sale.
Looking forward to the third quarter, we do not expect net mortgage revenue to stay at the record level of the second quarter.
Led by normalization of mortgage revenue, we believe a reduction of adjusted non-interest revenue in the third quarter is likely before we see a return to consistent growth in fee revenue.
Noninterest expense of $284 million or $276 million adjusted is shown on Slide 8.
As expected, we had approximately $7 million in COVID-related expenses in the second quarter.
These included bonuses to certain frontline team members, as well as, efforts to improve the safety of our team members and customers.
Adjustments for the quarter of $8 million included expenses of $3 million related to branch closures and restructuring of corporate real estate, as well as, $5 million in expenses related to the Global One earnout liability.
Adjusted expenses included the $7 million in COVID-related expenses, as well as, an increase in commission expense of $7 million higher than the prior quarter due to elevated mortgage production.
The second quarter also had $7 million in upfront expenses related to efforts we've made to implement and execute certain Synovus forward initiatives.
These efforts will help us achieve sustainable top quartile performance that Kevin will provide an update for shortly.
Consistent with prior guidance, we expect expenses to decline in the second half of the year.
Current credit ratios shown at the top of Slide 9, which include NPAs, NPLs, and past dues remain stable.
We generally expect some pressure on these credit metrics over the next few quarters which are aligned with the reserve builds in the first half of the year under the procyclical nature of CECL.
Although loan deferrals have an impact on these metrics, it's important to note that we are not seeing any widespread deterioration in the portfolio and these ratios remain at or near lows for this credit cycle.
The net charge-off ratio was 24 basis points, up 4 basis points from the prior quarter.
Net charge-offs of $24 million largely resulted from a single credit that was moved to nonaccrual last quarter.
Provision for credit losses of $142 million resulted in an allowance build of nearly $120 million from the current expectation for longer-term economic headwinds.
After adjusting for P3 loans, the ACL ratio increased 35 basis points to 1.74%.
The economic assumptions for the current quarter include the estimated impact of stimulus and an unemployment rate declining to around 10% by the end of the year, and remaining elevated throughout 2021.
We anticipate moderate economic expansion following the dramatic spikes in real GDP expected in the second and third quarter of the year.
Economic uncertainty remains great due in part to the direct impact of COVID.
The ACL ratio could remain elevated due to this economic uncertainty and credit migration which could result in today's allowance for credit losses not fully funding future charge-offs.
Slide 10 includes a review of our capital position as we ended the second quarter.
Our focus remains on diligently managing our balance sheet and capital in alignment with our risk appetite and capital adequacy process.
And you can see the result of that effort in our capital ratios.
CET1 improved 20 basis points to 8.9% and total risk-based capital rose 41 basis points to 12.7%, the highest level in two years.
Actions included student loan sales and the settlement of security trades in July will further reduce risk-weighted assets and will benefit CET1 by approximately 20 basis points in the third quarter.
As it relates specifically to common shareholder dividends, we continue to be guided by two considerations: capital adequacy and long-term earnings.
We remain confident in our current capital levels which is supported by stress testing and sensitivity analysis.
We believe it's important for shareholders to receive current income on their investment and also for us to retain enough capital for our strategic growth objectives.
To achieve those objectives, a total long-term payout ratio of 70% to 80% is appropriate, with approximately half of that coming from common shareholder dividends.
Before handing off to Kevin, I'd like to summarize our thoughts on the balance sheet.
We remain confident in our capital position and the second quarter has shown we have the means to further support capital when needed.
From December 31st to June 30th, we increased our allowance by approximately $400 million while maintaining a stable CET1 ratio.
Given the elevated uncertainty, we are not planning to repurchase shares in 2020 and we'll use future earnings to build capital and grow our businesses.
We expect our primary means of capital return to be through dividends and accretion of our tangible book value.
I'll begin on Slide 11 with an update to the segments we highlighted on the last call that we defined as particularly sensitive to COVID-19.
Balances totaled $4.7 billion in these industries which is stable with the prior quarter.
When we implemented a 90-day deferral program in late March, we utilized a review process, particularly on our larger customers, to assess the impact of the economic conditions that warranted a deferment to help address short-term changes in cash flow.
As these deferrals end, we have once again taken a proactive approach and conducted thorough cash burn analyses on our customers to determine who will continue to see reduced levels of cash flows over the next 90 and 180 days.
What we found is that a large percentage of the companies experiencing a longer-term impact to cash flows are encompassed in five of the segments identified on this slide.
Let me touch on each industry briefly.
I'll start with the hotel industry which continues to see a 40% to 60% decrease in occupancy and revenue per available room.
Given the reopenings in the southeast and the increase in occupancy in various drivable vacation destinations, we expect cash flows to increase somewhat in the coming months, and as a result, the overall deferral rate of the hotel portfolio to range between 30% and 40% in the next 90 days.
As we shared last quarter, this portfolio maintains a strong loan value, slightly over 50%, and it entered the downturn with almost 2 times debt service coverage.
For non-grocery-anchored shopping centers, we expect to see deferments in the range of 20% to 30% as certain types of retail are performing well such as home improvement and electronics, while other retail reopens and resumes their sources of revenue.
Moving to restaurants, this industry benefited greatly from the P3 program and we are seeing more significant improvements in the quick-serve and fast casual businesses which will lead to a reduction in second round deferrals.
However, we continue to see a lag in revenue recapture in full-service and drinking establishments.
Similar to shopping centers, the impact on the retail trade industry is largely a function of the type of goods sold, but we are seeing an improvement here as well with overall cash flows increasing in June versus the previous year with solid growth in beer and wine, furniture, and grocery-related trade.
And therefore, we expect 10% to 20% of the portfolio to pursue a second round of principal and interest deferments.
Fitness, recreation, and entertainment centers are among the industry's hardest hit by the shutdown, but golf courses and country clubs are faring better.
Despite the softness in some of the entertainment industries, we do expect this industry to have low percentage of second-round deferments.
Our oil-related segment, totaling approximately $300 million in outstandings was initially of greater concern due to the negative oil futures and the impact of less travel.
Despite those concerns, we saw a lower percentage of first-round deferments and expect this portfolio to continue to perform well with minimal second-round deferments.
In aggregate, while deferral trends are positive to this point, we are keenly aware that any additional mandated closings from the COVID surges in our markets would have the potential of impacting cash flows, and therefore, increasing the need for additional deferments.
At this point, I would like to draw your attention to Slide 25 in the appendix.
Another notable segment that is often discussed as a COVID-impacted industry that is not on this list is our senior housing portfolio, which is over $2 billion in outstandings.
We have not included senior housing on this slide based on the solid performance of this portfolio and our outlook on future performance.
The reason for exclusion is supported by the fact that we have only seen 4% of the outstanding balances deferred in round one, which was comprised of five loans, and the expectation at this time is that we will have no further deferments in the portfolio during round two.
In addition, we continue to work closely with our customers and the industry associations, as well as, actively monitor cash flows which have trended down only modestly to date.
Our senior housing portfolio primarily includes private pay facilities that have better access to resources, including staffing and equipment.
This portfolio is led by a very seasoned team with a stellar track record dealing with longtime operators.
The portfolio carries strong LTVs and debt service coverage metrics, and is strategically aligned with sponsors who have access to liquidity and have demonstrated commitment to the space over several decades.
In terms of overall portfolio deferments, a significant percentage of our first 90-day deferrals have expired.
And at this point, we are seeing a relatively low level of additional requests which is partially due to the timing of payment due dates.
As of July 14th, 2.3% of the total loan portfolio was in a 90-day deferral status.
We will continue to gain additional insights in the coming weeks.
But based upon current conditions, activity to date and ongoing discussions with our customers, as Kessel mentioned earlier, we believe this percentage could increase into the range of 3% to 5% this quarter.
The process for granting a second deferral takes into consideration the borrower's current financial condition and liquidity, the impact of the borrower's industry from COVID-19, and the performance history of the borrower pre-COVID.
The strength of our portfolio coming into the crisis combined with the assistance from deferrals and government stimulus programs, should help many customers weather the storm and help to minimize defaults.
Combining these actions with strong loan-to-values and good sponsorship should help to mitigate and limit future losses.
Moving to Slide 12.
This is an example of the analyses we've conducted to identify and assess the financial strength of our borrowers.
This work is supported by our commercial portfolio transaction data where we have the primary operating accounts.
Approximately two-thirds of our commercial loan exposures have an operating account open with us.
And we have been comparing their cash inflows which can serve as a proxy for revenues on a year-over-year basis to assess and predict their ability to repay debt during this crisis.
Using this data, we have validated the impact to cash inflows between our customers who received a deferral and those who have not, as well as, the pace of improvement.
Our customers overall have experienced improved cash flows since the trough in April, with the month of June exhibiting only a 6% reduction in cash inflows relative to the same month last year.
This analysis is constructive in evaluating current conditions, but more importantly, it enables a more real-time analysis versus traditional underwriting criteria and provides a prediction of cash flows throughout the current economic cycle.
Predictive analytics allows us to determine which customers require intervention and whether, for example, a deferral or bridge facility could provide the support needed to supplement short-term cash flow disruption.
It also provides early identification of customers where the outlook is less optimistic, thereby, allowing us to take earlier action to reduce and mitigate losses.
As we turn from credit to Slide 13, before I talk about the future, let me briefly touch on the present.
Despite the challenging environment, our businesses continue to perform well.
You have heard from Kessel and Jamie on the financial results this quarter, and those results reflect the ongoing success we have across our geography and our business units.
I want to highlight several areas that continue to perform at a high level in this difficult economy.
Yes, the low-rate environment helped drive volume, but it's important to also note that mortgage loan originators recruited since January 2018 have produced 42% of the year-to-date volume.
Successful recruiting in the past two years has also proven to be a key factor in our mortgage growth.
Second, we continue to bolster our balance sheet and P&L through productivity gains.
With mortgage and wholesale banking leading the way, second-quarter funded loan production was up 43% versus the same quarter last year and deposit production with increases in all of our lines of business, was up 37% versus second-quarter 2019.
The deposit growth is a great example of how our relationship-based model continues to deliver results.
This quarter's results reflect the growth in both balances and accounts.
It is a function of new customers being gained through the P3 process, new talent that we've added, as well as, thorough, consistent prospecting efforts while continuing to see existing customers augment their balances.
Next, as we've also shared in the past, we have been aggressively adding talent and new services in our treasury and payment solutions area.
As a result, production revenue of $2.9 million in the quarter, was up 210% versus the second quarter of 2019.
Lastly, our Global One premium finance business unit continues to generate strong growth while improving returns and the overall efficiency of operations.
As a result of this continued success and the successful integration within Synovus, we have expanded the responsibility of the executive leadership to now lead our specialty finance division which includes structured lending and asset-based lending.
Underlying all of these results, we have seen more significant year-to-date growth in markets where we have made substantial investments in talent, in marketing, and in distribution channels.
Markets such as Atlanta, Tampa, Miami, Birmingham, and Greenville, South Carolina drive a large portion of our overall growth.
And speaking of talent, we have continued to selectively attract top talent in growth markets throughout this quarter across all of our businesses.
We have achieved these results while our customer satisfaction scores and our branches and our contact centers remain quite high, and they've actually increased versus historical levels.
All of these areas, as well as others I have not mentioned, give me great confidence in our ability to win.
And when we return to a state of normalcy, we will be even better positioned to do so.
As I close, let me transition to our Synovus Forward initiative which we've highlighted on Slide 13.
We remain focused on the execution of this program to drive incremental efficiencies and sources of new revenue in 2020 and beyond.
Our financial objective of an incremental $100 million in pre-tax income remains intact with the efficiency benefits being realized early in 2021 while the revenue benefits will continue to build throughout next year.
Our work on one of our largest expense initiatives, our third-party spend concluded last week.
This work stream was accelerated and has proven to be quite fruitful with the identified savings from the renegotiation and demand management efforts yielding savings of around $25 million.
These benefits will be fully realized in our run rate expenses in 2021.
We have also completed Phase 1 of our branch consolidation and corporate real estate optimization efforts and are diligently working on subsequent opportunities that will result in additional savings in 2021.
We remain confident in our ability to generate $45 million to $65 million in expense savings through this program.
While we have focused more intently on the efficiency initiatives out of the gate, we have also turned our attention to the revenue opportunities that were identified during the diagnostic phase with the total potential pre-tax income of between $35 million and $55 million.
Analytics enhancement is at the center of many of these opportunities.
As I mentioned previously during the second quarter, we utilized the resources on this work stream to build out our credit analytics and predict the modeling capabilities to create early warning mechanisms that will allow us to take actions to mitigate and reduce credit losses.
We will benefit from this work in the coming quarters, but this work will also serve as the baseline analytic framework to generate advancements in our sales and our service activities, as well as, improvements in our overall relationship profitability.
Moreover, as we enter 2021, we will be in a better position to optimize the pricing of our depository and treasury products and solutions through the deployment of new tools and processes.
We will maintain a dedicated team to continue to lead this work and we'll also remain flexible to adjustments and additions to the overall program.
This work serves as our North Star as we prioritize future investments and determine needs to continue to differentiate Synovus in what is becoming an increasingly competitive landscape.
We also recognize the uncertainty in the environment and the subsequent impact of financial results which may lead to a change in the scope and the sizing of the program.
And the management team is fully committed to execution and the delivery of the results.
I had the privilege last week of participating in our mortgage company townhall meeting where they were celebrating a quarter of not only record production, but significant increases in customer satisfaction surveys.
And I said to them, what I'll say to our entire team today, I've never been more proud to be associated with the Synovus team and I continue to be inspired by, not only what they do, but how they do it, putting our customers first in all that they do each and every day.
And in spite of all the challenges and uncertainty facing our industry, we continue to attract and retain the very best talent in the industry.
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q2 adjusted earnings per share $0.23.
qtrly period-end loan growth of $1.66 billion or 4.3% sequentially.
total loans ended quarter at $39.91 billion, up $1.66 billion or 4.3% sequentially.
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These statements speak only as of October 15, 2021, and PNC undertakes no obligation to update them.
I imagine you have seen that earlier this week we completed our conversion of BBVA USA.
And I got to say I'm really proud of the team and our ability to sign, close, and convert a hundred billion dollar banking institution within a year.
The dedication of our employees and our sustained investments in technology allowed us to convert roughly 9,000 employees, 2.6 million customers, and nearly 600 branches across seven states.
BBVA USA is now integrated into PNC and its customers can bank with us from coast to coast.
We're bringing our technology talent and the full suite of best-in-class products and services to 29 of the nation's 30 largest markets with attractive growth opportunities, as you've heard me talk about it for years to come.
Now while we still have some more work to do, which is to be expected for a bank conversion of this size.
We're making solid progress with our staffing levels and the branch operations, and BBVA USA legacy markets.
In addition, we're encouraged to see the teams build pipelines and importantly growing new clients.
Now with BBVA legacy employees now on PNC systems, we believe our momentum is going to continue to accelerate.
As we previously were following the same game plan that we've used in previous acquisitions.
And we know what to do, we just have to execute on it.
With respect to our third-quarter results, we had a solid quarter highlighted by strong revenue growth, which included record fee income in our PNC legacy businesses and continued improvements in credit quality, similar to last quarter.
And pretty much as expected, we had a lot of moving parts in our reported results and, of course, Rob will take you through those in a few minutes.
Loan growth continues to be impacted by supply chain issues and the continued runoff of PPP loans.
And also, the strategic repositioning of the BBVA portfolios, which is consistent with our acquisition projections.
That said, total PNC legacy loans, if we back out that PPP runoff, actually grew almost 5 billion with growth in both commercial and consumer categories and while the environment is still challenging we're actually pretty encouraged by what we're seeing on the corporate side.
With spot utilization rates stabilizing and even rising a little on the back of strong new originations in our secured lending and corporate banking businesses.
And on the consumer side, we're also seeing promising origination activity, particularly in the residential real estate business.
Importantly and as you see our balance sheet remains very strong and we're well-positioned with substantial capital and liquidity to continue to support our expanding customer base while making strategic investments in our technology and businesses.
Another exciting development this quarter was the announcement of our integration with a clear data access network.
This is through an application programming interface.
And the integration is going to allow millions of our customers, if they choose to do so, to safely share their financial information with fintech and data aggregators.
It's an important step in our efforts to help our customers protect their data while also giving them the choice to share their data with third-party applications.
Similar to low cash mode, this integration positions us as a leader in technology and innovation and enables us to best serve our customers.
Our significant collaboration across all divisions is impressive and it gives me great confidence that will capitalize on the enormous opportunities ahead of us.
As Bill just mentioned, and notable during the third quarter we converted the BBVA USA franchise to the PNC platform in less than 11 months, following the announcement of the deal.
PNC's increased scale from this acquisition underscores the opportunity we have with the BBVA USA franchise.
We have a proven track record of acquiring attractive strategic opportunities, identifying and reducing inherent risks, and successfully growing franchises to deliver enhance shareholder value.
And as Bill just mentioned, we're well on our way to accomplishing this with BBVA USA.
Due to the June 1 closing of the acquisition, our average balance sheet growth for the third quarter reflected the full quarter impact of the acquisition.
As loans grew $36 billion, securities increased $12 billion, and deposits grew $53 billion.
For comparative purposes to the second quarter, which you'll recall included just one month of BBVA USA results our balance sheet on Slide 3 is presented on a spot basis.
Total spot loans declined $4.5 billion or 2% linked quarter.
Excluding the impact of PPP forgiveness, loans grew and I'll cover the drivers in more detail over the next few slides.
Investment securities declined approximately $900 million or 1% as we slowed purchase activity throughout much of the quarter during the relatively unattractive rate environment.
Our cash balances at the Federal Reserve continue to grow and enter the third quarter at $75 billion.
On the liability side, deposit balances were $449 billion on September 30th and declined $4 billion reflecting the repositioning of certain BBVA USA portfolios.
We ended the quarter with a tangible book value of $94.82 per share and an estimated CET1 ratio of 10.2%.
Both are substantially above the pro forma levels we anticipated at the time of the deal announcement.
During the quarter, we return capital to shareholders with common dividends of $537 million and share repurchases of $393 million.
Given our strong capital ratios, we continue to be well-positioned with significant capital flexibility going forward.
Slide 4 shows our loans in more detail.
Average loans increased $36 billion linked quarter to $291 billion reflecting the full quarter impact of the acquisition.
Taking a closer look at the linked quarter change in our spot balances total loans declined $4.5 billion.
The PNC legacy portfolio excluding PPP loans grew by $4.7 billion or 2% with growth in both commercial and consumer loans.
PNC legacy commercial loans grew $3.7 billion driven by growth within corporate banking and asset-based lending.
This growth in balances has been aided by a slight uptick in spot utilization.
And while still near historic lows, utilization did reach its highest level since December 2020.
Growth in PNC's legacy consumer loans linked quarter was driven by higher residential real estate balances.
Within the BBVA USA portfolio, loans declined $4.4 billion primarily due to intentional runoff relating to the overlapping exposures and nonstrategic loans.
Looking ahead we have approximately $5 billion of additional BBVA USA loans that we intend to let roll off over the next few years, which is in line with our acquisition assumptions.
Finally, PPP loans declined $4.8 billion due to forgiveness activity and as of September 30th, $6.8 billion of PPP loans remain on our balance sheet.
Moving to Slide 5, average deposits of $454 billion increased $53 billion compared to the second quarter driven by the acquisition.
On the right, you can see total period-end deposits were $449 billion dollars on September 30th, a decline of $4 billion or 1% linked quarter.
Inside of this PNC legacy deposits increased $5.4 billion, as deposits continue to grow reflecting the strong liquidity position of our customers.
BBVA USA deposits declined approximately $9.4 billion during the third quarter, which was anticipated as we rationalize the rate paid on certain acquired commercial deposit portfolios and exited several noncore deposit-related businesses.
Overall, our rate paid on interest-bearing deposits is now four basis points or one basis point decline linked quarter.
Slide 6 details the change in our period and securities and Federal Reserve balance.
And as most of you know we have been disciplined in deploying our excess liquidity with rates at historically low levels.
Back to the beginning of the year as the yield curve steepened, we accelerated our rate of purchasing activity.
However, toward the end of the second quarter, we deliberately slowed our purchases as yields declined.
With the increase in rates at the end of the third quarter, we resumed our increased levels of purchasing including $5.4 billion of forward-settling security, which will be reflected in the fourth quarter.
Average security balances now represent approximately 24% of interest-earning assets and we still expect to be in the range of approximately 25% to 30% by year-end.
As you can see on Slide 7, our third- quarter income statement includes the full quarter impact of the acquisition.
The reported earnings per share with $3.30 which included pre-tax integration costs of $243 million.
Excluding integration, costs adjusted earnings per share with $3.75.
Third-quarter revenue was up 11% compared with the second quarter reflecting the acquisition as well as strong organic feed growth.
Expenses increased $537 million or 18% linked quarter.
Including $235 million of integration expenses and two additional months of BBVA USA operating expense.
Legacy PNC expenses increased $76 million or 2.7%.
Virtually all of which was driven by higher fee business activity.
Pretax pre-provisioned earnings excluding integration costs were $1.9 billion and $25 million, or 7%.
The provision recapture of $203 million was primarily driven by improved credit quality and changes in portfolio composition and our effective tax rate with 17.8%.
For the full year, we expect our effective tax rate to be approximately 17%.
As a result, total net income was $1.5 billion in the third quarter.
Now, let's discuss the key drivers of this performance in more detail.
Turning to Slide 8, these charts illustrate our diversified business.
In total, revenue of $5.2 billion increased $530 million linked quarter.
Net interest income of $2.9 billion was up $275 million or 11%, reflecting the full quarter benefit of the earning asset balances acquired from BBVA USA.
Inside of that interest income on loans increased $277 million or 13% while investment securities income declined $9 million, driven by elevated premium amortization on the acquired BBVA USA portfolio.
Net interest margin of 2.27% was down 2 basis points driven primarily by lower security yield.
Importantly in the fourth quarter, we expect premium amortization to decline meaningfully and on the yield on securities portfolio to increase.
The third-quarter fee income of $1.9 billion increased $274 million or 17% linked quarter.
BBVA USA contributed fee income of $184 million, an increase of $122 million linked quarter driven by two additional months of operating results.
Legacy PNC fees grew by $152 million linked quarter were 10%, driven by higher corporate service fees related to recording M&A advisory activity, as well as growth in residential mortgage revenue.
Other noninterest income of $449 million, decreased $19 million linked quarter as higher private equity revenue was more than offset by the impact of $169 million negative visa derivative adjustments.
This adjustment relates to the extension of the expected timing of litigation resolution.
Turning to Slide 9, our third-quarter expenses were up by $537 million or 18% linked quarter.
The increase was primarily driven by the impact of higher BBVA USA expenses of $327 million and higher integration expenses of $134 million.
PNC legacy expenses increased $76 million or 2.7% due to higher incentive compensation commensurate with a strong performance in our fee businesses including a record quarter in M&A advisory fees.
Our efficiency ratio adjusted for integration costs was 64%.
Obviously, with the acquisition, our expense base is now higher but nevertheless, we remain disciplined around our expense management.
And as we've stated previously we have a goal to reduce PNC stand-alone expenses by $300 million in 2021 through our continuous improvement program, and we're on track to achieve our full-year targets.
Additionally, we're confident we'll realize the full $900 million and net expense savings off of our forecast of BBVA USA 2022 expense base, and expect virtually all of the actions that drive the $900 million of savings to be completed by the end of 2021.
We still expect to incur integration costs of approximately $980 million related to the acquisition.
Since the announcement of the acquisition, we've incurred approximately half of these integration costs.
And as Bill mentioned, we appreciate all the hard work our teammates have done to keep us on track and to achieve these goals.
Our credit metrics are presented on Slide 10 and reflect strong credit performance.
Nonperforming loans of $2.5 billion decreased $251 million or 9% compared to June 30th and continue to represent less than 1% of total loans.
Total delinquencies of $1.4 billion that September 30th increase a $106 million or 8%.
However, this increase includes approximately $75 million of operational delays in early stage delinquencies primarily related to BBVA USA acquired loans.
Subsequent to quarter end all of these operational delinquencies have been or are in the process of being resolved.
Excluding these total delinquencies would have increased $31 million or 2%.
Net charge offs for loans and leases were $81 million a decline of $225 million linked quarter.
The second quarter included $248 million of charge offs related to BBVA USA loans.
Mostly the result of required purchase accounting and treatment for the acquisition.
Our annualized net charge offs loans in the third quarter was 11 basis points.
During the third quarter are allowance for credit losses declined $374 million primarily driven by improvement in credit quality, as well as changes in portfolio composition.
At quarter-end, our reserves were $6 billion representing 2.0 -- 2.07% of loans.
In summary, the PNC reported a strong third quarter and notably earlier this week converted the BBVA USA franchise.
With its debt completed, we expect to add significant value to our shareholders as we continue to realize the potential of the combined company.
In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021 due in part to the delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the fourth quarter.
We also expect the Fed funds rate to remain near zero for the remainder of the year.
Looking at the fourth quarter of 2021, compared to the recent third-quarter results, we expect the average loan balances excluding PPP to be up modestly, we expect NII to be up modestly, on a percentage basis, we expect fee income to be down between 3% and 5%, mostly reflecting the elevated third quarter M&A activity.
We expect other noninterest income to be between $375 and $425 million excluding net securities and fees activities.
On [Audio gap] percent, we expect total noninterest expense to be down between 3% and 5% excluding integration expense, which we approximate to be $450 million during the fourth quarter and we expect fourth-quarter net charge offs to be between $100 and $150 million.
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compname reports q3 net income of $1.5 bln.
compname reports third quarter 2021 net income of $1.5 billion, $3.30 diluted earnings per share or $3.75 as adjusted.
q3 adjusted earnings per share $3.75.
qtrly net interest income of $2.9 billion increased $275 million, or 11% versus q2.
qtrly total revenue of $5.2 billion increased $530 million, or 11% q-o-q.
basel iii common equity tier 1 capital ratio was an estimated 10.2% at september 30, 2021.
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They will provide their perspective on Xylem's second-quarter results and their outlook.
A replay of today's call will be available until midnight on September 1st.
Additionally, the call will be available for playback via the investors section of our website under the heading investor events.
All references will be on an organic or adjusted basis unless otherwise indicated.
These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC, including in our Form 10-Q to report results for the period ending June 30, 2021.
In the appendix, we have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
For purposes of today's call, all references will be on an organic and adjusted basis, unless otherwise indicated.
So by now, you will have seen that second quarter performance exceeded our expectations on all major metrics, including orders, revenue, margin, and earnings per share.
I'm very beating the healthy pace we set in the first quarter and to delivering a very strong first half of the year.
Underlying demand for our solutions was robust across all segments and end markets.
The key to a great job converting that into better-than-expected performance and continuing to expand margin.
They delivered even more exceptional results on orders, which grew 29% on an underlying demand across all regions.
In addition, backlog is up 35% versus this point last year.
That broad expansion reflects commercial momentum that puts us in a strong position, both now and into the future as we continue to invest in sustainable growth.
At the end of the first quarter, we raised full-year guidance on revenue and earnings.
The second quarter's performance shows a continuing strong trajectory into the second half, and we're reflecting that by further raising full-year revenue guidance.
The top-line benefits are likely to be moderated somewhat by inflation and a challenging supply chain environment.
But we've been proactive on price and are working with our supply chain partners to mitigate the impact of those headwinds.
So we are also raising the midpoint on earnings per share guidance for the full year.
In a moment, I'll provide some additional color on what we're seeing globally.
But first, let me hand it over to Sandy to provide more detail on performance in the quarter.
The second quarter offered a strong story of continuing demand recovery as revenue grew 11% organically compared to the prior year.
We also saw momentum across most end markets on a quarter-sequential basis.
Utilities, our largest end market, was up 6% compared to the prior year, driven by clean water applications and continued wastewater utility OpEx demand.
Industrial was up 17% on broad-based strength as economies reopened and activity continued to ramp.
Commercial grew 12% and also improved sequentially, was by strength in the U.S. and Western Europe, while residential, our smallest end market, grew 29%.
Geographically, Western Europe and China were both up mid-teens with increasing demand seen across all end markets.
The U.S. returned to growth with site access restrictions easing during the quarter.
As Patrick mentioned, the team delivered exceptional organic orders growth of 29% on strong underlying demand across all segments and regions, with particular pace in M&CS, which grew orders 70% on large water metrology contracts.
This is our fourth consecutive quarter of sequential order improvement and reflects higher orders growth than in the same period in 2019.
Importantly, we exit the quarter with overall backlog up 35%.
Looking at the key financial metrics, margins were above our forecasted range with EBITDA margins coming in at 17.3%.
The 200 basis points of year-over-year EBITDA margin expansion came largely from productivity, volume, and favorable mix, partially offset by inflation and investments.
Earnings per share in the quarter was $0.66, which is up 65%.
Water infrastructure delivered strong results during the quarter.
Orders were flat, but up 22%, excluding the large prior-year deal in Telangana India, order intake was robust in treatment globally.
Revenues were up 6% organically.
Wastewater utilities remained resilient, and we are now seeing recovery in the industrial end markets.
Geographically, emerging markets delivered mid-teens growth from industrial recovery, driven in part by increasing mining demand in Latin America and Africa, while Western Europe delivered double-digit growth from continued strong utility OpEx activity.
In the U.S., healthy utilities OpEx demand reflected in strong orders growth was offset by the lapping of prior year treatment project delivery.
EBITDA margin was in line with the prior year as strong productivity savings and volume effects offset inflation and investments.
The applied water segment had a very strong quarter, driven by continuing market recovery across all regions and end markets.
Orders were up 43% organically in the quarter, with particular strength in the U.S. and Western Europe.
Revenue grew 18% in the quarter with double-digit industrial demand driven by reopening activity and especially in marine and food and beverage applications.
Residential growth continues to be robust and strong market demand.
Geographically, the U.S. was up double digits, while Western Europe contributed 27% growth on increasing industrial demand.
Emerging markets were up 24%, due in part to broad industrial recovery and momentum in China.
Segment EBITDA margin grew 200 basis points compared to the prior year the expansion came from strong volume leverage and productivity more than offsetting material and freight inflation.
M&CS delivered a strong quarter as large project deployments began to ramp.
We also realized gains in our industrial water quality testing business.
Orders for the segment were up 70% organically on strong demand.
Our M&CS backlog now stands at 1.5 billion, which is a historic high and almost 50% higher than at this time last year.
We have secured more than $400 million in large contracts in the last 18 months.
That reflects a number of major projects, which increasingly include our broader digital solutions in combination with our core metrology applications.
Revenue was up 11%, led by 17% growth in water applications, driven by large project deployments and double-digit growth in water quality applications.
Energy applications were down modestly due to project timing and supply chain constraints.
Unpacking the results by geography, emerging markets in Western Europe were up 20 and 25%, respectively.
The U.S. was up mid-single digits on strong demand for water quality applications and assessment services.
As a reminder, for this segment in particular, growth rates can be uneven due to the impact of project timing.
Segment EBITDA margin in the quarter was up 460 basis points compared to the prior year.
Strong productivity savings from prior year restructuring actions, favorable mix, and volume leverage more than offset inflation and investments.
Our balance sheet continues to be very strong.
We closed the quarter with 1.8 billion in cash and cash equivalents.
In the third quarter, $600 million of senior notes will mature to be paid with cash.
Free cash flow conversion was 172% in the quarter, in line with our expectations and historical seasonality patterns.
Net debt-to-EBITDA leverage was 1.3 times at the end of the quarter.
I'd like to touch on three areas briefly.
Our operating discipline, our growth platforms, and sustainability.
On operating discipline, the team did an excellent job on margins in the quarter, delivering 200 basis points of EBITDA margin expansion year on year in addition to quarter-sequential improvement.
We do anticipate some inflation and component supply challenges in the second half, but we're confident in our ability to manage through them and to mitigate their impact.
Earlier, I noted our extremely healthy backlog.
As we work through these volumes, the team is doing a great job making sure we manage the pressure on working capital this can create.
In fact, despite serving spiking demand, we've improved working capital both year over year and quarter sequentially.
As Sandy just mentioned, that performance puts us firmly on track to deliver our commitment on attractive free cash flow conversion.
We clearly have significant capacity for capital deployment.
On top of strong organic growth investment options, we have an attractive and active pipeline of M&A opportunities.
Our growth platforms are an area we'll be delving into at our Investor Day in September, so I'm going to refrain from too much detail here today.
I do want to draw attention to two things, however.
Last quarter, we highlighted the pace of growth in emerging markets.
This quarter, that pace has continued.
Despite India's hard acceleration through the quarter due to COVID impact there.
I'm very proud of the entire Xylem team's discipline and compassionate response in all countries affected by COVID, both in terms of our own operations and also how we've leaned in to support customers and help serve our communities.
I also want to take a moment to draw a connecting line between our portfolio and some of the dramatic water-centric events we've been seeing recently around the world, by which I mean the flooding in Europe, China, and Central Asia and the drought in American West.
These events reflect a trend as the effects of climate change become more and more apparent.
And that trend requires an affordable response to keep communities safe, resilient, and water secure.
So we continue to invest in specific technologies in our portfolio that respond to these challenges.
As an example, automated wastewater network optimization is among our most advanced digital solutions.
Its job is to manage overflows and prevent flooding.
And our customer deployments are already preventing 1.4 billion cubic meters of water from flooding communities.
Similarly, we also continue to innovate in the technologies that make communities more resilient to drought, technologies like leak detection, smart metering and especially water reuse.
Already 1 trillion gallons of water are being recycled using Xylem technology, which brings me to the topic of sustainability more broadly.
The numbers I just quoted come from our annual-sustainability report, which we published in June.
And I think they bear out what we've said for some time.
Our sustainability strategy is fundamental to our business strategy.
We were pleased to report, for example, that almost half of our major facilities are now operating on 100% renewable energy, helping reduce our greenhouse gas emissions intensity by more than 7% year over year.
Beyond our own footprint, our solutions have enabled our customers to reduce their carbon emissions by 700,000 metric tons last year.
The report details progress on all of our signature sustainability goals and shows how sustainability is deeply embedded in who we are as a company.
Now with that, I'll hand it back over to Sandy to provide commentary on our end markets and guidance for the remainder of the year.
Our full-year outlook for our end markets remains largely consistent with our view from last quarter with some positive evolution as a few end markets are showing even faster recovery.
In utilities, demand continues to be strong in both wastewater and clean water, affirming our anticipated growth of mid-to-high single digits.
On the wastewater side, we have seen steady demand in Western Europe and North America as operators continue to focus on mission-critical applications while also investing in larger scale upgrades on affordable funding from capital markets.
Bid activity and long-term capital spending outlook in emerging markets remains solid, though some COVID concerns linger in certain markets.
On the clean water side, demand for smart water solutions and digital offerings continues to be robust as utilities increasingly turn their focus to more resilient infrastructure and affordable water delivery.
Consistent with other technology companies, the connected nature of our solutions raises some risk in the second half, given prolonged supply chain constraints for electronic components.
Our teams are working closely with our suppliers and manufacturing partners to optimize deliveries.
Looking at the industrial end market, where we had expected mid-single digits growth for the year, we are now anticipated growing in the high single digits.
The growth is broad-based with rebounding industrial activity across all segments and regions.
We're seeing upticks in demand, particularly in our industrial dewatering business in emerging markets.
We're also seeing higher demand in marine and food and beverage, driven by recovery in outdoor recreation and the hospitality sector.
We are increasing our outlook in the commercial end market as well.
The U.S. replacement business is growing at a first pace.
New commercial building is expected to lag the recovery somewhat, but key leading indicators reflect optimism for late 2021 recovery in the institutional sector.
With growth in Western Europe and China sustained through the second half, along with modest share gains and supply chain resiliency, we now expect the commercial end market to be up mid-to-high single digits, up from the low single digits previously.
In residential, we now anticipate low teens growth for the full year, up modestly from our previous expectations of high single-digit to low double-digit growth.
We do expect growth will moderate through the second half, due largely to a more difficult year-over-year comparisons.
As you can see, we are further raising our previous annual guidance.
For Xylem overall, we now see full year organic revenue growth in the range of 6 to 8%, up from our previous guidance range of 5 to 7%.
This confidence is based on clear demand recovery, combined with the pricing actions we are taking to offset inflation.
This revenue guidance breaks down by segment as follows.
For water infrastructure, we expect mid-single-digit growth from a previous expectation of mid-to-high single digits.
We expect low double-digit growth in applied water, up from mid-to-high single digits.
And in measurement & control solutions, we expect mid-single-digit growth.
We also expect EBITDA margins in the range of 17.2 to 17.7%.
This guidance represents full-year margin expansion of 120 basis points at the midpoint.
That's grounded in a strong first-half performance with 300 basis points of expansion from restructuring savings on actions we took late last year, as well as volume leverage from the top line growth.
The third quarter is more challenging, primarily driven by the timing of inflation and price realization.
However, price realization will increase into the fourth quarter as we work through the large backlog built over the last several quarters.
Overall, we expect strong second-half margins compared to the first half of the year.
This yields an adjusted earnings per share guidance range of $2.55 to $2.70, reflecting increased confidence in our ability to lift the bottom end of the range while still managing through inflation and supply chain challenges.
That range now reflects a 28% increase in earnings per share guidance at the midpoint over last year.
We continue to expect full-year 2021 free cash flow conversion of 80 to 90% as previously guided, putting our three-year average right around 130%.
We have provided you with a number of other full-year assumptions to supplement your models.
Those assumptions are largely unchanged from our original guidance.
However, one item worth noting is our updated assumption on foreign exchange for the second half of the year.
Because of the recent dip in the euro and the disproportionate effect it had on our results, we've updated our euro to dollar conversion rate assumption for the second half from 1.22 to 1.18.
This change, along with some other currency movements has a $0.04 negative impact on our second-half outlook.
As you know, foreign exchange can be volatile, so we've included our typical foreign exchange sensitivity table in the appendix.
Also, we are making an adjustment to our restructuring and realignment guidance from 50 to 60 million to now 30 to 40 million, while still expecting to realize similar restructuring savings due to high natural attrition and the timing of actions.
And now before wrapping up, let me share some thoughts on our third-quarter outlook.
We anticipate total company organic revenues will grow in the range of 5 to 7%.
This includes mid-single-digit growth in water infrastructure, high single-digit growth in applied water, and low single-digit growth in M&CS.
We expect third-quarter adjusted-EBITDA margin to be in the range of 16.7 to 17.2%, largely in line with our strong second quarter.
While inflation and component supply are likely to present some headwinds in the third quarter, we are addressing them with the pricing and supply chain actions previously mentioned.
The team has been doing an outstanding job capturing market demand, giving us exceptional orders and backlog growth.
We expect to continue capitalizing on that underlying demand.
And the team will manage through the near-term supply chain environment with the same spirit and discipline they've demonstrated through the many external challenges of the past year.
Looking forward, trends toward new investment in infrastructure and particularly in the modernization of infrastructure are accelerating hand-in-hand with demand to make communities more resilient to climate change and to do it in a more affordable way.
Those trends only reinforce the strength of our investment thesis, that our differentiated portfolio of leading technologies, addressing scarcity, resilience, and affordability will drive increased revenue growth and margins, and sustainable growth with strong cash flow generation and increased opportunity for capital deployment.
This puts us in a privileged position to create both economic and social value for our stakeholders now and over the medium and long term.
We are genuinely excited about providing an update on our strategy and long-term plans at our upcoming Investor Day, which is scheduled for September 30th.
It will be the first opportunity for many of you to meet all of our business leaders and our entire senior leadership team, especially those who joined us over the past year.
So it's a great chance to provide a full-strategic update, including our long-term financial targets, and a deep dive into our vision of how digital solutions are transforming outcomes for our customers, including discussions with a few of those customers who've deployed some of our most advanced technologies.
Matt and the team will follow up with invitations and logistical details in the coming days.
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compname posts q2 adjusted earnings per share $0.66.
sees fy adjusted earnings per share $2.55 to $2.70.
q2 adjusted earnings per share $0.66.
raises full-year organic revenue guidance to a range of 6% to 8%, and raises mid-point of earnings per share guidance.
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There are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call.
This document is available on our website or through the SEC at sec.gov.
Also during the call, we'll present both GAAP and non-GAAP financial measures.
Allow me to start off by making a few remarks on the ongoing pandemics impact on the shipping industry.
I'll then discuss how we are doing on executing the plan we outlined on the first quarter call and provide some updates to our outlook for the remainder of 2020.
On our two most recent earnings calls, I mentioned the critical role the international travel infrastructure plays and moving our mariners around the world as they embark and disembark our vessels.
There are over 50,000 ships around the world of all different types and today an estimated 200,000 plus mariners are stranded on vessels and in need of repatriation.
Shipping moves 80% of the global commerce and as an essential part of keeping the global economic recovery going.
So my call to action is this, please join us in supporting the formal recognition of these individuals as key workers.
This would exempt mariners from travel restrictions and enable them to travel to and from ships.
Groups like the International Chamber of Shipping, the International Maritime Organization, the International Labor Organization and the International Transport Workers Federation are all championing this issue.
To the extent that you can help us cause, I urge you to do so.
When we last spoke, I outlined our revised outlook for 2020 and our performance in the second quarter was consistent with that revised outlook.
We stated last quarter that our revised estimated revenue for 2020 was $395 million and the estimated cash operating margin would be 35%.
We now anticipate full year revenue to be approximately $390 million, which is down $5 million from what we estimated as the full-year revenue on the last call.
We still anticipate cash operating margins of 35%, which would result in cash from core operations of $136 million for the year.
Further, we budgeted $20 million for frictional costs associated with the pandemic, and we still see this as the annual impact of the crisis.
This is the increased cost of travel and salaries, cost of quarantine mariners, the cost of fuel to transit vessels coming off hire to their layup locations, and the incremental cost of those vessels being in a layup.
This $20 million of cost gets us down to cash flow of $117 million.
General and administrative expense is now anticipated to be $77 million for the year, a $4 million improvement from $81 million we forecasted on the earlier call and that gets us to $40 million of cash flow.
Vessel disposals of $40 million less dry-dock expenditures of $36 million gets us another positive $4 million.
We are still anticipating a liquidation of working capital, net of taxes and other costs of $21 million for the year.
So our current 2020 outlook compared to the outlook on the last call has cash operating margin down approximately $2 million, dry-dock expenditures are up $3 million, and general and administrative expenses are down $4 million, down $1 million overall to $64 million of free cash flow for the year and consistent with what we laid out on the first quarter call.
In light of the decrease in offshore vessel activity in our revised forecast of the slope of the recovery in the industry, we reassessed the fleet and certain receivables to us from our joint ventures in Africa.
This reassessment resulted in impairments and other charges that totaled $111.5 million for the quarter.
The vessel impairments of $55.5 million reflects two components.
The first relates to moving into the asset held for sale category 22 additional vessels were the revised forecasted day rates and utilization, resulted in a present value from continuing to operate those vessels that was lower than their current disposal value.
So we move them into the asset held for sale category and mark them to their anticipated net realizable value.
Further, in addition to the adjustment in book value for those 22 vessels, the second component is a similar mark-to-market adjustment on the 24 vessels that were already classified as assets held for sale.
So we currently have a total of 46 vessels in this category, valued at $29 million and our intention is to dispose of these vessels over the next 12 months.
Although all the regions of the world have been impacted by the downturn in the oil market in the pandemic, the onshore oil and gas industry of Africa has been impacted disproportionately.
Our activity levels in West Africa are down over 80% and our operations in East Africa for the time being, have been completely shut down.
Other areas of the continent were negatively impacted although more in line with the roughly 25% global average decline, we noted on the first quarter call.
Since 2014, we have had a significant receivable due from our joint venture in Angola.
The balance was in excess of $400 million in 2014 and 2015 and although the balance has been substantially reduced during the intervening years, the current pullback in activity has resulted in us reassessing the collectability of the remaining balance.
As a result of that assessment we recognized an impairment of $42 million.
Related but separate, as a result of the decrease in immediate opportunities to expand our Angolan joint venture with our existing partner, we and our partner mutually agreed to dividend out, substantially all of the cash held by the joint venture.
That resulted in the receipt by Tidewater of $17.1 million of cash in the quarter and dividend income of the same amount.
Also on the continent of Africa, as a result of the steep decline in the business and the outlook in Nigeria, we recognized an impairment on the $12 million owed to Tidewater by our joint venture there and we established a liability for a $2 million loan guarantee, Tidewater provided to the joint venture, back in 2013.
Delivering on our free cash flow objective for 2020 will require similar quarterly results in the third quarter and the fourth quarter as we achieved in the second quarter.
And the formula is the same.
We must continue to minimize dry-dock expense.
We must quickly layup and de-crew idle vessels.
We must timely collect what is due from us from large multinationals and national oil companies and importantly, we have to dispose of older lower specification vessels.
All executed well in the second quarter and all achievable in the second half of 2020 as well.
Right now we have $40 million forecasted for proceeds from vessel disposals and we remain on track with 25 vessels sold for $21 million in the first half of 2020.
The generation of free cash flow remains our key focus and is the key determinant of our cash incentive compensation.
In the second quarter, we generated revenue of $102.3 million, which is a decrease of 19% from the same quarter in the prior year.
This was principally driven by decreases in vessel activity in our West Africa segment, which had a fewer active vessels in the second quarter and our Europe Mediterranean segment, which had 14 fewer active vessels.
Both segments were significantly affected by the decrease in demand caused by the pandemic and the general oversupply of oil.
Overall, we had 26 fewer average active vessels in the second quarter of 2020 then in the second quarter of 2019.
In addition, active utilization decreased from 79% in the same period in 2019 compared to 75% in the second quarter of 2020, which is result of vessels going off hire and into layup.
Consolidated vessel operating costs for the quarters ended June 30, 2020 and 2019 were $64.8 million and $80.4 million respectively.
The decrease year-over-year is driven by the decrease in the number of active vessels, but also a 5% decrease in operating cost per active day.
Our general and administrative expense for the quarters ended June 30, 2020 and 2019 were $17.6 million and $23.7 million respectively, which is down 23% year-over-year.
The significant restructuring of our executive management and corporate administrative functions in 2019 and ongoing cost measures resulted in this 12% decrease in G&A expense per active day, down from $1,587 million in the prior year to $1,401 million in the second quarter of this year.
Depreciation expense for the quarter ended June 30, 2020 and 2019 were $28.1 million and $25 million respectively.
The decrease in depreciation is due to the sale in 2019 of over 40 vessels and the reclassification of the aforementioned 46 vessels to assets held for sale.
Looking at our results of the segment level, despite the industry downturn our average day rates across the company improved to approximately $10,800 for the quarter, up approximately 3% from the same quarter last year.
This was driven by a tailwind of increasing day rates from contracts entered into before the crisis began and complemented by a mix shift as lower day rate vessels were retired through our disposal program or went off hire early in the downturn.
Naturally, the contract protections you get for lower specification, lower day rate vessels are less, and as a result, they tend to come off hire first in the pull back.
Our Americas segment saw revenue decreases of 3% or $1.2 million during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019.
The decrease is primarily the result of five fewer active vessels operating in the region year-over-year driven by lower demand.
Vessel operating profit for the Americas segment for the second quarter was $5.4 million, excuse me, $4.5 million, $1.6 million higher than the prior year quarter.
The higher operating profit was due to a $3.5 million decrease in operating expenses, resulting from fewer dry-docks and better vessel uptime in the second quarter of this year.
Our Middle East Asia-Pacific region had been impacted as negatively as a major operators in the area did not cut back production like they do in other areas of the world and consequently, planned vessel activity increases commenced in this region, whereas in other regions there was a sharp pullback.
Vessel revenues increased 17% or $3.5 million during the quarter ended June 30, 2020 as compared to the quarter ended June 30, 2019.
Activity utilization for the quarter increased to 76% from 75% average, day rate increased almost 10% and average active vessels in the segment increased by 2%.
The Middle East Asia Pacific segment reported an operating profit of $600,000 for the quarter compared to an operating loss of $2.1 million for the same quarter of the prior year.
For our Europe and Mediterranean region our vessel revenues decreased 41% or $14.4 million compared to the year ago quarter.
The lower revenue was driven by 14 fewer active vessels and lower average day rates, which were down 2%.
However, active utilization increased 2 percentage points during the quarter.
The segment reported an operating loss of $1.8 million for the quarter ended June 30, 2020 compared to an operating profit of $2.8 million for the prior year quarter due to decreased revenue, partially offset by $7.9 million of decreased operating cost, which was primarily due to lower personnel and lower repair and maintenance costs associated with the drop in active vessels.
Finally to West Africa where vessel revenues in the segment decreased 32% or $10.6 million during the quarter compared to the same quarter of the prior year.
The active vessel count was lower by -- inactive utilization decreased from 76% during the second quarter of 2019 to 55% during the second quarter of this year.
Average day rates increased 13% due to the vessel mix of remaining contract, similar to what I mentioned earlier.
The decrease in revenue was almost entirely the result of lower demand caused by the downturn as the significant number of vessels in Nigeria went off hire during the quarter.
Vessel operating profit for the segment decreased from $3.1 million for the quarter ended June 30, 2019 to an operating loss of $4 million in the current quarter due to the decrease in active utilization.
Although the magnitude of the business is shrinking, free cash flow generation is increasing.
Each of our four regions had higher average day rates than the previous quarter.
Operating cost per active day are down 10% from the previous quarter and down 4% from the year ago quarter.
Of course, because of those facts on a consolidated basis, we had higher operating margin percentages, as compared to the previous quarter and the year-ago quarter.
G&A cost per active vessel day is down on sequential quarterly and year-over-year basis and down substantially on an absolute dollar basis.
We're generating more cash by operating fewer vessels at higher day rates of lower operating cost per vessels and at a lower G&A cost per vessel.
We're doing this while carefully minding the capital expenditure and working capital investments.
The company is free cash flow positive and our objectives and compensation are all geared to keeping it go in that way.
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sees 2020 tds telecom total operating revenue $950-$1,000 million.
sees 2020 tds telecom adjusted ebitda $290-$320 million.
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In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our third quarter 2021 results and our updated financial outlook for 2021.
Joe Ventura, our Chief Legal Officer will also be joining Bruce and Susan for the Q&A session.
Before we begin our discussion, I need to advise call participants of our cautionary statement.
Actual results could differ materially.
Call participants should note that today's discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP.
Finally, any references to earnings per share or earnings per share made during this conference call refer to diluted earnings per common share.
Today, we reported adjusted earnings per share of $4.83 for the third quarter of 2021, slightly above consensus estimates.
Our year-to-date results reflect the strength of our core operations as we continue to see strong underlying fundamentals across all lines of business and have remained focused on ensuring our members receive the right care at the right time despite the continued disruption caused by the pandemic.
While our underlying fundamentals are strong, 2021 financial results have been impacted by the ongoing pandemic, which has resulted in an adjustment to our full year adjusted earnings per share guidance.
As Susan will share in more detail, this reduction of approximately $1 in adjusted earnings per share is a direct result of COVID and corresponds to our current expectation of the total Medicare Advantage utilization inclusive of COVID costs will run 1% below baseline in the fourth quarter, which is a 150 basis points less than our previous assumption of 2.5% below baseline.
This update reflects a more conservative posture going into the final months of the year and notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to this guidance update we had not recognized a COVID headwind in our '21 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results in an expected adjusted earnings per share growth at the lower end of our long-term range.
And importantly, it is not reflective of any concerns with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part contributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher rated contracts for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
Excuse me participants, this is the operator.
Your conference will begin momentarily.
Please stay on hold until the conference begin.
Sorry for the technical glitch share.
Let me just -- just maybe just go back to our guidance update here and reinsure that investors understand the guidance and in addition how it reflects in the -- as we look at the future here.
First, the guidance reflects a much more conservative posture going into the final months of the year.
And notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to the guidance update we had not recognized the COVID headwind in our 2021 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results an expected adjusted earnings per share growth at the lower end of our long-term range and is importantly does not reflect any concern with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part attributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher contract for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
And while CMS did make adjustments to the 2022 Star Ratings due to the possible impact of the COVID-19 pandemic, these adjustments had minimal impact on our ratings.
This further demonstrates our enterprisewide focus on quality, clinical outcomes and best-in-class customer service, which has been recognized from notable organizations such as Forrester, J.D. Power, and USAA.
Importantly, the Star's bonus allows us to maintain a strong value proposition for our members and provided value for supplemental benefits that address social determinants of health and other barriers not addressed by fee-for-service Medicare.
Looking ahead to 2022, we are pleased to be able to provide stable or enhanced benefits for the majority of our Medicare Advantage members.
Operating plans that support members whole health needs while continuing to deliver the human care our members have come to expect from us.
Our strong clinical and quality programs drive improved clinical outcomes and cost savings that allow our Medicare Advantage plans to continue to expand member benefits on those covered by fee-for-service Medicare.
Our plans include highly valuable extra benefits including dental, vision, hearing and over-the-counter medication allowance, transportation support, business program memberships and home delivered meals following an inpatient hospital set.
Over the last few years, we've made great progress in addressing social determinants of health and health equity by expanding our Medicare Advantage benefits.
Examples of those impactful areas include respite care distributing 1.5 million meals during COVID, sending fans to seniors with COPD during a heat wave and providing support for financial need impacting a senior's health and well-being.
Given the increased demand for health equity across America, we have aggressively expanded our efforts to address it.
We continue to advance our consumer segmentation efforts developing plans that are tailored to the unique needs of specific member populations.
This has allowed us to provide benefits that enhance and complement an individual's existing coverage through programs like Medicaid or entities such as Veterans Affairs.
This approach leads to disproportionate growth.
As you've seen in our D-SNP plans designed for dual eligible members where we have grown our membership approximately 40% in both 2022 and 2021.
We've expanded our D-SNP offerings for 2022 to cover nearly 65% of the dual eligible population nationally.
To reduce food and security, 97% of our members enrolled in our D-SNP plans, and we'll have a healthy foods cart, which provides a monthly allowance to purchase approved food and beverages at various national chains.
New for 2022, many of our D-SNP members will have reduced Part D drug co-pays as a result of the D-SNP prescription drug savings benefit, which will help address the financial barriers some members face when assessing needed prescriptions leading to better medication adherence, an important driver of member's health -- overall health outcomes.
As previously shared, we took a more conservative approach to our 2022 bids recognizing the continued uncertainty associated with COVID-19 and potential impacts to premium and claims assumption allowing us to prioritize long-term benefit stability for our members.
While it is early in the selling season we believe we struck the right balance and are competitively positioned for our continued growth in Medicare Advantage.
Our brand promise to deliver human care resonates with seniors given our comprehensive set of offerings and focus on providing a patient-centric experience based on their specific needs.
Susan will provide more detail and 2022 commentary in our remarks, including high level earnings per share and membership guidance.
I now would like to highlight the continued progress of our strategy through the build out of our healthcare service platform starting with Primary Care business and then moving to our Growing Home Solutions offerings.
We have the largest senior-focused, value based primary care organization in the country, which by year end will include approximately 200 clinics serving 300,000 patients across 24 markets in nine states.
We are accelerating organic and inorganic growth nationally and plan to open a total of 30 de novo senior focused centers in 2022, up from 24 in 2021.
This will include launching in two new major metropolitan areas, Dallas and Phoenix next year.
This faster pace expansion comes as we continue to gain conviction in our de novo center model with panel growth in centers launched in 2021 exceeding plan and clinical performance in our more mature markets continuing to improve.
At our more mature centers hospitalizations and ER visits are down 12% year-to-date versus 2019 pre-COVID Stars performance tracking to 4.5 Stars and NPS score of 90.
We will also continue to expand through inorganic growth completing seven acquisitions through the third quarter of this year bringing 21 newly, wholly owned centers to our portfolio.
We plan to continue this pace of acquisitions, focused on the markets where we have established presence to provide more access and high quality care to our patients.
Turning to the home, we completed the acquisition of Kindred at Home in the third quarter and now the largest home health and hospice organization in the nation.
As previously shared we will be migrating Kindred at Home to Humana's payor-agnostic healthcare service brand CenterWell.
Our efforts to transform home health to a value-based model come at a pivotal time for the industry.
As seniors increasingly choose Medicare Advantage, there is a meaningful opportunity for home health organizations to engage differently with patients and Medicare Advantage payers to more holistically address patient needs and improved health outcomes reduce the total cost of care for health plans and share appropriately in this value creation.
We've made substantial progress toward our goal of scaling and maturing a risk-bearing value-based model that manages the provision of home health, durable medical equipment and home infusion services.
With the acquisition of onehome earlier in 2021, a delegated post-acute management services organization for the home, we have the capabilities to be a value-based convener providing risk-based contracting and referral management and continue to develop technology enabling us to coordinate with other adjacent services.
These services include gap in care, closure, primary or emergent care in the home as well as coordination of meals, transportation and other services to positively support social determinants of health.
We currently care for approximately 270,000 Humana members under value-based home care models in South Florida and Southeast Texas where we have seen improved outcomes including emergency room usage being 100 basis points better than Humana's national average.
We now are focused on expanding to select markets in North Carolina and Virginia, which we've chose based on multiple criteria including market density, opportunity to significantly reduce home care expense and a robust Kindred at Home footprint.
We expect to begin the rollout in the second quarter of 2022 with the goal of covering nearly 50% of Humana Medicare Advantage members under this value-based home health model within the next five years.
We are excited about the continued progress of our strategy in the home, but consistent with our home health peers we recognize that the national nursing labor shortage poses a significant risk to the industry and we are taking proactive steps to address it as part of our well-developed integration process with Kindred at Home.
In some markets the nursing shortages resulting in inadequate capacity to meet demand, negatively impacting our ability to grow the top line.
We believe that Humana's CenterWell brand supported by our patient-centric culture will bolster recruiting and retention efforts for nurses.
We've seen increased nurse satisfaction and engagement in pilot markets where we have deployed value-based concepts, with voluntary nursing turnover improving nearly 10% among home health nurses in 2021.
In addition to unlock sufficient capacity to meet our growth goals, we are implementing broader operational improvements and benefit enhancements, while also making targeted investments in capacity constrained areas to enhance nurse recruiting and retention.
With respect to hospice, our intent remains to ultimately divest the majority interest in this portion of the asset.
As our experience has demonstrated, we can deliver desired experiences and outcomes for patients transitioning from restorative care to hospice through partnership models.
Since we closed the transaction in August we have continued to explore alternatives for the long-term ownership structure for the business and have initiated steps to reorganize the hospice business for stand-alone operations, while also ensuring business continuity and monitoring underlying trends.
We do not have a further update on the specific transaction structure or expected transaction timing, but we will provide additional updates as appropriate moving forward.
Given the continued expansion of an interest in our healthcare service platform we are committed to providing additional disclosure to give further transparency into the performance of these businesses beginning with our first quarter 2022 reporting.
Before closing, I want to touch on the current regulatory and legislative landscape.
As you know, last week, the White House and congressional leaders released their plan known as, Build Back Better, which includes several proposed changes to the Medicare program including establishing a hearing benefit starting in calendar year 2024, which will be included in the Medicare Advantage benchmark.
Given that today more than 40% of Medicare beneficiaries, over 27 million seniors and those with disabilities are enrolled in Medicare Advantage, we were encouraged to see that the package did not include any payment reductions to the program.
As this legislation continues to advance and likely be modified and as we look ahead to the annual CMS call letter and rate notice period, we will continue to work with policymakers and the Biden Administration to further improve Medicare Advantage building on the program's innovation and significant progress in areas like value-based care, social determinants of health, affordability and financial protection for beneficiaries, as well as reducing the total cost of care.
These attributes, along with a deep consumer popularity of Medicare Advantage are what have enabled it to have a strong bipartisan support with hundreds of members of Congress on record supporting the program.
With Medicare Advantage serving as a leading example of a successful private-public partnership, I am optimistic we can continue to lead on important healthcare issues facing both individuals and society, including addressing health and equities, improving health outcomes and expanding value-based care.
Today we reported adjusted earnings per share of $4.83 for the third quarter and updated full year 2021 adjusted earnings per share guidance to approximately $20.50 to reflect a net unmitigated COVID headwind resulting from our current view of utilization levels for the balance of the year.
I will now walk you through this detail starting with a reminder of our previous commentary.
As of our second quarter call, full year guidance assumed non-COVID Medicare Advantage utilization was around 2.5% below baseline in the second half of the year, with a further assumption of minimal COVID testing and treatment costs for the same period.
In September 2021 as a result of the surge in COVID cases due to the Delta variant, we updated our commentary on full year guidance to indicate we expected non-COVID Medicare Advantage utilization to be 5.5% below baseline in the back half of the year, while being partially offset by 3% of COVID costs, therefore, again assuming total utilization would be 2.5% below baseline in the back half of 2021.
What we've seen develop for the third quarter is that total utilization is running 1% below baseline versus the previously anticipated 2.5%.
COVID costs have been higher than initially anticipated as the Delta Variant resulted in hospitalization levels on par with what we experienced in January of 2021 and were overwhelmingly driven by the 20% of our Medicare Advantage members believed to be unvaccinated.
These higher-than-expected COVID costs were fully offset by non-COVID utilization in the quarter.
As COVID hospitalizations increased or decreased we continue to see an approximate 1-to-1 offset in non-COVID hospitalization levels.
We also continue to see significantly reduced non-inpatient utilization when surges occur, offsetting the higher average cost of COVID admission.
However, for the third quarter, in total we saw 1% incremental reduction in utilization beyond the level needed to offset COVID costs versus the 2.5% contemplated in our previous guide.
As a result, we have adjusted our full year guide to now reflect the fourth quarter running similarly with total Medicare Advantage utilization running 1% below baseline inclusive of estimated COVID costs, consistent with what we experienced in the third quarter.
We realized higher than expected positive current period claims development in Medicare Advantage in the third quarter as well as other operating outperformance largely mitigating the lower than anticipated depressed Medicare Advantage utilization allowing us to report results that were slightly favorable to The Street estimates.
Our revised guidance does not assume that the higher levels of favorable current period development seen in the third quarter will continue.
Taken together, our updated full year 2021 adjusted earnings per share guidance takes a more conservative posture going into the final months of 2021, and it's important to note as we've consistently shared throughout the year the midpoint of our original guidance range of $21.50 remains the correct baseline for 2022 given our approach to pricing.
I will now briefly touch on operating results across our segments before sharing early thoughts on 2022 performance.
Our Medicare Advantage growth remains on track and consistent with previous expectations.
We have refined our full year individual Medicare Advantage membership guidance to up approximately 450,000 members consistent with the midpoint of our previous guidance of up 425,000 to 475,000 members.
This outlook represents above market growth with an increase of 11.4% year-over-year.
Our Medicaid results continue to exceed initial expectations due to higher than anticipated membership increases, largely attributable to the extension of the public health emergency.
We now expect to add 125,000 to 150,000 Medicaid members in 2021, up from our previous expectation of up 100,000 to 125,000 members.
Utilization trends continue to be favorable to initial expectations and the Medicaid team is working diligently toward a successful implementation in Ohio with Go Live anticipated in July.
In our Group and Specialty segment, fully insured medical results were impacted by higher than expected COVID costs in the quarter, while our Specialty business results continued to exceed expectations as utilization, particularly for dental services remained lower than previously anticipated.
Recall that our guidance as of second quarter did not contemplate significant COVID costs in the back half of the year and the Commercial business is not seeing the same level of utilization offset experienced in Medicare Advantage.
From a membership perspective, we have increased our expected Group medical membership losses from 100,00 to 125,000 reflecting the expectation of additional losses in the fourth quarter as a result of rating actions taken to account for the expected impact of COVID in 2022.
Finally, within our healthcare service of operations, the Pharmacy and Provider businesses continue to perform slightly better than expected with Pharmacy benefiting from increased mail order penetration as a result of customer experience improvements and marketing campaigns and the Provider business seeing continued operating improvement at our more mature centers, which are now aligned under the same leadership in our de novo centers.
As Bruce mentioned in his remarks, we are actively integrating the Kindred at Home operations and results post integration have largely been in line with expectations.
Similar to Home Health and Hospice peers, the business is being impacted by COVID and labor shortages.
For the third quarter, home health admissions grew low single digits year-over-year, while hospice experienced a low single-digit decline year-over-year.
We will continue to closely monitor trends as we made targeted investments to sustainably improve the recruitment and retention of nurses.
Now, let me take a few moments to share an early outlook for 2022 starting with membership.
As you're aware, the overall PDP market continues to decline as more and more beneficiaries including dual eligibles choose Medicare Advantage.
In addition, as we've discussed previously, PDP plans have become a commodity with the low price leader capturing disproportionate growth.
Consistent with 2021 the Walmart Value Plan will offer competitive benefits but will not be the low premium leader in 2022.
As a result, we expect a net decline in PDP membership of a few hundred thousand members in 2022.
We continue to focus on creating enterprise value for our PDP plans by driving increased mail order penetration and conversions to Medicare Advantage.
With respect to Group Medicare Advantage, we expect membership to be generally flat for 2022 as we do not anticipate any large accounts will be gained or lost as we continue to maintain pricing discipline in a highly competitive market.
Moving to individual Medicare Advantage; as previously shared, we took a more conservative approach to our 2020 bids, reflecting the continued uncertainty associated with the pandemic.
We expect to grow our individual Medicare Advantage membership in a range of 325,000 to 375,000 members in 2022 or approximately 8% year-over-year reflective of our prudent approach we took to pricing for 2022 and the competitive nature of the market.
It is early in our AEP selling season and the outlook we are providing today could change depending on how sales and voluntary disenrollment ultimately commence.
And consistent with prior years we have very little member disenrollment data at this point in the AEP cycle.
I will now turn to our expected 2022 financial performance.
As previously mentioned, I want to reiterate that the $21.50 midpoint of our original 2021 guide continues to be the appropriate jumping-off point for 2022 adjusted earnings per share growth given our approach to pricing.
In addition, we feel comfortable that the risk adjusted assumptions and our 2022 pricing are appropriate as providers have been actively engaging with our members to ensure their conditions are fully documented and that care plans are established to address gaps in care.
Provider interactions and documentation of clinical diagnoses that we anticipate will impact 2022 revenue are approximately 92% complete to-date, in line with both our expectations for 2021 as well as the estimated completion rate for the same time period in 2019.
We also assumed medical costs will return to baseline levels reflecting a pre-COVID historical trending.
From an earnings perspective, we believe the conservative approach we took to 2020 pricing struck the appropriate balance between membership and earnings growth.
Given the ongoing uncertainty surrounding the COVID-19 pandemic we expect to enter the year with an appropriately conservative view of our initial 2022 financial outlook.
Accordingly, we anticipate that our initial earnings per share guidance will target the low end of our long-term growth range of 11% to 15%.
We expect that COVID will be net neutral to the Medicare business in 2022 as we do not anticipate a risk adjustment headwind and expect COVID utilization to be offset by a reduction in non-COVID utilization.
However, our initial guide will allow for an explicit COVID-related headwinds that we can tolerate, should it emerge similar to the approach some of our peers took in 2021.
We believe entering the year with this more conservative approach is prudent in the current environment and sets the company up for success in 2022.
We look forward to providing more specific guidance on our fourth quarter earnings call in early February.
In fairness to those waiting in the queue we ask that you limit yourself to one question.
Operator, please introduce the first caller.
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sees fy adjusted earnings per share $21.25 to $21.75.
compname reports 2q21 earnings per diluted common share of $4.55 on a gaap basis, $6.89 on an adjusted basis.
maintains fy 2021 earnings per share guidance of $21.25 to $21.75 on adjusted basis.
company’s fy adjusted earnings per share guidance assumes $600 million covid related headwind expected to be largely offset by favorable operating items.
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The factors that could cause our actual results to differ materially are discussed in the Company's most recent 10-K and 10-Q filed with the SEC.
Lastly, because the offer period for our IEnova exchange offer is open, we're limited in what we can say about the exchange offer and we will be unable to respond to questions about this transaction.
I'm pleased with our first quarter results, and I think it sets us up well for the balance of 2021.
You'll recall, we shifted our market focus back to North America several years ago and have been consistently investing new capital in our utility platforms in California and Texas.
This strategic focus, together with strong operational execution, are continuing to drive improvements in our financial performance.
A second part of our strategy is focused on consolidating our unregulated investments under Sempra Infrastructure and we're making great progress there as well.
Just last month, we announced our agreement to sell a 20% equity interest in that business to KKR and it's an important step for two reasons: first, bringing in a new strategic partner allows Sempra Infrastructure to strengthen its own balance sheet while also position the business to self-fund its future growth; and second, this transaction sends a clear market signal about the value and expected growth of our Infrastructure platform.
Turning now to the Company's financial results.
We're also affirming our 2021 adjusted earnings per share guidance range.
We've had several positive developments at our operating companies this past quarter.
At our California Utilities, we received a proposed decision for 2022 and 2023 attrition rates, which if approved, will provide greater support for safety and reliability initiatives, as well as improved visibility into future earnings.
In 2020, Oncor experienced its highest organic premise growth ever and we're excited to see the growth continue this year.
In the first quarter alone Oncor connected approximately 19,000 new premises, greater than the connections in the first quarter of 2020, again validating the underlying strength of economic and demographic growth in the region.
Now, shifting to our Infrastructure business.
At Sempra LNG, we have begun engineering, construction of ECA Phase 1 and continue to progress our LNG development projects.
At Cameron Phase 2, we continue to work with our Cameron partners on the technical design of the project and to advance commercial discussions.
At Port Arthur LNG, we continue to work with partners and customers to focus on options to reduce the projects' greenhouse gas profile and continue improving its competitive position in the global energy transition.
At this time, given this work and the continued impacts of the pandemic on the global energy markets, it is more likely that final investment decision at Port Arthur will move to next year.
We will keep you updated as things progress.
Moving to our Mexican business.
We continue to advance our pipeline of development projects, focused on diversifying its energy supplies and improving the country's energy security.
In March, we expanded the renewable energy platform by finalizing the acquisition of the remaining 50% equity interest in ESJ and placing the Border Solar project into operation.
Also, as Jeff mentioned earlier, we're making great progress on Sempra Infrastructure and the associated series of transactions.
Just last week, we received the necessary regulatory approvals to launch the IEnova exchange offer.
As that process moves forward, it's important to note that it does not have a minimum requirement to close.
With that, please turn to the next slide for a short update on additional details of the pending sale announcement in Sempra Infrastructure.
With the announced sale of a 20% equity interest in Sempra Infrastructure to KKR, we've gained a strategic partner to help fund future growth.
The $3.37 billion in proceeds is expected to be used to fund growth at our US utilities and to strengthen our balance sheet, and also establishes an implied enterprise value of approximately $25.2 billion.
Equally important, we're pleased to be partnering with an investment firm that has a shared vision for growth in North America.
Lastly, we expect to close the transaction in the middle of this year, subject to customary closing conditions and certain approvals from third parties and regulatory agencies.
Please turn to the next slide, where I will review the financial results.
This compares to first quarter 2020 GAAP earnings of $760 million, or $2.53 per share.
On an adjusted basis, first quarter 2021 earnings were $900 million, or $2.95 per share.
This compares to our first quarter 2020 adjusted earnings of $741 million, or $2.47 per share.
Please turn to the next slide.
The variance in the first quarter 2021 adjusted earnings compared to the same period last year was affected by the following key items: $73 million of lower losses at parent and other, primarily due to net investment gains, lower net interest expense, lower retained operating costs and lower preferred dividends; $62 million of higher equity earnings from Cameron LNG JV, primarily due to Phase 1 commencing full commercial operations in August of 2020; $35 million of higher CPUC base operating margin at SoCalGas, net of operating expenses; and $30 million of higher equity earnings at Sempra Texas Utilities, primarily due to increased revenues from rate updates to reflect invested capital and customer growth and higher consumption due to weather.
This was partially offset by $56 million of lower earnings due to the sales of our Peruvian and Chilean businesses in April and June of 2020, respectively.
Please turn to the next slide.
We're pleased to report a successful quarter, both operationally and financially, and we are affirming our full-year 2021 adjusted earnings per share guidance range.
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compname reports q1 adjusted earnings per share $2.95.
q1 adjusted earnings per share $2.95.
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Starting on Slide 4.
Our fourth quarter completed another year of robust and sustained growth.
In 2021, we remained focused on growth, performance and people, driving another year of strong results and continuing our momentum.
The profit driven by our strong sales growth in 2021, while tempered by the well-known headwinds of higher inflation and broad-based supply chain challenges, was also strong.
Our 2021 operating performance underscored the strength of our business model, the value of our products and capabilities, and the resilience of our employees.
We have a demonstrated history of managing through short-term pressures and did so again in the fourth quarter.
And we expect to do the same through this inflationary environment using pricing and other levers to fully offset cost pressures over time.
The breadth and reach of our global flavor portfolio ideally position us to fully knowing demand for flavor around the world and drive continued differentiated growth.
This has never been more evident than over the last two years as consumers adapted to the ever-changing environment.
Our compelling offerings in our Consumer and Flavor Solutions segment for every retail and customer strategy across all channels create a balanced and diversified portfolio to drive growth and consistency in our performance.
It also gives us significant flexibility to adapt to changing conditions, wherever they may arise, and continue on our growth trajectory.
This is a significant differentiator in the dynamic environment in which we currently operate.
We are delivering flavor experiences for every meal occasion regardless of whether the occasion is consumed at home or away from home through our products and our customers' products.
We are end-to-end flavor.
Now turning to Slide 6 and our fourth quarter results.
Our performance was at the high end of the guidance range we provided for sales and adjusted operating profit on our last earnings call and exceeded the guidance range we provided for adjusted earnings per share.
On our top line versus the year-ago period, we grew fourth quarter sales 11%.
Both of our segments delivered strong growth with contributions from base business growth, driven by higher volume and pricing actions as well as new products and acquisitions.
Our fourth quarter adjusted operating income and adjusted earnings per share both increased 6%, driven by growth from higher sales and CCI-led cost savings, partially offset by cost inflation.
Let's turn to our fourth quarter segment business performance, which includes some comparisons to 2019 pre-pandemic levels, which we believe are meaningful, given the level of demand volatility from quarter to quarter experienced in 2020.
Starting on Slide 7.
Consumer segment sales grew 10%, including incremental sales from our Cholula acquisition.
The increase was driven by strong volume growth and the impact of pricing actions phased in during the quarter as we discussed on our last earnings call.
Our Consumer segment organic sales momentum on a two-year basis was up double digits, highlighting how the sustained shift in consumer consumption continues to drive increased demand for our product and outpace its pre-pandemic level.
Our Americas sales growth was 13% in the fourth quarter, with incremental sales from our Cholula acquisition contributing 3% growth.
Our total McCormick U.S. branded portfolio consumption, as indicated in our IRI consumption data and combined with unmeasured channels, grew 1%, following a 17% consumption increase in the fourth quarter of 2020, which results in a 19% increase on a two-year basis.
As we previously discussed, in the year-ago period, elevated demand challenged our supply chain whereas in 2021 with the actions we took to add capacity and increase resilience, we were far better positioned and able to ship in line with consumption.
Demand has remained high, and we continue to realize the benefit of our U.S. manufacturing capacity expansion, although some products remain stretched by sustained high demand.
Shelf conditions are improving as is our share performance with another sequential improvement in the fourth quarter, as we expected.
We continue to see further improvement in our recent performance as we begin 2022.
Importantly, and as I just mentioned, we are better positioned than we were a year ago and are confident in our continued momentum.
Focusing further on our U.S. branded portfolio, our 19% consumption growth versus the fourth quarter of 2019 was the seventh consecutive quarter that our U.S. branded portfolio consumption grew double digits versus the two-year ago period.
Our key categories also continued to outpace the center-of-store growth rates versus the two-year ago period.
Household penetration and repeat rates have also grown versus 2019.
And when consumers shop, they are buying and therefore using more of our products than they were pre-pandemic.
Now turning to EMEA.
During the fourth quarter, we continued our momentum with strong consumption growth in key categories compared to the fourth quarter of 2019.
For the full year, we gained market share in key categories and across the region.
Similar to the U.S., our household penetration and repeat rates have also grown versus the two-year ago period.
And when consumers shop, they are buying more than they were pre-pandemic.
And in the Asia Pacific region, our fourth quarter performance continued to reflect the recovery of China's lower branded foodservice sales last year as well as consumer consumption growth across the region.
Turning to Slide 9.
Our Flavor Solutions segment grew 14%, reflecting higher base volume growth in new products as well as pricing actions to partially offset cost inflation and contributions for our FONA and Cholula acquisitions.
On a two-year basis, our sales also increased double digits with strong growth in all three regions.
In the Americas, our FONA and Cholula acquisitions made a strong contribution to our fourth quarter growth.
Additionally, we continued to see robust growth momentum with our consumer packaged food customers as well as the recovery of demand from branded foodservice customers as more dining out options are open versus a year ago.
We continued to execute on our strategy to shift our portfolio to more value-added and technically insulated products in the region, both through the addition of FONA and Cholula to our portfolio as well as the exit of some lower-margin business.
Turning to EMEA, which has continued its strong momentum.
We are winning in all channels with double-digit fourth quarter growth to quick-service restaurants or QSRs, branded foodservice customers and packaged food and beverage customers.
Recovery has been robust in the away-from-home part of the portfolio, and growth in our at-home offerings has been outstanding.
Notably, for the full year, on a two-year basis, we have driven 19% constant currency growth across the portfolio.
In APZ, our momentum with our QSR customers remained strong, driving double-digit growth versus 2020 as well as on a two-year basis.
As for the fourth quarter and in line with what we have said in the past, limited time offers and promotional activities can cause some sales volatility from quarter to quarter.
Moving from our fourth quarter results.
I'm pleased to share highlights of our full fiscal year, including an update on our Cholula and FONA acquisitions, starting on Slide 10.
We drove record sales growth in 2021, growing sales 13% to $6.3 billion with strong organic sales growth and a 4% contribution from our Cholula and FONA acquisitions.
Notably, on a two-year basis, we grew sales 18%, reflecting a robust and sustained growth momentum in both of our segments.
Our Consumer segment sales growth of 9% was driven by consumer sustained preference for cooking more at home fueled by our brand marketing, strong digital engagement and new products, as well as growth from Cholula.
Versus 2019, we grew sales 20%, which reflects the continuation of consumers cooking and using flavor more at home and the strength of our brands.
Our Flavor Solutions segment growth of 19% reflected the strong continued momentum with the at-home products in our portfolio, including a record year of new product growth and a robust recovery from last year's lower demand for away-from-home products as well as contributions from FONA and Cholula.
Notably, growth was driven equally from both the at-home and away-from-home products in our portfolio.
On a two-year basis, we grew sales 15%, driven by the at-home part of our portfolio with demand for the away-from-home portion recovering to pre-pandemic levels.
We have consistently driven industry-leading sales growth resulting in McCormick being named to the latest Fortune 500.
We're proud of our sustained performance and for being included in this prestigious group of industry-leading companies.
At year end, our board of directors announced a 9% increase in our quarterly dividend, marking our 36th consecutive year of dividend increases.
We have paid dividends every year since 1925 and are proud to be a dividend aristocrat.
Finally, we continue to be recognized for doing what's right for people, communities and the planet.
During the year, McCormick was named the United Nations Global Compact LEAD Company and awarded the inaugural Terra Carta seal from his Royal Highness, the Prince of Wales, for our industry leadership in creating a sustainable future.
And just last week, Corporate Knights ranked McCormick in their 2022 Global 100 Sustainability Index as the world's 14th most sustainable corporation, and for the sixth consecutive year, No.
1 in the food products sector.
Moving to the one-year anniversary of our two fantastic recent acquisitions.
Cholula and FONA are creating value, achieving synergies and delivering results according to our plans.
Importantly, we've achieved our one-year sales and earnings per share accretion expectations for both Cholula and FONA.
I'd like to share some comments about the successful execution of our growth plans.
And then in a few moments, Mike will cover in more detail our delivery on acquisition plans.
Starting with Cholula on Slide 12.
The addition of this beloved iconic brand with authentic Mexican flavor is accelerating the growth of our global condiment platform.
In our Consumer segment, we're unlocking Cholula's significant growth potential by using our category management expertise, leveraging e-commerce investments, launching new products, and optimizing brand marketing spend.
We executed on initiatives this past year, including optimizing shelf placement and assortment; expanding into new channels; gaining momentum in e-commerce where Cholula had been under-penetrated; increasing awareness, both through brand marketing investments and brand partnerships such as with DoorDash; and leveraging promotional scale across McCormick brands.
We are excited about the results our initiatives are yielding.
During 2021, we gained significant momentum on top of lapping elevated growth in 2020, adding over one million new households and growing Cholula's consumption 13% in 2021 versus last year.
Cholula is continuing to outpace category growth and gain share.
Combined with 19% total distribution point growth in the fourth quarter of 2021, it is clear our plans are driving accelerated growth.
And notably, we drove Cholula to the No.
2 hot sauce brand in the U.S., joining Frank's RedHot, the No.
1 ranked brand, at the top of the category.
We are just as excited about Cholula's performance as part of our Flavor Solutions portfolio.
With our broad presence across foodservice channel, we have strengthened Cholula's go-to-market model through 2021.
We continued to build on Cholula's strong front-of-house presence, which builds trial and brand awareness beyond foodservice with significant double-digit growth of portion control packs as more restaurant meals are now consumed as delivery or takeaway.
Leveraging our culinary foundation and insights on menu trends, we've also driven double-digit growth in our back-of-house foodservice penetration through recipe inspiration and increasing Cholula's menu participation.
We are growing with big national accounts and smaller independent restaurants, as well as expanding distribution through leveraging the strength of our distributor relationships where Cholula was less developed.
We are succeeding with new menu items, including both permanent ones and limited time offers.
Our momentum with Cholula is very strong.
And we are confident our initiatives will continue to build on consumers' growing passion for heat and drive further growth of this fantastic brand.
Now turning to FONA.
The addition of this leading North American flavor manufacturer is accelerating the growth of our global flavors platform.
We are thrilled our first year of owning FONA has been a record year for the business, with double-digit sales growth compared to last year.
Beverages, with particular strength in the fast-growing performance nutrition category, continued to drive significant growth for FONA up 15% compared to last year.
FONA's new product wins and its pipeline potential have also hit record high, fueling future growth.
We are continuing to drive growth and create new opportunities with our global footprint.
We are leveraging Giotti's infrastructure to expand FONA's flavors into the EMEA region.
In our APZ region, the combination of our infrastructure, which includes our recent flavor capability investments in China and FONA's local application and flavor creation talent is unlocking further potential to accelerate flavor growth in that region.
And just a few months ago, we began our expansion of FONA's footprint to increase our Americas flavor manufacturing capacity, an investment we planned as part of our acquisition model, enabling us to deliver the future growth we expect.
By expanding our breadth and depth in developing flavors while also combining our infrastructures to provide greater scale as well as increasing our manufacturing capacity and technical bench strength, we are providing our collective customers with a more comprehensive product offering and fueling more opportunities for growth across our entire portfolio.
We are cross-selling products across our customer base, and we've also realized the benefit of our combination within our own portfolio.
For instance, with FONA now leveraging McCormick's USDA savory flavors and developing flavors for pet food applications.
The combination of our capabilities has created new opportunities to participate on briefs that capitalize on core strength across McCormick and FONA, enabling us to build a robust pipeline of opportunities, and importantly, win and grow with our customers.
We are thrilled with both Cholula and FONA.
Our enthusiasm for these acquisitions, as well as our confidence that we will continue to achieve our plan, accelerate growth of these portfolios and drive shareholder value has only continued to strengthen.
In summary, for 2021, we continued to capture the momentum we have gained in our Consumer segment and the at-home part of our Flavor Solutions segment.
We have successfully navigated through the pandemic-related disruption in the away-from-home portion of our Flavor Solutions segment, and Cholula and FONA have proven to be fantastic additions to our portfolio.
All of this reinforces our confidence for continued growth in 2022.
Global demand for flavor remains the foundation of our sales growth and we have intentionally focused on great, fast-growing categories and will continue to differentiate our performance.
We are capitalizing on the long-term consumer trends that accelerated during the pandemic: healthy and flavorful cooking, increased digital engagement, trusted brands, and purpose-minded practices.
These long-term trends and the rising global demand for great taste are as relevant today as ever with the younger generations fueling them at a greater rate.
Our alignment with these consumer trends, combined with the breadth and reach of our global portfolio, and the successful execution of our strategies, sustainably positions us for future growth.
In this current dynamic and fast-paced environment, we remain focused on long-term, sustainable growth.
As I mentioned earlier, we continue to experience cost pressures from higher inflation and broad-based supply chain challenges similar to the rest of the industry.
To partially offset rising costs, we raised prices where appropriately last year and began to realize the impact of those actions in our fourth quarter sales growth.
As costs have continued to accelerate, we are raising prices again where appropriate in 2022.
These pricing actions are on track, and we appreciate our customers working with us to navigate this environment.
Additionally, our plans to mitigate cost pressures include our CCI-led cost savings, revenue management initiatives and taking prudent steps to reduce discretionary spend where possible.
Throughout our history, we have grown and compounded our growth regardless of short-term pressures and plan to do so again in 2022 as we continue to accelerate our momentum and drive growth from a position of strength.
Across our Consumer segment, our 2022 plans include continuing to build consumers' confidence in the kitchen, inspire their home cooking and flavor exploration, and accelerate flavored usage, including delivering on the global demand for heat.
We also plan to strengthen our consumer relationships at every point of purchase as well as create delicious, healthy, and sustainable future.
With our investments in brand marketing, category management and new products, we expect to drive further sales growth.
For our Flavor Solutions segment, the execution of our strategy to migrate our portfolio more technically insulated and value-added categories will continue in 2022.
Our plans include targeting opportunities to grow with our customers at attractive, high-growth categories, continuing to leverage our broad technology platform to develop clean and natural solutions that taste great and strengthening our leadership in heat.
With our culinary-inspired innovation and our passion for creating a flawless customer experience, we plan to continue our new product momentum and drive further sales growth.
Our achievements in 2021, our effective growth strategies, as well as our robust operating momentum, all bolster our confidence in delivering another strong year of growth and performance in 2022.
We're looking forward to sharing more details regarding our 2022 growth plan in just a few weeks at CAGNY.
In summary, we have a strong foundation and are well equipped to navigate through this ever-changing environment, responding with agility to volatility and disruptions, while remaining focused on the long-term objectives, strategies, and values that have made us so successful.
We are in attractive categories and are capitalizing on the long-term consumer trends that are in our favor.
A combination of our strong business model, the investments we've made, the capabilities we've built, and the power of our people position us well to continue our robust growth momentum.
Importantly, our strong growth trajectory supports our confidence in our long-term financial algorithm to drive continuous value creation through top line growth and margin expansion.
Our fundamentals, momentum and growth outlook are stronger than ever.
McCormick's employees around the world have done a tremendous job of navigating this past year's volatile environment.
Before I provide additional remarks on our fourth quarter and full year results, I would like to build upon Lawrence's comments on Cholula and FONA and highlight how we have delivered on our acquisition plans now that we have completed the first year.
Starting on Slide 19.
As Lawrence already shared, we have created value by driving sales growth according to our plans.
In addition, Cholula was margin accretive to the gross and operating margins in both of our segments and FONA was accretive to the margins in the Flavor Solutions segment.
We are delivering against our synergy and onetime cost estimates, in fact, doing better than our acquisition plan.
Starting with our original synergy targets.
For Cholula, we have achieved the targeted $10 million to be fully realized by 2022.
For FONA, we are on track to achieve our targeted $7 million by the end of 2023.
We are also achieving revenue synergies as expected.
Our transaction and integration costs for Cholula and FONA are both lower than our acquisition plans.
Early in 2021, we took the opportunity in a low interest rate environment to optimize our long-term financing following the acquisitions, raising $1 billion through the issuance of five-year 0.9% notes and 10-year 1.85% notes, and therefore, realized lower interest expense than we originally projected.
Additionally, our ongoing amortization expense is favorable to both of the acquisition models.
In summary, we executed our year one acquisition plans in line with, and in some areas, better than our modeled including the adjusted earnings per share accretion we expected.
Successful acquisitions are a key part of our long-term growth strategy.
Importantly, we have a proven track record of driving value through acquisitions and increasing the performance of acquired businesses, and Cholula and FONA are adding to that history.
Now for our fourth quarter and full year performance, starting on Slide 20.
Our fourth quarter capped off a year of record sales growth.
During the fourth quarter, we grew constant currency sales 10%, with higher volume and product mix.
Acquisitions and pricing each contributing to the increases in both segments.
Our organic sales growth was 6%, driven by strong growth in both the Consumer and Flavor Solutions segments.
And incremental sales from our Cholula and FONA acquisitions contributed 4% across both segments.
Versus the fourth quarter of 2019, we grew sales 15% in constant currency with both our Consumer and Flavor Solutions segments growing double digits.
During the fourth quarter, our Consumer segment sales grew 9% in constant currency, driven by higher volume and product mix, pricing actions and a 2% increase from our Cholula acquisition.
The year-over-year increase was led by double-digit growth in the Americas and Asia/Pacific regions.
Compared to the fourth quarter of 2019, sales grew 14% in constant currency, led by the Americas.
On Slide 21, Consumer segment sales in the Americas increased 13% in constant currency, driven primarily by higher volume and product mix as the sustained shift to at-home consumption continues to drive increased demand as well as lapping last year's capacity constraints.
Pricing actions and a 3% increase from the Cholula acquisition also contributed to sales growth.
Compared to the fourth quarter of 2019, sales increased 19% in constant currency, driven by broad-based growth across branded products as well as an increase from the Cholula acquisition.
A decline in private label sales partially offset the branded growth.
In EMEA, constant currency consumer sales declined 5% from a year ago due to lapping the high demand across the region last year.
On a two-year basis, sales increased 5% in constant currency driven by growth in spices and seasonings, hot sauce and mustard.
Consumer sales in the Asia/Pacific region increased 11% in constant currency due to the recovery of branded foodservice sales in China or away-from-home products and higher sales of cooking at-home products across the region.
Compared to the fourth quarter of 2019, sales were flat with growth across the region offset by a sales decline in India due to the exit of some lower-margin business.
Turning to our Flavor Solutions segment on Slide 24.
We grew fourth quarter constant currency sales 12%, including a 7% increase from our FONA and Cholula acquisitions.
The year-over-year increase was led by double-digit growth in the Americas and EMEA regions.
Compared to the fourth quarter of 2019, Flavor Solutions segment sales grew 16% in constant currency.
In the Americas, Flavor Solutions constant currency sales grew 13% year over year, with FONA and Cholula contributing 11%.
Organic sales growth was driven by the recovery of demand from branded foodservice and other restaurant customers, higher sales to packaged food and beverage companies, with strength in snack seasonings and pricing.
On a two-year basis, sales increased 15% in constant currency versus 2019, driven by higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower-margin business in other parts of the portfolio.
In EMEA, constant currency sales grew 16% compared to last year due to increased sales to QSRs and branded foodservice customers, as well as continued growth momentum with packaged food and beverage companies.
Constant currency sales increased 26% versus the fourth quarter of 2019, driven by strong sales growth with packaged food and beverage companies and QSR customers.
In the Asia/Pacific region, Flavor Solutions sales rose 1% in constant currency versus last year and increased 8% in constant currency versus the fourth quarter of 2019, both driven by QSR growth and partially impacted by the timing of our customers' limited time offers and promotional activities.
As seen on Slide 28, adjusted operating income, which excludes transaction and integration costs related to the Cholula and FONA acquisitions as well as special charges, increased 6% in the fourth quarter versus the year-ago period with minimal impact from currency.
Adjusted operating income in the Consumer segment increased 14%, or in constant currency, 13%.
The higher sales and CCI-led cost savings more than offset cost pressures from inflation and logistics challenges.
Brand marketing investments, as planned, were 10% lower in the quarter, following an 18% Consumer segment increase in the fourth quarter of last year.
For the full year, we increased our brand marketing investments 3%.
In the Flavor Solutions segment, adjusted operating income declined 16% or 15% in constant currency.
Higher sales and CCI-led cost savings were more than offset by the cost pressures in this segment, unfavorable product mix and costs related to supply chain investments.
Across both segments, incremental investment spending for our ERP program was offset by lower COVID-19 costs compared to last year.
As seen on Slide 29, adjusted gross profit margin declined 150 basis points, driven primarily by the net impact of cost pressures we are experiencing and the phase-in of our pricing actions.
Our selling, general, and administrative expense as a percentage of sales declined 70 basis points, driven by leverage from sales growth and the reduction in brand marketing I just mentioned.
These impacts netted to an adjusted operating margin decline of 80 basis points, as we had expected.
For the fiscal year, adjusted gross profit margin declined 140 basis points, primarily driven by the cost pressures we experienced in the second half of the year and the lag in pricing.
Adjusted operating income grew 6% in constant currency with the Consumer segment's adjusted operating income increasing 1% and the Flavor Solutions segment 23%.
Both segments were driven by higher sales and CCI-led cost savings, partially offset by cost pressures and incremental strategic investment spending.
Adjusted operating margin declined 80 basis points for the fiscal year, driven by the adjusted gross profit margin decline.
Turning to income taxes.
Our fourth quarter adjusted effective tax rate was 21.3%, compared to 22.9% in the year-ago period.
Both periods were favorably impacted by discrete tax items.
For the full year, our adjusted tax rate was 20.1%, comparable to 19.9% in 2020.
Adjusted income from unconsolidated operations declined 40% versus the fourth quarter of 2020 and 5% for the full year.
The elimination of higher earnings associated with minority interest impacted both comparisons unfavorably.
Our adjusted income from operations was also unfavorably impacted by the elimination of ongoing income from Eastern Condiments following the sale of our minority stake earlier this year.
For the fiscal year, this was partially offset by strong performance from our McCormick de Mexico joint venture.
At the bottom line, as shown on Slide 32, fourth quarter 2021 adjusted earnings per share increased to $0.84 from $0.79 in the year-ago period.
And for the year, adjusted earnings per share increased 8% to $3.05 for fiscal year 2021.
The increases for both comparisons were driven by higher adjusted operating income attributable to strong sales growth.
On Slide 33, we summarize highlights for cash flow and the year-end balance sheet.
Our cash flow from operations for the year was $828 million.
The decrease from last year was primarily due to the higher use of cash associated with working capital and the payment of transaction and integration costs.
The working capital comparison includes the impact of higher inventory levels to support significantly increased demand and to mitigate supply and service issues as well as buffer against cost volatility.
We've returned $363 million of this cash to our shareholders through dividends and used $278 million for capital expenditures in 2021.
Our capital expenditures included growth investments and optimization projects across the globe.
For example, our new U.K. Flavor Solutions manufacturing facility, our ERP business transformation, additional hot sauce capacity in the U.S. and our new U.S. Northeast distribution center.
In 2022, we expect our capital expenditures to be higher than 2021 as we continue to spend on the initiatives we have in progress, as well as to support our investments to fuel future growth.
We expect 2022 to be a year of strong cash flow driven by profit and working capital initiatives.
And our priority is to continue to have a balanced use of cash funding investments to drive growth, returning a significant portion to our shareholders through dividends and paying down debt.
Now turning to our 2022 financial outlook on Slide 34.
We are well positioned for another strong year of growth and performance in 2022.
We are projecting strong top line and operating performance with earnings growth partially offset by a higher projected effective tax rate.
We also expect there will be an estimated one percentage point unfavorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share.
On the top line, we expect to grow constant currency sales 4% to 6%.
As Lawrence mentioned, we are taking further pricing actions in 2022, and as a result, expect pricing to be a significant driver of our growth.
We expect volume and product mix to be impacted by elasticities, although at a lower level than we have experienced historically.
We plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products and customer engagement growth plans.
Our volume and product mix will also continue to be impacted by our pruning of lower-margin business from our portfolio.
Our 2022 adjusted gross margin is projected to range between comparable to 2021 to 50 basis points lower than 2021.
This adjusted gross margin compression reflects the anticipated impact of a mid-teens increase in cost inflation, an unfavorable impact of sales mix between segments, a favorable impact from pricing and CCI-led cost savings.
As a reminder, we price to offset dollar cost increases.
We do not margin up.
This has a dilutive impact on our adjusted gross margin and is the primary driver of our projected compression.
We expect to grow our adjusted operating income 8% to 10% in constant currency, which reflects our robust operating momentum, a reduction in COVID-19-related costs and our continuing investment in ERP business transformation.
This projection includes inflationary pressure in the mid-teens, a low single-digit increase in brand marketing investments and our CCI-led cost savings target of approximately $85 million.
Our cost savings target reflects the challenges of realizing commodity and packaging cost savings in the current inflationary environment.
Importantly, we believe there continues to be a long runway to achieve cost savings in 2022 and beyond.
Based on the expected timing of certain items, we expect our profit growth to be weighted to the second half of the year.
Our additional 2022 pricing actions are expected to be phased in during the second quarter.
Cost inflation will have a more significant impact in the first half of 2022 as cost pressures accelerated in the back half of last year.
We also expect our ERP investment to be higher earlier in the year versus 2021.
As a reminder, we are also lapping a very strong business performance in the first quarter of 2021.
Our 2022 adjusted effective income tax rate is projected to be 22% to 23% based upon our estimated mix of earnings by geography as well as factoring in a level of discrete impacts.
This outlook versus our 2021 adjusted effective tax rate is expected to be a headwind to our 2022 adjusted earnings-per-share growth of approximately 3%.
Our 2022 adjusted earnings per share expectations reflect strong operating profit growth of 8% to 10% in constant currency, partially offset by the tax headwind I just mentioned.
This results in an increase of 4% to 6% or 5% to 7% in constant currency.
Our guidance range for adjusted earnings per share in 2022 is $3.17 to $3.22 compared to $3.05 of adjusted earnings per share in 2021.
In summary, we are well positioned with our broad and advantaged flavor portfolio, our robust operating momentum and effective growth strategies to drive another year of strong growth and performance.
Now that Mike Has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 35.
We drove record sales growth in 2021.
Our strong operating performance underscores the strength of our business model, the value of our products and capabilities and the resilience of our employees.
We achieved our one-year Cholula and FONA acquisition plans.
Cholula and FONA have proven to be fantastic additions to our portfolio.
We have a demonstrated history of managing through short-term pressures on driving growth, as we did in the fourth quarter.
McCormick has grown and compounded that growth successfully over the years regardless of the environment.
We have a strong foundation, we are in attractive categories and we're capitalizing on the long-term consumer trends that are in our favor.
We are confident that our broad and advantaged flavor portfolio, our robust operating momentum, and effective growth strategies, we will drive another year of strong growth in 2022 and build value for our shareholders.
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q4 adjusted earnings per share $0.84.
q4 sales rose 11 percent.
sees fy adjusted earnings per share $3.17 to $3.22.
for fiscal year 2022, mccormick expects to increase year-on-year sales by 3% to 5%, or 4% to 6% in constant currency.
mccormick & company q4 sales rose 11 percent.
q4 revenue $6.3 billion.
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We would like to allow as many of you to ask questions as possible in our allotted time.
So, we would appreciate you limiting your initial questions to one.
NIKE creates value through our relentless drive to serve the future of sport and as we saw again in Q1, our strategy is working with business results that reflect our deep connection to consumers around the world.
Q1 was another strong quarter for NIKE with revenue growth of 16%.
And even as we saw physical retail traffic return across much of the portfolio, digital continued its momentum with 25% currency-neutral growth led by North America at over 40%.
Our digital success is evident of the product innovation, brand strength and scale that drives our meaningful relationships with consumers as we continue to show momentum against our biggest growth priorities.
As has been the case since the start of pandemic, I'm proud of the way our entire NIKE team has delivered through macro volatility.
Over the past 18 months, we've demonstrated our ability to manage through turbulence to emerge even stronger and better positioned.
And that's what we'll continue to do as we navigate through these current supply chain issues.
We'll focus on what we can control, while leveraging the many levers.
You'll hear Matt walk through our mitigation efforts in a few minutes.
Today, we're in a stronger position relative to our competition than we were prior to the pandemic.
Because the changes happening in the market work in our favor.
Consumers shift to digital that might have taken five years, will now only take two.
That plays to NIKE's advantage and our consumer direct acceleration strategy is capitalizing on this marketplace transformation.
We know that when we get to the other side of this, we'll be in even stronger shape.
We'll be more agile, more direct and more digital.
So, we remain focused and confident in our long-term business outlook.
Our competitive advantages, including our innovative product, brand strength fueled by compelling storytelling, our roster of the world's best athletes and increasingly our industry-leading digital experiences at retail, will continue to create separation.
As we drive strong sustained consumer demand, our confidence remains undiminished.
We've just wrapped up an incredible summer of sport, highlighted of course by the Olympics and Paralympics.
And moments like these are exciting for our company because sport energizes our roughly 75,000 employees around the world.
You can just feel it.
And it's through that passion for sport that we continue to innovate and connect to the consumer.
In this summer in Tokyo, our leadership as the world's most innovative sports brand was demonstrated once again.
If NIKE were a country, we would have eclipsed the competition, capturing 226 medals, including 85 golds.
Here are a few examples of what excited us most this summer.
We saw the emergence of Gen Z as a powerful next generation of athletes led by a pair of 13-year-old skateboarders who showed us the joy in the expansion of the definition of sport.
We signed in key team sports including football where NIKE teams took home gold in both men's and women's, and basketball where NIKE and Jordan teams combined to take five of the six medals, including both golds.
And we continued our great legacy in track and field with NIKE athletes winning more individual medals in track and field events than all other brands combined.
And at the same time, the European championships brought incredible energy to football in Q1 with England making it to the final.
The film saw more than 800 million impressions across all channels as more than half of EMEA's Gen Z population viewed it at least once.
And the summer sport also saw Giannis in the Milwaukee Bucks win the NBA title after an electrifying finals against Chris Paul, Devin Booker in the Phoenix Suns.
Days later, we released Giannis' latest signature shoe, the Zoom Freak 3, which is built to support the dominant physicality that defines his style of play.
We continue to see strong response to the Zoom Freak and we're excited by what we're seeing with our growing Giannis business.
And speaking it Devin Booker, Q1 was a great reminder of how we're investing in the next generation of superstars as we continue to build our roster of athletes.
Jordan Brand signed the NFL's Dak Prescott in the quarter, joining emerging global icons in NIKE Inc's family, including U.S. Open winner Emma Raducanu and Manchester United's Jadon Sancho.
At the end of the quarter, the summer sport gave way to back-to-school season.
So far this fall, we've seen sell-through in our kids business up almost 30%, led by digital with growth of almost 70.
As we focus on the kids opportunity, our new consumer construct through that we are connecting with families more authentically than ever before.
We're creating kid-specific designs and leveraging new channel for us to connect with these consumers.
Take, for example, Playlist, which is a just for kid series on nike.com and YouTube.
It's filled with games, challenges and exclusive athlete content, all aligned to our mission of encouraging movement in play.
Its latest season began a few months back with a new video starring LeBron James and some of his co-stars from their movie Space Jam, a new legacy.
Playlist has been a hit with kids and parents alike with viewership numbers well above our expectations.
And our kids business remains an important connection point for us, an organic incubator of the brand across multiple generations as we look long term.
We're the largest kids' athletic footwear brand in the world, but we know that there is still so much potential ahead.
And as I've said before, at NIKE, everything starts with innovation.
Our culture of innovation is our most profound competitive advantage.
In this week, I toured our new LeBron James innovation center here at our world headquarters with LeBron.
At over 750,000 square feet, this new home for our innovation teams is five times the size of our previous lab and is continued proof of NIKE's leadership in sports science.
We expect this facility to act as an accelerant as it helps extend our advantage in innovation even further.
And looking at our innovation agenda, the two areas that I'd like to touch on today where our relentless pipeline of innovative product continues to create separation between us and our competition, apparel and sustainability.
First, let's take a look at apparel.
We're seeing strong over indexing growth of 16% in this key growth driver.
And the investments we're making in our new consumer construct are fueling higher parallel growth for women, led by our yoga business.
Our yoga collection today features multiple industry leading innovations, including Dri-FIT and Infinalon.
These innovations are resonating with consumers and have helped us nearly quadruple our yoga business over the past two years.
Another key apparel story for us in Q1 was our bras business.
This quarter, we maintained our number one market share in sports bras in North America and introduced the NIKE Dri-FIT ADV Swoosh bra.
Dri-FIT ADV combines the ultimate in cooling fabrics with highly engineered methods to make.
it's an innovation that's connected with consumers as we scale this technology across our line.
And now to take a look at sustainability, look at what we've done with Space Hippie.
Space Hippie as you may recall is quite literally made from trash and it was originally introduced at our 2020 Future Forum and debuted four separate sustainable material innovations for us including crater foam and space waste yarn.
Now since then we have strategically grown this franchise to global scale and what's more, we've also scaled these individual material innovations across our entire portfolio.
So today, one year after that initial launch, there are more than 43 styles using Space Hippie innovations across four sports, three brands and our full consumer construct.
For instance, you could see it come to life and iconic franchises such as the Air Force 1 Crater.
New performance innovation platforms like Cosmic Unity and even in our hands-free accessibility line with styles like Glide FlyEase.
By driving new dimensions across platforms, our work to scale Space Hippies innovations catalyze growth.
Consumers are clearly responding to sustainability as we're seeing very strong full price sell-through for this family of product, with vast opportunity to drive continued consumer and business value still ahead.
And this is just one example of how we lead with platforms and not just products.
Our deliberate franchise and innovation management create scalable and sustainable impacts on our business and I'm excited by the upcoming new innovation platforms we'll be introducing soon.
Next, let's discuss NIKE's increasing digital advantage.
We continue to lead the industry by creating a premium consistent and seamless experience that deepens relationships between consumers and our brand.
Our advantage comes to life at retail in both digital as well as at the intersection of digital and physical.
I'll discuss both here.
Even as physical retail revenue approach pre-pandemic levels, our digital business this quarter grew double-digits.
This is the result of an unwavering focus on our strategy and the investments we've made against our end-to-end digital transformation.
And so we continue to expect digital to be our leading channel for growth in fiscal '22.
Now one of the best agents for success in our digital business is how strongly we're connecting with members.
Our digital growth is led by outsized member buying, which has seen a penetration increase of 14 points since last year.
Our membership strategy is working as we increasingly use data and analytics to personalize member product offering and experiences.
And we're seeing this come to life as repeat buying members grew more than 70% in the quarter.
Now part of our success stems from our constant focus on expanding what it means to be a NIKE member.
We brought this to life in Q1 by introducing a new launch experience, exclusive to the SNKRS app that revolutionizes how we serve consumers.
The new experience debuted in one of the year's most highly anticipated launches the Off-White Dunk.
For the launch last month, we rolled out our new elevated SNKRS exclusive access.
This approach sends personalized purchase offers to members based on their engagement with SNKRS past purchase attempts and other criteria using data science to drive digital member targeting.
for example, 90% of the invitees for the Off-White Dunk went to members who have lost out on a prior Off-White collaboration over the past two years.
The result the Off-White Dunk end up in the hands of hundreds of thousands of our most deserving members creating what we call exclusivity at scale.
And this improved consumer experience has a positive impact on the entire business.
We've seen that those who benefit from exclusive access on SNKRS spend more across NIKE, fueled by the energy of their win.
So our increasingly personalized approach to launch, along with benefits like member days an exclusive NIKE By You access highlights how we continue to increase the value proposition of NIKE membership.
We're also leveraging our digital advantage by investing in our brick-and-mortar fleet to create a compelling retail footprint that super charges how we serve consumers across physical and digital.
A couple of weeks ago, I was in Los Angeles and toward some of our great retail there.
I got to see a wide variety of stores including our NIKE Live door in Long Beach, a community door in East LA and more.
And across each and every store what jumped out to me was our team.
Their love for their community and their passion for our product and bringing it to life for consumers was inspiring and just awesome to see.
I also enjoyed visiting a few strategic partner doors,including DICK's and Foot Locker.
What's clear across the marketplace, both owned and partnered is how online to offline is becoming second nature.
We know that higher level of the connectivity across physical and digital are driving better consumer experience and loyalty.
Other services such as buy-online-pick-up-in-store and ship-from-store, as well as the in-store shopping features of the NIKE app drive our premium and seamless consumer experience.
And we're starting to extend these innovative experiences globally.
In Q1, we brought our NIKE Rise, an immersive concept to Seoul.
NIKE Seoul introduces new features to Rise rather including inside track and interactive RFID enabled digital footwear table where shoppers can compare details for any two shoes simply by placing them on the table.
Our digitally connected retail experiences are clearly resonating with consumers.
This quarter our inline fleet grew over 70% in revenue approaching pre-pandemic levels.
We're seeing over index growth from members, not just in digital, but also in physical retail with member buying penetration up double digits since last year.
And so, we'll continue expanding these compelling experiences across our fleet in fiscal '22, driving that interplay between physical and digital retail.
In the end, NIKE is doing what we always do, staying on the offense.
The strength of our consumer demand around the world continues to give us confidence in our playbook and execution.
I said it earlier and I'll say it again, I am proud of our resilient and creative team across NIKE, Jordan and Converse and the work we continue to deliver for consumers.
Our confidence as we look long term has not changed one bit.
We've already gotten stronger through this pandemic and we're going to emerge from it even stronger yet.
NIKE's acceleration to a more direct member-centric business model continues to fuel deep connections between consumers and our portfolio of brands, drawing upon our culture of innovation, unmatched global scale and our industry-leading digital platform, we continue to serve the modern consumer as only NIKE can.
Our first quarter results proved again that our strategy is working and NIKE's Consumer Direct Acceleration is fueling the transformation of our long-term financial model.
Our relentless focus on serving the consumer translated into revenue growth of 16% and EBIT growth of 22% versus the prior year.
The NIKE brand remains distinctive and deeply connected in our key cities around the world from New York to Paris, Shanghai to Tokyo, NIKE continues to be consumers number one cool and favorite brand with a position that has gained strength as we've navigated through the pandemic.
Consumer demand for NIKE, Jordan and Converse remains incredibly high and our first quarter financial results would have been even stronger if not for supply chain congestion resulting in lack of available supply.
Despite these headwinds, retail sales still grew double digits versus the prior year, including a record-setting back-to-school season in North America.
Sneakers has increasingly become an indicator and barometer of brand heat, now being operational at scale in 50 countries around the world.
NIKE Digital is now 21% of total NIKE brand revenue, which is an increase of 2 points versus last year, with strong double-digit growth versus the prior year even with broad reopening of physical retail.
Digital is increasingly becoming a part of everyone's shopping journey and we are well positioned to reach our vision of a 40% owned digital business by fiscal '25.
And coming back to marketplace health for a moment, we delivered strong growth in average selling price this quarter with continued improvement in full price realization.
This performance reflects our intentional efforts to manage the health of our product franchises as demand surges to move available inventory to serve demand in the right channels and to drive a more premium experience for consumers.
This quarter, we exceeded our 65% full price sales realization goal, which reflects the expectations that we put forward at our last Investor Day.
As we accelerate our consumer led digital transformation, we are developing and refining new capabilities that are transforming our operating model, quickly becoming a competitive advantage for NIKE.
Central to these capabilities is scaling our digital first supply chain to enable NIKE's digital growth while optimizing service, cost, convenience and sustainability.
We are evolving our distribution network and forward deploying inventory closer to the consumer, leveraging data and advanced analytics.
These actions will improve service levels, reduce carbon impact and ultimately reduce cost to fulfill an order.
Our regional service center outside of Los Angeles opened one year ago and we're excited with the opening of two more centers in Q1, pne on the East Coast and one in Spain.
Our investments in Odoo services are putting our products in the path of more consumers and more efficiently optimizing our inventory.
Today, we have at least two Odoo services in each of our NIKE owned stores in the U.S. and we are aggressively scaling these services across the globe.
Our Express Lane offense is also creating more and more agility across our portfolio from creating locally relevant product on shorter lead times to leveraging a shared inventory pool across the marketplace.
We are better conserving consumers with more operational flexibility, yielding higher profitability.
This quarter Express Lane grew roughly 20% versus the prior year and it increased its share of overall business.
And last, the NIKE App continues to enable a convergence between physical and digital shopping journeys, eliminating friction for consumers.
From member driven personalization and localization to building an endless aisle through digital integration with our most important wholesale partners, Consumer Direct Acceleration is transforming NIKE's operating model to move at the speed of the consumer.
Now, let me turn to the details of our first quarter financial results and operating segment performance.
NIKE Inc revenue grew 16% and 12% on a currency neutral basis with growth across all marketplace channels.
NIKE Digital grew 25% and NIKE owned stores grew 24%.
Wholesale grew 5% in the quarter, negatively impacted by lower available inventory supply due to worsening transit times.
Gross margin increased 170 basis points versus the prior year, driven primarily by higher NIKE Direct margins and partially offset by increased ocean freight surcharges.
SG&A grew 20% versus the prior year.
This was due to higher wage related expenses, higher levels of brand activity connected to return to sport and strategic technology investments.
Our effective tax rate for the quarter was 11% compared to 11.5% for the same period last year.
This was due to increased benefits from stock-based compensation and discrete items, offset by a shift in our earnings mix.
First quarter diluted earnings per share was $1.16, up 22% versus the prior year.
Now, let's move to our operating segments.
In North America, Q1 revenue grew 15% and EBIT grew 10%.
Demand for NIKE remained incredibly strong for the fifth consecutive season, energized this quarter by back-to-school and the return to sport.
Retail sales for our Performance business grew strong double digits during the fall season, led by running, fitness and basketball, powered by excitement from the Olympics, the new WNBA season and the NBA finals.
NIKE Direct grew more than 45% with NIKE Digital now representing 26% share of business.
Digital continued its momentum and grew more than 40%, increasing market share by outperforming industry trends with strong growth in traffic and repeat buying member activity.
The return to physical retail accelerated NIKE owned store growth of over 50% as we served members with elevated experiences.
NIKE owned inventory increased 12% versus the prior year.
This was driven by highly elevated in-transit inventory levels as transit times in North America deteriorated during the last quarter, now almost twice as long as pre-pandemic levels.
This impacted product availability across the marketplace and our ability to serve strong levels of consumer demand, particularly in the wholesale channels.
Closeout inventory was down double digits versus the prior year.
In EMEA, Q1 revenue grew 8% on a currency neutral basis and EBIT grew 26% on a reported basis.
This region was energized by the EURO this summer, where NIKE players scored more goals than all other brands combined and more than half of those goals were with our Mercurial boots.
We saw a strong consumer response to both the Mercurial boot and replica jerseys during the tournament.
NIKE Direct grew 10% on a currency neutral basis, led by our NIKE owned stores.
Following a full reopening, we saw traffic increase by double digits versus the prior year, with better than expected conversion rates.
In EMEA, while NIKE Digital grew 2% in the quarter, demand for full-priced products grew nearly 30% as we compared to higher liquidation levels in the prior year.
NIKE owned inventory declined 14% on a reported basis with closeout inventory down double-digits.
Transit times to EMEA have also deteriorated over the past 90 days, causing higher levels of in-transit inventory and negatively impacting product availability to serve strong consumer demand.
In Greater China, Q1 revenue grew 1% on a currency neutral basis, EBIT grew 2% on a reported basis as the team delivered in line with our own recovery expectations.
Retail sales were impacted in late July and August due to regional closures and lower levels of foot traffic due to COVID containment.
Prior to late July, physical traffic had been approaching prior year levels.
In July, we engaged with consumers through the launch of our joy of sports local marketing campaign.
This campaign generated over $1 billion local views, demonstrating strong brand connection with Chinese consumers.
NIKE Direct declined 3% on a currency neutral basis, partially impacted by retail closures.
NIKE Digital declined 6% as we compare to higher liquidation in the prior year, partially offset by double-digit improvement in full price sales mix.
We experienced a strong 6.18 consumer moment where we grew nearly 10% versus the prior year and remained the number one sports brand on Tmall.
Demand in our SNKRS app grew more than 130% for the quarter.
Our experienced local team continues to navigate through marketplace dynamics.
we finished the quarter with healthy marketplace weeks of supply and inventory normalization is on plan.
Now moving to APLA.
First quarter revenue grew 31% on a currency neutral basis and EBIT grew 72% on a reported basis.
Revenue growth was led by SOKO, Japan, Mexico and Korea with more muted growth in Pacific and Southeast Asia and India due to COVID restrictions and government-mandated store closures.
NIKE Digital grew more than 60% on a currency neutral basis, highlighted by the expansion of our NIKE app.
in June, the app went live in Mexico and six additional countries across Southeast Asia generating 3 million local downloads during the quarter.
Earlier on the call, John spoke about the new NIKE Rise retail experience in Seoul.
To mark the opening of the store, our Express Lane, SNKRS and NIKE Rise teams created the NIKE Seoul [Phonetic] Dunk.
This collaboration drove more than half of day 1 sales and highlights how digital and physical experiences are converging in our own stores, leveraging local insights and a more agile supply model.
Now, I will turn to our financial outlook.
Consumer demand for NIKE remains at an all time high and we are confident that our deep consumer connections and brand momentum will continue.
However, we are not immune to the global supply chain headwinds that are challenging the manufacturer and movement of product around the world.
Previously, I had shared that we were planning for transit times to remain elevated for the balance of fiscal '22.
Unfortunately, the situation deteriorated even further in the first quarter with North America and EMEA seeing increases in transit times due primarily to port and rail congestion and labor shortages.
Additionally, several of our factory partners in Vietnam and Indonesia were required to abruptly cease operations in the first quarter.
As of today, Indonesia is now fully operational, but in Vietnam nearly all footwear factories remain closed by government mandate.
Our experience with COVID related factory closures suggests that reopening and ramping back to full production scale will take time.
Therefore, we're revising our short-term financial outlook to incorporate the following factors: 10 weeks of production already lost in Vietnam since mid July.
Factory reopening to occur in phases beginning in October with a ramp to full production over several months and elevated transit times consistent with where we are now operating today.
We now expect fiscal '22 revenue to grow mid single digits versus the prior year versus our prior guidance of low double-digit growth due solely to the supply chain impacts that I just described.
Specifically for Q2, we expect revenue growth to be flat to down low-single digits versus the prior year as factory closures have impacted production and delivery times for the holiday and spring seasons.
Lost weeks of production combined with longer transit times will lead to short-term inventory shortages in the marketplace for the next few quarters.
We expect all geographies to be impacted by these factors.
However, those geographies in Asia with less in-transit inventory at the end of the first quarter will experience a disproportionate impact beginning in Q2.
For the balance of fiscal '22, we expect strong marketplace demand to exceed available supply.
We are optimistic inventory supply availability will improve heading into fiscal '23 against the backdrop of a very strong brand and healthy pull market across all geographies.
Turning to the rest of the P&L.
We still expect gross margin to expand 125 basis points versus the prior year, at the low end of our prior guidance, reflecting stronger than expected full price realization, the ongoing shift to our more profitable NIKE Direct business and price increases in the second half.
This more than offsets roughly 100 basis points of additional transportation, logistics and airfreight costs to move inventory in this dynamic environment.
We also expect a lower foreign exchange benefit now estimated to be a tailwind of roughly 60 basis points.
And for the second quarter, we expect gross margin to expand at a rate lower than the full year due to higher planned airfreight investment for the holiday season.
We expect SG&A to grow mid-to-high teens.
We intend to maintain our position as the number one cool and favorite brand and to celebrate the return to sport as we inspire and engage consumers around the world.
We will also maintain pace on our multi-year investment plans in order to transform our business for the future as I've outlined in prior quarters.
NIKE's financial strength is a competitive advantage and it is in moments like these where our competitive strengths and strong balance sheet affords us the ability to remain focused on what's required to win and serve consumers for the long term.
In closing, our vision for NIKE's long-term future remains unchanged.
NIKE is a growth company with unlimited potential.
Despite new short term operational dynamics, our consumer-direct acceleration offense is driving our business forward and transforming our financial model toward the long-term fiscal '25 financial outlook I shared last quarter.
This quarter's impressive results are additional proof that our strategy is right, not only for the moment we find ourselves in, but also for the opportunity to serve the future of athlete and sport like only NIKE can.
I wouldn't trade our position with anyone.
And there is no better team to navigate through volatility and lead long-term transformational change.
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nike q1 earnings per share $1.16.
q1 earnings per share $1.16.
qtrly gross margin increased 170 basis points to 46.5 percent.
qtrly revenues for nike, inc. increased 16 percent to $12.2 billion compared to prior year, up 12 percent on a currency-neutral basis.
qtrly revenues for nike brand were $11.6 billion, an increase of 12 percent to prior year on a currency-neutral basis.
saw growth across all channels, led by nike direct growth of 25 percent during quarter.
contributing to nike direct growth was steady normalization of owned physical retail, which grew 24 percent during quarter.
nike brand digital business continued strong growth, increasing by 25 percent, led by north america growth of 43 percent during quarter.
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On our call today are David Gibbs, our CEO; Chris Turner, our CFO; and Dave Russell, our senior vice president, corporate controller.
Following remarks from David and Chris, we'll open the call to questions.
Please note that during today's call, all system sales and operating profit results exclude the impact of foreign currency.
We will no longer be providing an update on temporary store closures as we ended Q4 with less than 1% of our stores temporarily closed.
As a reminder, temporary store closures only include stores that were fully closed as of the end of the quarter but have or are expected to reopen.
For more information on our reporting calendar for each market, please visit the Financial Reports section of our website.
We are broadcasting this conference call via our website.
Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.
We would like to make you aware of upcoming Yum!
investor events and the following.
Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-K filing.
First quarter earnings will be released on May 4, 2022, with the conference call on the same day.
As we reflect on 2021, I couldn't be prouder of the collective accomplishments of our world-class franchise partners and collaboration of our global teams, guided by our Recipe for Growth and Good.
While the last two years have been the most challenging operating environment we've ever navigated, we exit 2021 stronger than ever with over 53,000 global restaurants.
Compared to 2019, we've nearly doubled our digital business.
System sales have grown over $5.5 billion, and operating profit has grown over $200 million.
Additionally, since 2019, we've added another iconic brand and closed on three technology acquisitions, all while launching our global Unlocking Opportunity Initiative with a $100 million commitment over five years investing in equity and inclusion, education and entrepreneurship, the cornerstones of our Recipe for Good.
In 2021, we opened 3,057 net new units, driven by 4,180 gross unit openings, with meaningful contributions from each of our brands, marking the strongest growth year in our history and setting an industry record for unit development.
To put that into context, as the world's largest restaurant company, we opened a new restaurant on average every two hours.
This speaks to the health of our business; iconic brands; capable, committed and well-capitalized franchise partners; and strong unit economics.
This is yet another significant development milestone on our ongoing growth journey, providing customers with access to our brands through a variety of restaurant formats and on- and off-premise ordering channels.
Now more than ever, we've leaned into the structural advantages of our diversified global portfolio by leveraging our unmatched global scale, sophisticated supply chains, marketing and consumer insights expertise and our growing digital and technology capabilities to fuel growth and deliver strong results.
Even as dining room sales recovered throughout the year, we continued to grow our digital sales that reached a record $22 billion in fiscal 2021, an increase of approximately 25% over 2020, suggesting a more permanent shift to digital channels.
We ended the year with over 45,000 restaurants offering delivery, representing more than a 25% increase year over year.
We galvanized our digital and technology strategy and accelerated the development of our ecosystem with both internal investments and the closing of the Kvantum, Tictuk and Dragontail acquisitions.
Our teams remain focused on elevating the customer experience, expanding our off-premise capabilities and empowering our team members with tools to make it easier to run our restaurants, all ultimately fueling improved unit economics.
Expectations of our customers, team members and franchisees have forever changed due to the experiences over the past two years, and we continue to challenge ourselves to exceed their rising bar.
I'm confident we're poised to lead the industry as we embark on the next chapter of our growth journey.
Today, I'll discuss our 2021 results showcasing a few examples across our brands for two of the four pillars in our Recipe for Growth: our Relevant, Easy and Distinctive Brands or R.E.D. for short; and our Unrivaled Culture and Talent.
Then I'll share progress on our Recipe for Good.
Chris will share our fourth quarter results and provide an update on the other two pillars of our Recipe for Growth, Bold Restaurant Development and Unmatched Operating Capability, as well as an update on our strong balance sheet position and capital allocation strategy.
To begin, full year 2021 system sales grew 13% with same-store sales growth of 10% or 3% on a two-year basis and 6% unit growth.
Each of our brands recorded positive same-store sales growth for the year and contributed to broad-based development strength.
Full year core operating profit increased 18%, driven by same-store sales growth and the impact of unit development throughout the year.
As we ended the year, COVID outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in Asia, presenting a headwind to fourth quarter results.
However, our sales momentum remained strong with continued global recovery as evidenced by our two-year global same-store sales excluding Asia up 10% on a two-year basis, accelerating sequentially from last quarter.
Next, I'll talk about our four R.E.D. brands.
I'll begin with KFC, which accounts for 52% of our divisional operating profit.
KFC full year 2021 system sales grew 16%, driven by 11% same-store sales growth and 8% unit growth.
Q4 system sales increased 10% with 5% same-store sales growth or 3% on a two-year basis.
We continue to see ongoing recovery in emerging markets as evidenced by the fact that more than half of our 13 global KFC regions delivered system sales growth in excess of 25% for the full year.
KFC International Q4 same-store sales grew 6% or 2% on a two-year basis.
Sales remained strong throughout the quarter despite regional impacts from COVID variants, with momentum holding in many recovered markets more than offsetting heavily impacted markets including parts of Asia and Western Europe.
Common themes fueling top line growth in the quarter include off-premise and digital capabilities, newsworthy products and a strong value offering.
Q4 same-store sales grew 4% or 12% on a two-year basis.
Strong top line momentum was fueled by strength in group occasions, growth in the digital channel and the success of our chicken sandwich.
The chicken sandwich continues to perform well for the business and now makes up roughly 9% of our sales mix as of Q4, a strong improvement from a 1% mix last year.
Our sandwiches are served straight from the fryer and hot to our guests.
We expect the chicken sandwich platform to continue to be a significant driver of our positive sales momentum for the business going forward.
Next, Taco Bell, which accounts for 32% of our divisional operating profit.
Before delving into results, I'd like to congratulate the entire Taco Bell system for ranking No.
1 in the Franchise 500 for the second year in a row, beating our peers, as well as impressive concepts in other industries.
Entrepreneur magazine, which produces this list, recognized Taco Bell for its franchisee collaboration and innovation.
This recognition is further evidence of our intentionality to be the world's franchisor of choice.
Now I'll discuss our results for the year.
Taco Bell full year 2021 system sales grew 13%, driven by 11% same-store sales growth and 5% unit growth.
Fourth quarter system sales grew 11% with same-store sales growth of 8% or 9% on a two-year basis, reflecting an acceleration from Q3.
Taco Bell kicked off the quarter by introducing the new Cantina Crispy Melt Taco and later in the quarter brought back the Grilled Cheese Burrito, featuring a grilled and bubbly blend of real cheddar, mozzarella and pepper jack cheeses.
Additionally, the team kept value front and center with the launch of a new Crave More Value Menu featuring the $2 burritos.
Taco Bell fans continue to adopt digital ordering channels as we set digital sales records in both the U.S. and international this year.
We will continue to bring distinctive products to life through our digital channels with early access to new products, digital-only campaigns and loyalty rewards.
Moving on to Pizza Hut, which accounts for 16% of our divisional operating profit.
Full year 2021 system sales grew 6%, driven by 7% same-store sales growth and 4% unit growth.
Q4 system sales grew 4% with same-store sales growth of 3% or 2% on a two-year basis.
Overall, we saw an inflection in the growth trajectory of the Pizza Hut brand this year, a testament to the hard work of our team members and franchise operators and a reflection of the overall health of the system.
Pizza Hut International Q4 same-store sales grew 4% while same-store sales declined 3% on a two-year basis.
Key markets that contributed strong performance in the quarter included Africa, Canada, India and the U.K. The brand remains focused on emphasizing easy through embracing continued growth in off-premise channels through utilization of both first- and third-party delivery networks.
Pizza Hut U.S. Q4 same-store sales grew 1% or 10% on a two-year basis.
The team continues to bring iconic pizza that customers love to market in relevant and distinctive ways.
In the fourth quarter, Pizza Hut received strong recognition for an influencer-based marketing campaign that resulted in Pizza Hut being named a 2021 culture driver by TikTok.
Additionally, we brought back a fan favorite, the Triple Treat Box, offering customers a convenient and value-oriented family meal option which drove sales in the quarter.
Lastly, the Habit Burger Grill achieved full year 2021 system sales growth of 24%, driven by a 16% same-store sales growth and 11% unit growth.
Q4 system sales increased 20% with 11% same-store sales growth or 5% on a two-year basis.
To showcase their chef-inspired innovations, The Habit Burger Grill reintroduced the Chicken Caprese Sandwich on garlic ciabatta bread with garlic aioli during the quarter.
Now I'll discuss our Unrivaled Culture and Talent growth driver.
The hallmark of Yum!
is our people-first culture which drives retention and recruitment of amazing talent.
We remain committed to growing our talent from within and recruiting top external talent, as you've seen from some of our recent internal promotions and leadership transitions.
The past two years have allowed us to build a strong foundation centered on our culture, talent and unwavering relationships with our franchisees.
The collaboration with our franchisees has never been more powerful as we're aligned more than ever on the future growth trajectory of the business.
Finally, I want to give an update on our Recipe for Good and the work we're doing around our three priority pillars: planet, food and people.
When it comes to our planet pillar, 2021 was a milestone year.
We announced science-based targets to reduce greenhouse gas emissions nearly 50% by 2030 and pledged to achieve net zero emissions by 2050.
We are expanding our foundational requirements for green building standards for new unit builds and advancing our corporate office and company-owned restaurant footprint to renewable energy.
In terms of our food, we remain focused on food safety and listening and responding to customers' evolving preferences and improving the nutritional value of our menu items.
to Pizza Hut offering Beyond Italian Sausage Crumbles in Canada.
Finally, on the people front, we're committed to investing in Yum!
's social purpose focused on unlocking opportunities for our people and communities while championing equity, inclusion and belonging across all aspects of our business.
Just last week, we announced the Yum!
Franchise Accelerator, a groundbreaking partnership with the University of Louisville and Howard University to train and advance underrepresented minorities and women interested in building a career in the restaurant industry.
Not only is this a priority for Yum!
but unlocking opportunity remains a focus for our brands as well with the recent launch of the Taco Bell Business School.
As a result of our elevated commitments and transparent disclosures, we've received notable recognition this quarter, including being named to the Dow Jones Sustainability Index North America for the fifth consecutive year and being named on Newsweek's ranking of America's Most Responsible Companies.
I'm incredibly proud of our Recipe for Good and know that this work is more important than ever when it comes to building resilient and relevant brands for the future.
As I take a moment to reflect on the past two years, I'm extremely proud and grateful for the significant accomplishments and collaboration across our teams to both serve our customers and community while fueling growth for our franchisees and shareholders.
We're entering 2022, which marks Yum!
's 25th anniversary, with confidence in our Recipe for Growth and Good strategies, and I'm energized for what lies ahead.
I'm certain we'll continue to build the world's most loved, trusted and fastest growing restaurant brands while delivering lasting value for our stakeholders.
With that, Chris, over to you.
Today, I'll discuss our fourth quarter financial results, Bold Restaurant Development and Unmatched Operating Capability, as well as our strong balance sheet position and capital allocation strategy.
I'll begin by discussing our financial results.
We finished the year strong, opening a record-breaking 4,180 gross units or 3,057 net new units, resulting in 6% unit growth for full year 2021.
A robust 10% same-store sales growth helped us achieve 13% system sales growth, driving full year core operating profit growth of 18%.
That is a tremendous outcome given the inflation, labor, supply chain and consumer mobility challenges our brands faced in the back half of the year particularly in Q4.
Q4 results also reflect impressive performance.
System sales grew 9%, led by same-store sales growth of 5% or 4% on a two-year basis, accelerating from Q3.
Strong underlying profit growth was masked by elevated G&A levels owing to higher incentive compensation as a result of our strong full year results and the normalization of Taco Bell company-owned restaurant margins in the quarter as previously signaled.
We anticipate quarterly variability in our company-owned restaurant margins as we remain focused on balancing relative value for our customers while protecting margins in the long run.
To that end, full year 2021 Taco Bell company-owned restaurant margins were in line with our historical range of 23% to 24%, virtually unchanged relative to 2019 levels.
This demonstrates our ability to drive strong top line results while managing profitability in an inflationary environment.
Our Q4 ex special earnings per share was impacted by two items.
First, we recorded a $35 million pre-tax gain on our investment in Devyani International Limited.
Second, we had a higher-than-normal tax rate for the quarter due to a tax reserve related to a prior year filing position that was challenged.
And so our Q4 results were in line with our internal expectations and culminated in full year results that exceeded all elements of our long-term growth algorithm.
Moving on to our Bold Restaurant Development growth driver.
We opened 1,678 gross units in the quarter or 1,259 on a net new unit basis, resulting in nearly 4,200 gross units opened for the full year, which is a record for Yum!
and the restaurant industry.
That equates to over 100,000 jobs created worldwide last year alone.
China continues to be the biggest developer.
However, we continue to see broad-based strength across our portfolio, evidenced by over 2,500 restaurants opened outside of China this year.
In fact, we saw new restaurants built in over 110 countries this year, a step-up from prior years, signaling our development engine is diversified and stronger than ever.
At KFC, the brand delivered a record development year, led by significant contributions from China, India and Russia.
Overall, KFC International opened over 2,400 gross units and nearly 2,000 net new units during 2021.
At KFC U.S., after several years of same-store sales growth and strengthening unit economics, we have a much stronger foundation now on which to grow in the future as evidenced by the inflection point in developments with the system moving to positive unit growth in 2021.
Taco Bell reported a strong development year in both the U.S. and international.
In the U.S., Taco Bell reached an impressive milestone, ending the year with over 7,000 restaurants and ample white space for future developments.
During the fourth quarter, Taco Bell celebrated más international expansion as Spain was the first market to surpass 100 units.
We believe this development threshold unlocks accelerated growth, fueled by the benefits of scale, including supply chain advantages, as well as marketing and brand awareness.
We're confident in what the future holds for Taco Bell International, particularly as scale ties directly to profitability.
Pizza Hut International delivered a record year in development with all international business units reporting net positive growth, led by China and India.
Continued improvement in unit economics and a more HMR-focused footprint are drivers of the broad-based unit growth.
Finally, The Habit Burger Grill restarted their development engine this year with 23 net new units.
Our brands are entering 2022 from a position of strength with plans to continue exceptional growth, owing to our world-class operators and franchise partners.
We're confident in our future growth engine given our broad-based strength, improved unit economics and the visibility we have into our development pipeline.
Next, I'll talk about our Unmatched Operating Capability growth driver.
We remain focused on leveraging our digital and technology strategy to elevate both customer and team member experiences by leaning in on three key elements: easy experiences, easy operations and easy insights.
Starting with easy experiences.
We expanded our digital ordering channels, including chat ordering via Tictuk, to nearly 2,000 stores at year-end, an increase of roughly 60% since our acquisition in the first quarter.
We also saw digital sales at KFC U.S. grow approximately 70% year over year, fueled by our delivery service channel and e-commerce platform that launched nationwide in early 2021.
We continue to invest in technology platforms focused on delivering a frictionless experience for our guests, including the launch of Quick Pick-Up at KFC U.S. in the fourth quarter that allows guests to bypass the drive-thru and grab their digital orders from cubbies inside the restaurant.
The outstanding sales growth across our digital channels is evidence that our customers continue to expect and opt for easy access to our brands.
Now moving on to easy operations, which are focused on making it easier for our team members to run the business and ensure a superior customer experience.
I want to highlight the exceptional operating performance of our brands, starting with Taco Bell, whose team members were unwavering in their commitment to deliver a superior customer experience.
In 2021, Taco Bell's drive-thru times were two seconds faster year over year, and the fourth quarter marked the eighth consecutive quarter of an average drive-thru time under four minutes.
This truly is an impressive performance considering labor availability challenges.
Additionally, the Dragontail order and delivery platform is now live in 2,800 stores in 21 markets across KFC and Pizza Hut, up from 13 markets last quarter and nine markets from the end of 2020.
Dragontail allows us to tap into the power of artificial intelligence to streamline the end-to-end food preparation process and optimize delivery routes for drivers.
At Pizza Hut International, we continued deploying HutBot, our intelligent coaching app designed to enhance both the team member and customer experience by digitizing routines and insights into operational efficiencies.
When HutBot is deployed and used effectively, it's proven to increase customer satisfaction scores.
We ended the year with HutBot live in over 6,000 Pizza Hut locations in 70 markets.
To round out our technology strategy, our easy insights platform provides us with invaluable knowledge about our consumers, enabling us to enhance the customer relationship.
When we acquired Kvantum, a leading AI-based consumer insights and marketing performance analytics business, in the first quarter, it was operating in 13 markets.
We have since tripled Kvantum's footprint to over 45 markets.
We will continue to prioritize initiatives that lead to incremental sales growth and improved unit economics for our franchisees.
The impressive adoption rates of these technology platforms are evidence of our franchisees' confidence in the investments we made to advance our digital and technology ecosystem this year.
We're confident these investments have created a meaningful competitive advantage and will be a point of differentiation for Yum!
as we serve the elevated expectations of customers.
Now for an update on our strong balance sheet position and our capital allocation strategy.
We ended the year with cash and cash equivalents of $486 million excluding restricted cash.
We closed the year temporarily below our net leverage target of five times as a result of our strong earnings growth.
Capital expenditures, net of refranchising proceeds, were $55 million during the quarter and $145 million for the full year.
The full year consisted of $230 million in gross capex and $85 million in refranchising proceeds.
We paid a healthy quarterly dividend of $0.50 per share or approximately $600 million for the full year.
With respect to our share buyback program, during the quarter, we repurchased 5.6 million shares at an average share price of $128, totaling $720 million.
For the full year, we have repurchased 13 million shares at an average price of $122, totaling $1.6 billion.
As we look to 2022, our capital priorities remain unchanged: invest in the business, maintain a healthy balance sheet, pay a competitive dividend and return excess cash to shareholders via share repurchases.
We remain committed to maintaining our asset-light business model of at least a 98% franchise mix.
Going forward, we expect strong returns from our equity store investments to continue and like our franchisees, see attractive opportunities to invest in unit development.
Capitalizing on these opportunities, we expect net capital expenditures for full year 2022 to be approximately $250 million, reflecting up to $350 million of gross capex and $100 million of refranchising proceeds.
In the long run, we expect our refranchising proceeds to offset our new store investments as they have in the past.
But in the near term, new store investments may exceed refranchising by $50 million to $100 million annually, primarily driven by our strategy to accelerate growth of The Habit equity estate.
We were pleased to announce earlier this week an increase in our quarterly cash dividend of 14% to $0.57 per share in 2022.
The recovery of our business in 2021 and proven resilience of our free cash flow supported this increase, reflecting a two-year double-digit CAGR, in line with our historical earnings growth and dividend increases.
I'd like to wrap up by providing color on the shape of 2022.
I'm pleased to share that we expect to deliver full year growth in line with our long-term growth algorithm, which includes 2% to 3% same-store sales growth and 4% to 5% unit growth, culminating in mid- to high single-digit system sales growth leading to high single-digit core operating profit growth which excludes FX.
Reflecting on 2021 results, we had several quarterly drivers that created lumpiness in the shape of the year, creating noise in our year-over-year lapse in 2022.
We expect our full year G&A to be approximately $1.1 billion but our G&A spend will return to a more balanced quarterly cadence relative to 2021.
Given the shape of our anticipated G&A spend throughout 2022 in comparison to 2021, we expect G&A to be a headwind to operating profit growth in the first half and a tailwind to growth in the second half of 2022.
Due primarily to these timing factors related to G&A, we are expecting roughly flat core operating profit growth in the first half and high teens core operating growth in the second half, culminating in full year high single-digit core operating profit growth, in line with our long-term growth algorithm.
Finally, on our 2022 effective tax rate.
Although it's difficult to forecast with precision at this time, we continue to believe 21% to 23% is the appropriate range, but there are factors that could move us toward the high end of the range.
We'll continue to provide updates as appropriate.
Overall, I couldn't be prouder of the results for the year.
Looking forward to 2022, I'm confident we're poised to take share and deliver on our long-term growth algorithm, driven by our expanding competitive advantages tied to our unmatched global scale, investments in our digital ecosystem and world-class franchise partners.
I'm looking forward to the year ahead and the continued success of our iconic global brands while delivering consistent earnings growth for shareholders.
With that, operator, we're ready to take any questions.
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compname reports fourth-quarter results; industry record full-year 3,057 net-new units.
fourth-quarter system sales growth of 9% with over $6 billion in digital sales.
full-year system sales growth of 13% and record digital sales of $22 billion.
qtrly worldwide system sales grew 9% excluding foreign currency translation, with kfc at 10%, taco bell at 11%, and pizza hut at 4%.
qtrly worldwide same-store sales grew 5%.
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As we begin the final year of The Walt Disney Company's first century, I am pleased to share our results for the first quarter of fiscal 2022, starting with the highlights.
Our adjusted earnings per share of $1.06 is up from $0.32 a year ago.
Our domestic parks and resorts achieved all-time revenue and operating income records despite the Omicron surge.
And our streaming services ended Q1 with 196.4 million total subscriptions after adding 17.4 million in the quarter, including 11.8 million Disney+ subscribers.
I'll share more about those items shortly.
But first, I want to talk about this unique moment in the history of The Walt Disney Company.
It is perhaps fitting that our 100th anniversary comes at a time of significant change for us and our industry.
In the midst of a global pandemic, fast-changing consumer expectations and a leadership transition, we reimagined our parks business, substantially increased our investment in content creation and executed a reorganization that will facilitate our ongoing transformation.
Each of those actions has helped set the stage for our second century.
And as we approach that remarkable milestone, I am filled with optimism.
We have the world's most creative storytelling engine, an unmatched collection of brands and franchises and an ability to tell stories that form deep emotional connections with audiences.
We have a portfolio of distribution platforms, including powerful and growing streaming services.
We have diverse revenue streams that span business models and industries, but which all are interconnected to create entertainment's most powerful synergy machine.
We have the country's top news organization and the most trusted brand for following sports and our theme parks continue to be the most magical places on Earth.
In short, our collection of assets and platforms, creative capabilities, and unique place in the cultural zeitgeist give me great confidence that we will continue to define entertainment for the next 100 years.
To carry through on that promise, we will be guided by three strategic pillars: storytelling excellence, innovation, and audience focus.
Storytelling excellence is, of course, dependent on having excellent storytellers.
I am thrilled to share that our legacy of being home to the most accomplished leaders in the industry will continue, as nearly all of our top creative executives have recently renewed, extended, or signed new contracts.
I could not be more excited to continue working with these creative powerhouses.
The quality content from our teams was recognized just yesterday with a fantastic 23 Oscar nominations, including three of the five best animated feature films: Pixar's Luca; Walt Disney Animation's Raya and the Last Dragon; and our newest franchise, Walt Disney Animation's Encanto, which received three nominations.
Summer of Soul was recognized in the best documentary category, and Nightmare Alley and West Side Story both received best picture nominations.
As you may have seen earlier today, we announced West Side Story will debut in most Disney+ markets on March 2, and we can't wait for our subscribers to see this incredible film.
In Q1, our studios took us deeper into the Marvel Cinematic Universe with Eternals and the Disney+ original series, Hawkeye, and returned us to that galaxy far, far away with another Disney+ original series, The Book of Boba Fett.
Our general entertainment teams also continued to produce programming of the highest quality.
In fact, last year, our general entertainment team produced nearly a quarter of the industry's best-reviewed shows.
And Q1 saw 10 of their shows achieve a 100% critic score on Rotten Tomatoes.
That includes Abbott Elementary, the first freshman broadcast comedy to earn the 100% Certified Fresh score since ABC's own Modern Family in 2009.
Our success in branded storytelling is, of course, no secret.
However, it's often lost that the depth, breadth, and quality of our general entertainment content is also a driving force behind the success of our streaming services.
In fact, six of the 10 most-watched programs across our services are general entertainment titles produced by our own team.
And general entertainment is an increasingly powerful driver of engagement in most of our international markets where such content is already included in our service under the Star brand.
Going forward, integrating more owned general entertainment into our services, especially Disney+, will be a priority.
In fact, just today, we added episodes of Grown-ish, Black-ish, and The Wonder Years to our domestic Disney+ service.
Rounding out our content focus is, of course, sports.
Sporting events continue to be the most powerful draw in television, accounting for 95 of the 100 most-watched live broadcast in 2021.
And ESPN once again set the bar this quarter with live games across each of our four major U.S. sports, including the revolutionary Monday Night with Peyton and Eli.
And I am pleased to announce that we have expanded our agreement with Peyton Manning and his Omaha Productions company to extend our relationship through the 2024 NFL season.
While multiplatform television and streaming will continue to be the foundation of sports coverage for the immediate future, we believe the opportunity for The Walt Disney Company goes well beyond these channels.
It extends to sports betting, gaming, and the metaverse.
In fact, that's what excites us, the opportunity to build a sports machine akin to our franchise flywheel that enables audiences to experience, connect with and become actively engaged with their favorite sporting events, stories, teams, and players.
Turning to distribution results.
The continued growth of our streaming services was certainly a standout.
Our success at Disney+ this quarter was not the result of any one item, but instead a combination of organic growth and powerful new content, our strategic decision to include the Disney bundle with all Hulu Live subscriptions, and new market launches.
The remainder of this fiscal year will feature compelling Disney+ originals from across our brands and franchises, beginning with Pixar's Turning Red and Marvel Studios' Moon Knight in March.
And the back half of FY '22 will feature a truly stunning array of content, including two Star Wars series: Andor and the highly anticipated Obi-Wan Kenobi, which I am excited to announce will premiere on May 25.
We'll debut two Marvel series, Ms. Marvel and She-Hulk; fresh new shorts from Disney Animation and Pixar featuring the worlds of Big Hero 6 and Cars; a live-action reimagining of the Disney classic Pinocchio, starring Tom Hanks as Geppetto; and one of the most anticipated sequels in some time, especially in the Chapek household, Hocus Pocus 2.
As I've said before, we continue to manage our services for the long term and maintain confidence in our guidance of 230 million to 260 million total paid Disney+ subscribers globally by the end of fiscal 2024.
Christine will provide more detail into our theatrical results.
However, I want to reiterate that we continue to see value in the moviegoing experience, especially for big franchise blockbusters.
And given the performance of titles like Spider-Man: No Way Home, we are looking forward to kicking off our summer slate with another Marvel franchise film, Doctor Strange in the Multiverse of Madness.
That said, audiences will be our North Star as we determine how our content is distributed.
And we do not subscribe to the belief that theatrical distribution is the only way to build a Disney franchise.
This quarter, audiences proved us right as Encanto became a phenomenon within days of its arrival on Disney+ after families' continued reluctance to return to theaters resulted in a muted theatrical performance.
With outstanding music from Lin-Manuel Miranda, it became the fastest title to cross 200 million hours viewed on Disney+ and took social media by storm.
People around the world expressed their fandom through their own content and conversation, and the Encanto hashtag has been viewed more than 11 billion times.
The soundtrack, which debuted at No.
197 on the Billboard 200 chart, reached No.
1 shortly after debuting on Disney+.
And eight of the film's songs hit the Hot 100 chart, including We Don't Talk About Bruno, which became the first Disney song to reach No.
1 since Aladdin's A Whole New World in 1993.
At the same time, sales of Encanto merchandise defied traditional post-holiday declines and actually increased following the film's release on Disney+ on Christmas Eve and guests at Disney California Adventure have loved seeing Mirabel in real life.
These results are exactly what you would expect from the launch of a new Disney franchise, and we are thrilled that Disney+ was the catalyst.
We are more confident than ever in this platform as a content service, a franchise engine, and as a venue for the next generation of Disney storytelling.
Finally, I could not be more pleased with the performance of our Parks, Experiences and Products segment, which posted its second best quarter of all time.
Over the last several years, we've transformed the guest experience by investing in new storytelling and groundbreaking technology, and the records at our domestic parks are the direct result of this investment.
From new franchise-based lands and attractions, to craveable food and beverage offerings, to must-have character merchandise, there is more great Disney storytelling infused into every aspect of a visit to our parks than ever before.
At the same time, we're giving guests new tools to personalize their visits and spend less time in line and more time having fun.
While we anticipated these products would be popular, we have been blown away by the reception.
In the quarter, more than a third of domestic park guests purchased either Genie+, Lightning Lane, or both.
That number rose to more than 50% during the holiday period.
While demand was strong throughout the quarter at both domestic sites, our reservation system enabled us to strategically manage attendance.
In fact, their stellar performance was achieved at lower attendance levels than 2019.
As we return to a more normalized environment, we look forward to more fully capitalizing on the extraordinary demand for our parks, along with the already realized yield benefits that took shape this quarter.
And we, of course, will continue to invest in the guest experience.
I am personally looking forward to Star Wars: Galactic Starcruiser at Walt Disney World, a two-night adventure into the most immersive Star Wars story ever created.
Later this summer, we will debut an innovative new roller coaster at Epcot, Guardians of the Galaxy: Cosmic Rewind, and open Avengers Campus at Disneyland Paris, where the iconic Quinjet landed a few weeks ago ahead of the resort's 30th-anniversary celebrations.
Our company is truly extraordinary, and I am honored to work with the most talented team in the industry to create the next generation of Disney stories and experiences through our focus on storytelling excellence, innovation, and our audience.
With that, I'll hand it over to Christine.
Excluding certain items, diluted earnings per share for the quarter were $1.06, an increase of $0.74 from the prior-year quarter.
Fiscal 2022 is off to a good start as evidenced by our first-quarter results and our continued progress toward more normalized operations across our businesses.
At parks, experiences, and products, operating income was up $2.6 billion year over year as all of our parks and resorts around the world were open for the entirety of the fiscal first quarter.
In the prior-year quarter, Walt Disney World Resort and Shanghai Disney Resort were open for the entire quarter, while Hong Kong Disneyland Resort and Disneyland Paris were each open for a limited number of weeks and Disneyland Resort was closed for the entire quarter.
At our domestic parks, we were very pleased with the strong levels of demand we saw from both Walt Disney World and Disneyland.
And as Bob mentioned, our reservation system has allowed us to strategically manage attendance.
Overall, attendance trends at our domestic parks continued to strengthen in the quarter with Walt Disney World and Disneyland Q1 attendance up double digits versus Q4, in part reflecting holiday seasonality.
Per capita spending at our domestic parks was up more than 40% versus fiscal first quarter 2019 driven by a more favorable guest and ticket mix, higher food, beverage and merchandise spending and contributions from Genie+ and Lightning Lane.
Putting these factors together, our domestic parks and resorts delivered Q1 revenue and operating income exceeding pre-pandemic levels even as we continued managing attendance to responsibly address ongoing COVID considerations.
Looking ahead to Q2, our demand pipeline for domestic guests at Walt Disney World and Disneyland remain strong, benefiting from our 50th-anniversary celebration at Walt Disney World and new attractions and experiences at both parks.
At international parks, a profitable first quarter reflected improving trends at Disneyland Paris.
We also saw improved results at Hong Kong Disneyland, although the resort is now temporarily closed in response to a resurgence in COVID cases in the region.
We expect international parks will continue to be impacted by COVID-related volatility for the remainder of Q2.
Moving on to our media and entertainment distribution segment.
First-quarter operating income decreased by more than $600 million versus the prior year as revenue growth across our lines of business was more than offset by higher programming and production costs.
Revenue growth in the quarter was primarily driven by increased subscription fees from our direct-to-consumer services.
We also delivered record advertising revenues for the segment as we continue to see strong advertiser demand for our live sports and streaming and digital businesses.
Turning to our results by line of business.
At linear networks, you may recall that we guided to a decrease in operating income of nearly $500 million for Q1 versus the prior year.
Operating income of $1.5 billion came in better than expected, primarily driven by our international channels, which I'll discuss in a minute.
At our domestic channels, both broadcasting and cable operating income decreased in the first quarter versus the prior year.
Lower results at broadcasting were impacted by an adverse comparison to prior year political advertising revenue at our owned television stations, as we noted in the guidance we gave last quarter.
At cable, the year-over-year decrease in operating income reflected higher programming and production costs and increased marketing spend, partially offset by increases in advertising and affiliate revenue.
Growth in advertising revenue was driven by ESPN as we benefited from the start of a normalized NBA calendar and increased viewership for football.
ESPN advertising revenue in the first quarter was up 14% versus the prior year and second quarter-to-date domestic cash advertising sales at ESPN are currently pacing up.
Total domestic affiliate revenue increased by 2% in the quarter.
This was primarily driven by six points of growth from higher rates, offset by a four-point decline due to a decrease in subscribers.
Operating income at our international channels decreased slightly versus the prior year.
These results came in more than $200 million better than our prior guidance primarily due to lower programming and production costs as well as better-than-expected advertising and affiliate revenues.
At direct-to-consumer, first-quarter operating results decreased by $127 million year over year, driven by higher losses at Disney+ and ESPN+, partially offset by improved results at Hulu.
I'll note that beginning this quarter, we are providing disclosure on our programming and production expenses by service as well as additional detail for Disney+ in our 10-Q.
Operating losses at Disney+ increased versus the prior year as growth in subscription revenue was more than offset by higher programming, technology, and marketing costs.
We ended the quarter with nearly 130 million global paid Disney+ subscribers, reflecting over 11 million net additions from Q4.
Taking a look at subscriber growth by region.
We added 4.1 million paid domestic Disney+ subscribers, including a benefit of approximately 2 million incremental subscribers from our strategic decision to include Disney+ and ESPN+ as part of a Hulu Live subscription.
In international markets, excluding Disney+ Hotstar, we added 5.1 million paid subscribers, primarily driven by growth in Asia Pacific and European markets.
I'll note that growth in Asia included the benefit of new market launches in South Korea, Taiwan, and Hong Kong in the quarter.
Finally, we were able to resume growth in Disney+ Hotstar markets with 2.6 million paid subscriber additions in the quarter.
Overall, we are pleased with Disney+ subscriber growth in the quarter and are looking forward to new market launches and a strong content slate later this year.
As I've previously shared, we don't anticipate that subscriber growth will necessarily be linear from quarter to quarter, and we continue to expect growth in the back half of the fiscal year to exceed growth in the first half.
At ESPN+, we ended the first quarter with over 21 million paid subscribers versus 17 million in Q4.
Results decreased compared to the prior year as growth in subscription revenue was more than offset by higher sports programming costs driven by the NHL and LaLiga.
And at Hulu, higher subscription revenues versus the prior year were partially offset by higher programming and production costs driven by increased affiliate fees for live TV.
Hulu ended the first quarter with 45.3 million paid subscribers, inclusive of 4.3 million subscribers to our Hulu Live digital MVPD service.
Moving on to content sales/licensing and other.
Results decreased in the first quarter versus the prior year to an operating loss of $98 million, driven by lower theatrical results and higher film impairments, partially offset by improved TV SVOD results.
As I noted last quarter, while theaters have generally reopened, we are still experiencing a prolonged recovery to theatrical exhibition, particularly for certain genres of films, including non-branded general entertainment and family focused animation.
This dynamic contributed to increased losses in the quarter as we released more titles in Q1 this year versus the prior year, resulting in lower theatrical results.
This was partially offset by income from our co-production of Spider-Man: No Way Home.
As we look ahead, we would like to give you some context around two items that may impact our second-quarter results.
First, as we continue to increase our investment in content, we expect programming and production costs at DMED to increase versus the prior year, primarily driven by direct-to-consumer and linear networks.
At direct-to-consumer, we expect programming and production expenses to increase by approximately $800 million to $1 billion, including programming fees for Hulu Live.
At linear networks, we expect programming and production expenses to increase by approximately $500 million, reflecting factors including COVID-related timing shifts.
We aired four additional NFL games at the start of the current quarter.
And as a reminder, the Academy Awards will be held in Q2 of this year, while it fell into Q3 of the prior year.
Second, at content sales/licensing and other, a difficult Q2 comparison to prior year TV and SVOD program sales is due in part to our strategic decision to hold more of our owned and produced content for our direct-to-consumer services.
As a result, we expect operating income to be adversely impacted by more than $200 million versus the prior-year quarter.
[Operator instructions] And with that, operator, we're ready for the first question.
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q1 earnings per share $1.06 excluding items.
11.8 million disney+ subscribers added in q1.
saw significant increase in total subscriptions across our streaming portfolio to 196.4 million.
as of quarter-end total hulu paid subscribers were 45.3 million.
at disney media and entertainment segment, our film and television productions have generally resumed.
we have seen disruptions of production activities depending on local circumstances.
in fiscal 2022, domestic parks and experiences are generally operating without significant mandatory covid-19-related restrictions.
qtrly lower results at disney+ reflected higher programming and production, marketing and technology costs.
have incurred, and will continue to incur, costs to address government regulations and safety of employees, guests and talent.
qtrly higher subscription revenue at disney+ was due to subscriber growth and increases in retail pricing.
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Actual results may differ materially from these statements.
For more information about the factors that can adversely affect Company's results, please see our SEC filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures.
They worked tirelessly to ensure the successful combination of these 2 high-quality and complementary real estate platforms.
For those of you that were with us before the transaction, please know that if it wasn't for all of the remarkable things that we've accomplished together over the past several years, none of this would have been possible.
I've enjoyed getting to know many of you over the past several months and I have consistently been impressed with your positive attitude and exceptional professionalism.
We're so excited to have you join us as we embark on this new era of excellence.
This merger has been transformative for all of us yet our model remains unchanged.
We are one team with one focus.
As we began to come out of the depths of the pandemic, we talked about how KRG was positioned to seize upon any opportunities that may present themselves.
It was that very same posture that made the merger with RPAI possible resulting in one of the largest open-air owners in the country.
Yet despite the unprecedented stress and dislocation caused by COVID and despite the immense undertaking of completing the merger that impacted every single person at KRG, we were still able to produce a phenomenal quarter of results.
It all goes back to our 3 Ps, Properties, Processes and People and we absolutely excel on all 3 fronts.
The quality of our results also speaks volumes about the health of the retail environment.
The long-term viability of open-air retail real estate and the durability of our cash flows.
Our property serve not only as a last-minute last mile fulfillment hub for retailers but as an access point for consumers and communities.
The demand for our great real estate is evident, not only in traffic which is up versus 2019, but also in the accelerated leasing volumes and resulting spreads.
We signed approximately 5,000 square feet in the third quarter including 7 anchor leases, 3 lease for grocers.
In the past 2 quarters, we leased over 1.2 million square feet which are unprecedented levels for our legacy portfolio.
Blended lease spreads were 20.7% and 13.4% on a GAAP and cash basis respectively.
Our lease rate continues to rebound.
It is now at 92.8% for the portfolio.
This 130 basis point increase from last quarter is another indication of the continuing recovery in our operation and -- operational and financial performance.
The outsize leasing volume continues to widen our total retail portfolio leased to occupied spread to 400 basis points with current sign not-open NOI of approximately $14 million.
Together with the legacy RPAI portfolio, we have signed not-open NOI of approximately $33 million.
Said another way, our stock is significantly undervalued.
One of the drivers behind the widening lease to occupied spread is the success, we are experiencing in our Anchor Acceleration program.
We signed another 5 anchor leases this quarter for a cumulative total of 12 anchor leases since the program's inception.
These 12 leases are expected to generate average cash yields of over 26% with comparable spreads of 14% on a cash basis.
While the program as far from over, I'm very pleased with the progress we've made.
Let's turn to a topic I'm sure you're all focused on.
The merger of RPAI and KRG is a great strategic match that lines up perfectly with many of the macro trends we're seeing impacting our industry.
First, as is with everything in KRG, it's about the real estate.
As you can see from our operating results, our top quality assets are benefiting from being in high-growth, warmer and cheaper markets.
These low tax and business-friendly geographies continue to benefit from the highest population growth and corporate relocations.
This merger more than doubled the GLA and ABR that KRG owns in those markets.
We now have nearly 60% of our ABR in warmer and cheaper markets, 40% of which belongs in Texas and Florida alone.
An added benefit of the merger is that establishing a significant presence in select strategic gateway markets.
The combined portfolio now has 26% of value in superzip [Phonetic] neighborhoods, the second highest percentage in the sector.
Additionally, our portfolio of mix of predominantly grocery-anchored neighborhood and community centers are now complemented by a vibrant mixed use assets, thereby providing greater optionality to help serve both retailers and consumers.
Many of these mixed-use and lifestyle assets have experiential components that were disproportionately impacted by COVID and now are seeing a significant resurgence in demand, while customers reembrace the live, work and play environment.
A final benefit, I'd like to point out is that KRG is now a top 5 open-air shopping center REIT.
The increased scale provide numerous operational and capital market benefits.
On the operational side, we'll be better able to serve retailers by having a balanced variety of additional high-quality assets.
We also believe the combined operations platform will lead to increased NOI margins across the portfolio.
On the capital market side, KRG will become a serial issuer of public bonds that will lower our debt cost and improve our risk profile.
Likewise, the larger equity market cap will make our stock more liquid and expand the universe of potential equity investors.
In addition to the accretion from the merger, synergies will create a significant economic impact from the merger and Heath will address those momentarily.
That being said, we are just as excited about the value of our new entitled land.
Our development philosophy has never been nor will it ever be a mandate.
We evaluate each project based on the needs of the underlying real estate, the timing of the development cycle and the resulting risk-adjusted returns.
Given this mantra, there are times where we may decide it's better to wait or take on a partner to pursue alternatives.
One example is The Corner.
We entered into a 50-50 joint venture to develop 285 apartment units and 24,000 square feet of ground floor retail.
In doing so KRG sold the land to the venture, will earn development fees and is expected to contribute no additional capital.
We will use this discipline to examine all of our real estate included -- including the newly acquired entitled land and determine the best course of action for each opportunity to maximize shareholder value.
No matter what of course of action -- course of action we will take, we will always keep in mind our best-in-class balance sheet.
As part of our due diligence, we had a third party value each of the entitled land parcels.
We believe the approximate value of this entitled land as is with no additional spend is between $125 and $180 million.
That represents a tremendous opportunity for KRG to showcase our capital allocation part.
Regarding the integration of the merger, we are making excellent progress.
We were able to hit the ground running on day 1 due to our pre-close planning.
We not only determine what the combined team would look like, but each business unit had multiple meetings and established both how to integrate the team, their systems and how to operate going forward.
No integration of 2 companies is flawless but we are very pleased where we are to date.
This is a testament to our people.
We are a premier open-air shopping center REIT and I'm proud of the progress our team has made.
KRG remains committed to its primary focus of continuing to grow operating cash flows.
The completed merger paired with a strong quarter of operational results is another step in the right direction.
I can't emphasize enough how excited I am about the processes, properties and especially the people of KRG.
I want to echo John's gratitude for all the hard work that's gone into completing the transaction and the ongoing integration activities.
We are confident that when the dust settles, KRG will have a best-in-class platform across every single business unit.
We are looking forward to doing great things together.
To say this transaction has been full circle for me is an understatement, suffice to say that life works in mysterious ways.
Turning to KRG's stand-alone third quarter results, we generated $0.25 of NAREIT FFO and $0.33 of FFO as adjusted.
As a reminder, we were reporting 2021 FFO on an as adjusted basis so as to reduce the noise associated with 2020 receivables, 2020 bad debt and the cost associated with the merger.
As set forth on page 19 of our supplemental, the net 2022 collection impact in the third quarter was minimal with the collection of $2.4 million of prior bad debt, offset by $300,000 of accounts receivable we now deemed uncollectible.
Our same property NOI growth for the third quarter is 10.8% primarily driven by a reduction in bad debt as compared to the prior year period.
This includes the benefit of approximately $2.1 million of previously written-off bad debt that we collected in the third quarter.
Excluding those amounts, our same-store NOI growth would be 6%.
It is also important to note that when evaluating our same-store results for 2021, keep in mind that KRG consistently achieved the highest levels of rent collections in 2020, thereby trading more challenging comparable period.
With respect to outstanding accounts receivable items as of last Friday, the balance on our outstanding deferred rent stands at $1.7 million as compared to $6.1 million as of December 31, 2020.
Our small business loan program has been extremely successful and not a single borrower under the program is delinquent or has defaulted.
Our balance sheet and liquidity profile not only remain solid but continue to improve.
Our net debt to EBITDA was 6.1 times, down from 6.4 times last quarter.
Pro forma for the merger, third quarter net debt to EBITDA is 6 times along with roughly $1 billion of liquidity, adding in $33 million of signed not-open NOI for the combined portfolio, our net debt to EBITDA would be 6 times.
We are in a great position to not only weather any storm, but to also take advantage of any opportunities that present themselves.
We are also proud to announce our inaugural credit rating from Fitch Ratings of triple B with a stable outlook.
We believe, along with our investment grade ratings from Moody's and S&P, the KRG is well positioned to establish itself as a serial public bond issuer.
I know many of you are anxious to understand the full earnings accretion associated with the merger and we are equally anxious to share with you the details behind our growing enthusiasm.
However, in light of the fact that we just closed the merger last week and that we are in the middle of our budget season prudence dictates that we wait until we give our combined fourth quarter results and 2022 guidance early next year.
What I can share is that with each day our conviction regarding the merger grows exponentially.
In the meantime, to help with your modeling, we can provide some additional detail regarding synergy savings.
As a reminder, we estimated stabilized cash synergies of $27 million to $29 million and stabilized GAAP synergies of $34 million to $36 million.
As of today, we are still comfortable with that range.
In fact, as of the closing approximately $21 million of annualized GAAP savings have already been achieved.
It is important to note that we anticipate realizing on the additional annualized $13 million to $15 million of GAAP synergies over the next 12 to 18 months.
We will provide updated detail with respect to the timing of the remaining synergies when we report our combined fourth quarter results and 2022 guidance.
Finally, due to the timing of the closing of the merger and the challenge in -- challenge of determining correct guidance for a partial quarter we are suspending our 2021 guidance.
We are confident based on performance to date that KRG's stand-alone 2021 results are on track to outperform our last published guidance.
I will further share that based on our initial review of the preliminary operating results for RPAI in the third quarter, it would be safe to assume that they were also on track to outperform the last published guidance.
We look forward to reporting combined fourth quarter results and issuing 2022 guidance in February.
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kite realty group trust raises full year guidance.
q2 ffo per share $0.34.
q2 adjusted ffo per share $0.34.
sees fy 2021 adjusted ffo per share $1.29 to $1.35.
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During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
I'm pleased with Brinker second quarter performance in the progression throughout the quarter.
It was great to see the effects of the delta spike dissipate.
Our momentum come back and flow through improve.
Take-out and delivery remain strong in the mid-thirties, while dining room demand was on the rise.
All our brands had impressive holiday results as guests got more comfortable coming together in groups, which helped us deliver a better than expected quarter with positive sales of 17.7% and adjusted earnings per share of $0.71 cents.
These results demonstrate that would diminish COVID interference our business model continues to perform well, particularly at volume.
Now we, along with the restaurant, the rest of the restaurant industry are not without our headwinds.
Obviously, there are cost pressures, with inflation at the highest levels we've seen in years.
We've responded with appropriate pricing actions and with our most recent price increase, our menu price is now up over 4%.
We've been deliberate about taking incremental price increases throughout the year to ensure that with every step, we protect our traffic advantage, and we've done exactly that.
Chili's continued its trend of beating the industry, marking the 16th consecutive quarter of traffic outperformance.
This trend has continued into January, despite being on the current spike.
Our fundamental belief is that the key to healthy, sustainable growth is to have an increasing number of guests choosing us, so we will maintain a disciplined approach to determining the timing and amount of future pricing actions.
To ensure we deliver a great guest experience, and continue to grow the base business, we're focused on making sure Chili's is staffed with stable, well-trained teams and smooth operational systems.
The staffing situation across the country has been the most unique I've seen in my career, but we're pleased with the hiring progress we've made.
We have more team members on a per restaurant basis today than we did pre-COVID.
Just last week, when I was out in restaurants, managers were saying that they're where they used to see only two or three applicants for a job and now getting 10 or more.
So we're devoting increased time and attention on providing high quality training and improving retention for our new hourly team members and managers.
And with the added pressure that COVID has put on our operations team, retention today is about more than just a paycheck.
It's also about improving quality of life and creating a sense of belonging.
We found new ways to leverage our technology to accomplish these goals.
We're implementing a virtual learning platform that allows us to train both hourly team members and managers from the Restaurant Support Center.
This is a live, interactive experience that improves the speed, quality and consistency of our training while reducing costs and the burden on our restaurant managers.
With this system, we're experiencing a 20 percent retention improvement for new hourly team members.
For managers, we're also focused on increasing career progression and diversity that's so important to our business.
We're doubling down on leadership development programs for both new and tenured managers like our highly successful women, Take the Lead program.
We see much higher retention levels among those who've engaged in these programs.
Our rehire rates also demonstrate further evidence of the positive impact of these efforts.
Historically, the rehire rate for managers who, for whatever reason, chose to leave Chili's and then come back to us has been in the low to mid-single digit range.
Today, that rate is more than double, and it's even higher at the hourly level, which speaks to the power of our culture and the strength of our business.
We know how crucial it is to support our teams with efficient, effective systems that enable smooth operational execution, improve the guest experience, and strengthen our base business.
This is another area where our technology, expertise gives us a big advantage.
At Chili's, we recently completed the implementation of two major technology systems.
The first, is our handheld system, which redefines how we serve our guests.
With this system, our servers cover more tables and earn more money.
We're already seeing an average of 15% higher server earnings and significant improvements in guest metrics.
We've been testing this in restaurants for years now so we know the potential once it's fully up and running.
We're also capitalizing on the consumer's increased demand to dine off premise with a new curbside system that provides a more seamless guest experience.
The operators are getting comfortable with it now, and restaurants that have fully adopted are generating 15 to 20 point improvements in guest metrics.
These efforts to strengthen our base set us up to accelerate additional growth vehicles.
We've ramped up Chili's development plans and currently have in excess of 20 new full size restaurants in the pipeline.
We're also testing small footprint off premise centric designs for densely populated markets that don't make sense for a full size prototype.
We've opened our first Urban kitchen in Manhattan, offering both Chili's and It's Just Wings.
And I never thought I'd see the day when I'd see a Chili's in Manhattan, but it's been up and running for a month, and we're encouraged by its early performance.
We plan to open two small footprint locations and trade areas adjacent to college campuses in the near future, and virtual brands continue to be an important growth vehicle for us.
We remain fully committed to this strategy.
Our size and scale are uniquely suited to enable growth through this vehicle.
It's Just Wings continues to perform well, and as of this week, Maggiano's Italian Classics is up and running in over 700 restaurants.
We're actively working to expand sales channels, build brand awareness and accelerate this part of our business.
Second quarter proved that when our business operates with minimal COVID impact, guest demand is high and the model is strong.
We generated solid cash flow and good earnings.
As we continue to navigate the inflationary pressures and respond prudently for the long term health of our business, we want you to know we're committed to keeping our business model strong and we still have growth ahead of us.
We see a lot of opportunity to leverage our scale, our ownership model, to grow the brands in our portfolio and move the business forward and deliver a great return for our shareholders.
And this is only possible because of our amazing teams working tirelessly in the restaurants, and in the support center.
Let me continue the overview of our second quarter by providing additional insight into our operating results, as well as briefly touching on the initial post-holiday operating environment as we move into the back half of our fiscal year.
For the second quarter of fiscal 2022, Brinker reported $0.71 of adjusted diluted earnings per share, up from $0.35 in last year's second quarter.
Brinker's total revenues were $926 million for the quarter, and our comparable restaurant sales were positive 17.7%.
For some context around this performance, our sales trends improved steadily as we move through the quarter as guests resume their routines with the waning of the delta wave of COVID.
Our restaurant staffing improve through the quarter, and by the holidays, we experienced some of the highest level of dining room capacity recovery since the beginning of the fiscal year in July.
We ended the quarter on a high note with a strong December, driven by the several weeks leading up to Christmas.
Chili's comparable restaurant sales were 12.1% for the second quarter.
Their comp sales were negatively impacted approximately 1.5% by Christmas, shifting back into the quarter from Q3 prior year, and close to 0.5% from closing early on Christmas Eve.
We chose this year to invest back into the well-being of our teammates in the restaurants and sent them home at four o'clock to spend time with family and friends.
This reaction reduced company sales by approximately $4 million.
Maggiano's reported net comp sales for the quarter of a positive 78.1%.
The much improved performance resulted from a higher pace of dining room recovery and importantly, improved banquet sales.
The team has also done a nice job maintaining their elevated carry-out business, which appears to have stickiness in the mid 20% range, even as the other business channels improve.
Still recovery to go but the top line performance coupled with an improved business model, allowed Maggiano's to deliver an above expectations quarter.
A nice step forward for the brand.
During the quarter, Chili's inclusive of the virtual brands took several incremental price increases and exited the quarter carrying approximately 3% menu price compared to the prior year.
In addition, as Wyman mentioned, we have taken further pricing actions in January, resulting in Chili's now carrying price of over 4% and Maggiano's adding 5% price with their latest menu rollout.
We do anticipate maintaining price at these historically higher levels for the foreseeable future.
Brinker increased its consolidated restaurant operating margin to 11% in the second quarter versus 10.7% a year ago.
We continue to be very encouraged in periods of low COVID impact, as it allows us to realize the power of the business model and the ability to leverage margins with more normalized top line performance.
Food and beverage costs were unfavorable, 120 basis points driven by commodity inflation, partially offset by price.
We are seeing stabilization in our supply chain and have a good line of sight into the balance of the fiscal year, with a large majority of our contracts locked for the next six months.
We are expecting high single digit inflation for the third and fourth quarter.
Labor for the quarter was then favorable 60 basis points versus prior year.
Our recruiting and training efforts a good progress throughout the quarter, and the higher sales volumes in the latter part of the quarter work to effectively leverage the six components of these costs.
Wage rates at the manager, an hourly level remained elevated in the high single digits, and we expect to see this trend continue as we work through the remainder of the fiscal year.
As the teams continue to stabilize outside of COVID spikes, we should make incremental progress in reducing costs such as training and overtime utilization.
The crept into the system during times of higher turnover and lack of labor availability.
Restaurant expense was favorable 210 basis points year-over-year, as the improved sales performance effectively leverage the fixed cost included in this category.
As we work to further build our sales channels, we should see this leverage dynamic continue, and how balanced the inflationary aspects, and other parts of [Inaudible] Our cash flow for the second quarter remain strong with cash from operating activities of $67 million and EBITDA of $88 million.
Our total funded debt leverage was 2.6 times and our lease adjusted leverage was 3.6 times.
Both down slightly from the first quarter, but down significantly from prior year.
Let me finish my prepared comments with some perspective related to our January periods operating performance that closes today.
This has been widely reported.
The Omicron variant spiked rapidly just after the Christmas holiday, and played havoc throughout the industry with staffing and sales capacity, particularly with dining rooms.
We have not been immune to that impact.
After a challenging first couple of weeks, we have seen the spike dissipate in many markets and are seeing improvements in our sales week-to-week as team member exclusions come down almost as fast as they rose.
While it's good to see what appears to be a much quicker resolution of this COVID wave, the January period will be a setback to our overall operating results.
It's important that we quickly move back to a more normalized operating environment in order to meet our expectations for the fiscal year.
Taking a step back from the volatility in the current environment, and looking past the veil of COVID, we remain confident in our ability to drive improved business results across our brands.
We see good growth ahead as we invest in our strategic initiatives, open an increasing number of restaurants, and leverage our technological advantages.
We also remain very appreciative of our restaurant leaders and teams, and the efforts they are making each and every day to deliver the results, we simply report.
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qtrly adjusted earnings per share $0.35.
qtrly brinker company owned comparable restaurant sales down 12.1%.
brinker international qtrly total revenue declined due to capacity limitations,personal safety preferences,partially offset by increased off-premise sales.
qtrly chili's company-owned comparable restaurant sales decreased 6.3%.
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I hope you are all well and safe.
Let me just start with the things that I'm happy about when it comes to Q3.
First of all, I'm happy on our progress with our new product introductions that they're going quite well.
Our execution on recent M&A is going as planned, if not better.
Our commercial focus and our discipline is as good as I've seen it.
And I'm very happy with our growth versus our key competitors in both large joints and set, particularly when it comes to the U.S. For the team, in my view, continues to drive results in the areas under our control.
And as a result, I continue to be proud of them for doing so.
Alternatively, Q3 was also a quarter with unexpected negative environmental impacts that are, for the most part, out of our control.
Q3 brought greater COVID pressure than I think anybody expected.
More customer staffing shortages certainly than we expected and an earlier China VBP impact than we anticipated.
And this resulted in Q3 revenues that were lower than we had projected.
And unfortunately, we expect these pressure points to continue into Q4.
And as a result, we need to update our 2021 financial guidance and really the view we have of the fourth quarter.
As we look forward, until we see a fundamental shift in these trends, we're just going to assume that these pressure points aren't going away, but will be with us into Q4 and possibly into early 2022.
Let's just start by taking a look at COVID and staffing concerns kind of together because I believe they're somewhat related.
As I think most of us know by now that there was a significant delta variance surge in Q3 that drove more COVID pressure than, again, I think anybody expected.
We previously thought COVID pressure would lessen through the back half of the year, but instead, while procedures did seasonally step up in September, it wasn't by as much as we expected, again, due to the enhanced COVID and staffing pressures.
And as a result, September was our least attractive month relative to growth.
And until we see a real shift in COVID and staffing-related recovery, we're projecting that the pressure we saw in September will continue through the end of the year, that's in the view of COVID.
If we think about the China VBP, the process in China is moving forward.
And although it's still fluid, we are getting more clarity on what it will mean this year and in 2022.
And our assumption going into the process was that VBP would pose no more than a 1% risk in terms of impact to ZB's overall revenue.
And although for a number of reasons, the overall impact will likely be greater than what we originally anticipated.
We do believe that sizing this at around 1% of revenue impact is still accurate, that is the right way to size it.
With that said, the timing of the revenue impact as definitely shifted forward, and we now expect that much of this impact will be felt in 2021.
And there are a few factors that are driving this shift into 2021.
First one is around current year inventory reductions by distributors.
The second is around just ongoing negotiations we have with our distributor partners that are beginning to include price concessions on existing inventory.
And then unfortunately, we're now seeing patients defer their surgeries until after the lower VBP pricing is in effect.
Apparently, even though China achieves near universal public medical coverage, there are out-of-pocket expenses that increase or decrease based on implant pricing, and this is substantial enough for patients to defer their procedures.
So clearly, in summary, although we feel very good about our execution in the areas we can control, these macro environmental issues continue to mute our overall performance, and these are fluid.
These issues for sure, they're fluid, but we've done our best to incorporate our current view of their impact in our revised guidance.
I'm going to briefly discuss our Q3 results and updates that we made to our full year 2021 financial guidance.
We've also provided comparisons to the third quarter of 2019 as we feel that performance to pre-pandemic results is an important comparator.
Net sales in the third quarter were $1.924 billion, a reported decrease of 0.3% and a decrease of 0.8% on a constant currency basis.
When compared to 2019, net sales increased 0.4%.
On a consolidated basis, as Bryan mentioned, we were growing through August, but then declined in September as we saw delta variant cases and staffing shortage increases.
In short, there was a seasonal step-up in procedure volumes for the quarter, but the recovery has not taken hold as fast as we thought it would, especially in our hip and knee businesses.
The Americas declined 3.2% or flat versus 2019.
The U.S. declined 4.4% or up 0.1% versus 2019.
Lower U.S. performance in September was the key driver to lower consolidated results.
EMEA grew 5.9% or up 0.3% versus 2019.
This is the first time the region posted positive growth since the start of the pandemic.
In the quarter, we saw an improving trend across a number of markets.
However, the U.K., France, Spain and most emerging markets continue to be challenged despite higher vaccination rates.
Lastly, Asia Pacific grew 0.5% or up 1.5% versus 2019.
While we did see growth versus 2019, it decelerated versus what we observed in the first half of the year.
This was driven in part by pricing adjustments on channel inventory as we continue to negotiate with our distributor partners ahead of VBP implementation.
In tandem with continuing COVID pressure throughout the region, especially in Japan and Australia and New Zealand.
Turning to business performance in the third quarter.
The global knee business declined 0.7% or down 1% versus 2019.
In the U.S., knee is declined 5.3% or down 0.7% versus '19.
Our global hip business declined 6.6% or down 2.4% versus 2019.
In the U.S., hips declined 11.3% or down 2.4% versus '19.
The sports extremity and trauma category increased 4.2% or 7.7% versus '19, driven by continuing commercial specialization, new product introductions and the contribution from strategic acquisitions we added to this portfolio in 2020.
Our dental and spine category declined 6.1% or down 2% versus 2019.
The dental business posted good growth in the quarter and continued to benefit from strong execution and market recovery, while the spine business declined when compared to 2020 and 2019 due to increasing COVID pressure throughout the quarter.
Finally, our other category grew 15.4% or down 1.1% versus 2019.
Inside this category, we saw ongoing demand for ROSA Knee as well as increased revenues from the launch of our ROSA partial knee and hip applications.
Moving to the P&L.
For the quarter, we reported GAAP diluted earnings per share of $0.69, lower than our GAAP diluted earnings per share of $1.16 in the third quarter of 2020.
This decrease was driven primarily by cost of goods and higher spending related to litigation, our spin-off and R&D.
In addition, our share count was up versus the prior year.
On an adjusted basis, diluted earnings per share of $1.81 was flat compared to the prior year, even though sales were down.
We implemented targeted reductions in SG&A, which in tandem with a slightly lower tax rate helped offset higher investments in R&D and a higher share count.
Adjusted gross margin of 70.3% was just below the prior year, and the results were slightly below our expectations due to lower volumes in tandem with less favorable product and geographic mix.
Our adjusted operating expenses of $852 million were in line with the prior year and stepped down sequentially versus the second quarter.
Inside of that, we continue to ramp up investment in R&D and commercial infrastructure across priority growth areas like S.E.T., robotics and data and informatics.
And we are offsetting those increases with improvements in efficiency across other areas of SG&A.
Our adjusted operating margin for the quarter was 26.1%, largely in line with the prior year and prior quarter.
The adjusted tax rate of 15.8% in the quarter was in line with our expectations.
Turning to cash and liquidity.
We had operating cash flows of $433 million and free cash flow totaled $307 million with an ending cash and cash equivalents balance of just over $900 million.
We continue to make good progress on deleveraging the balance sheet and pay down another $300 million of debt totaling $500 million of debt paydown for 2021 to date.
Moving to our financial guidance.
We've updated our full year 2021 outlook based on two factors: first, COVID and customer staffing pressures continuing at levels higher than previously expected.
And while we expect procedure volumes to seasonally improve in the fourth quarter, we are taking a cautious approach and currently assuming that the more acute pressure we saw in September will continue through the fourth quarter.
And second, as Bryan mentioned, we now know more about the dynamics leading up to the implementation of the China VBP and project that it will have a bigger impact in the fourth quarter than originally assumed.
The impact across inventory reductions, price write-downs on existing inventory and a new factor, which is patients deferring their procedures have increased the impact of VBP and the timing of that impact.
As a result, our current projection for Q4 VBP impact is about 300 basis points of headwind to our consolidated results, but the situation remains fluid, and we will continue to update you as the implementation of VBP unfolds.
For the full year, we now expect reported revenue growth to be 11.3% to 12.5% versus 2020 with an FX impact of about 140 basis points of tailwind for the year.
While we are taking steps to further reduce spending in the fourth quarter as a response to our lower revenue outlook, we are reducing our adjusted operating margin projections to be 26% to 26.5% for the full year.
Our updated full year adjusted diluted earnings per share guidance is now in the range of $7.32 to $7.47.
Our adjusted tax rate projection is unchanged at 16% to 16.5%.
And finally, our free cash flow estimates remain in the range of $900 million to $1.1 billion.
This updated full year 2021 guidance range implies that Q4 constant currency revenue growth will be between negative 2.3% and positive 1.8% versus Q4 2020.
And we project Q4 adjusted earnings per share to be between $1.90 to $2.05.
We kept a wider range of potential Q4 outcomes in our guidance to account for the uncertainty around COVID surges, customer staffing pressure and VBP implementation.
As a note, we do believe that COVID pressure, including the related staffing shortages will continue to mute pandemic recovery as we move into 2022.
Additionally, as we mentioned earlier, VBP is expected to reduce 2022 consolidated revenues by about 100 basis points.
That impact will be felt in our large joint segment and will negatively impact gross margins as we move forward.
To respond to this, we are accelerating transformation and efficiency efforts to help offset these headwinds.
In summary, the macro environment presents challenges, but our underlying business fundamentals remain strong as we continue to execute successfully against what we can control.
And that's why I have such confidence in our long-term growth projections.
The ZB team remains intensely focused on creating value and most importantly, delivering on our mission.
Our underlying business is strong.
And overall, we're pleased with our performance in large joints and set versus market.
This is a significant shift for ZB versus where we were just a few years ago and an important driver of our ongoing growth.
Our innovation is in full stride, and that's a big part of this.
We're going to enter 2022 with a new product pipeline of more than 20 anticipated product launches across the next two years.
And of course, this is incremental to a number of new products we recently launched, including, but certainly not limited to, ROSA partial knee, ROSA Hip and Persona IQ, which is the first smart knee implant in the world.
We're very excited about this launch.
And we continue to see strong ROSA placements, increased robotic penetration into our accounts.
I think most importantly, just more robotic procedures as a percentage of our overall procedure base.
And ROSA is even more attractive because it's a key component of our ZBEdge suite of truly integrated solutions.
And that really does help to tie pre-intra and post-op data together with the goal of changing patient care.
And finally, we are accelerating our corporate transformation.
We're making great progress on the planned spin-off of our spine and dental business.
We just recently appointed a new CFO and other key leadership team members for Zimby.
We continue to be strategic and selective in our active portfolio management process and have added key assets over the past year that have helped us to better compete and more importantly to win across robotics and data, dental, set, CMFT and the broader ASC market.
We're reinvesting in our business for sure, but we're also advancing efficiency programs designed to streamline and improve how we operate and very importantly drive savings.
All of this forward momentum plus ZB's differentiated portfolio, the expected value creation of our planned spin transaction and our ability to execute really does give us continued confidence in our path to grow revenue in the mid-single digits and to deliver a 30% operating margin by the end of 2023.
And I can tell you that this is clearly a time of significant challenge in market pressures, particularly given the fact that we have such a dependence on elective procedures.
So there's no doubt about that.
But this is also a time of significant opportunity for Zimmer Biomet.
We look forward to delivering for our team members, delivering for our shareholders and most importantly, the customers and patients that we serve.
[Operator Instructions] With that, operator, may we have the first question, please?
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q3 adjusted earnings per share $1.81.
q3 earnings per share $0.69.
q3 sales fell 0.3 percent to $1.924 billion.
sees fy 2021 adjusted earnings per share $7.32 - $7.47.
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On the call today, we will discuss non-GAAP financial measures, including adjusted EBITDA and free cash flow.
I'm proud of the performance we delivered in 2020, particularly in the light of the unprecedented challenges we face due to COVID-19.
Under the leadership of our newly expanded management team, which had been in place just 75 days before the pandemic took hold, we made significant progress on our historic transformation executing on our strategy, and operating in four new segments.
We further optimized our portfolio completing targeted divestitures, and exit during the past year.
We also ended 2020 with a lowest net debt in 2.5 years and paid our regular quarterly dividend demonstrating our disciplined stewardship and financial strength.
Although I'm proud of how well our team has executed, the impact of COVID-19 on our financial performance was clear.
We reported revenue of $1.79 billion for the full year 2020, a decline of 11% compared to 2019.
You will note, at our Q1 earnings call we had forecasted 20% adjusted EBITDA margins for the full year 2020; fast-forward nine months later, I'm very pleased to report that we achieved this goal delivering adjusted EBITDA margin of 20.4% for the full year, despite the macroeconomic impact from COVID.
Importantly, COVID did not change our focus strategy and one thing has become increasingly clear; our company's diverse portfolio and business model are highly durable, we have the right strategy, right segments, and right team to whether any major macroeconomic storm.
We're a sales driven company now, we continue to invest the strong cash flows contracts and promotional solutions to grow payments and cloud solutions, each of which is well positioned in secular growth markets.
Now, I would like to take a moment to review the 4 core pillars of our strategy.
First, sales; continue to unify our go-to-market sales approach in order to drive growth, selling more of what we have to new and existing customers, breaking our previous dependence on acquisition-only growth, that also resulted in escalating debt.
Second, payments and clouds; we focus on these secular growth businesses, sell what we have, build new products, and migrate to a recurring revenue model.
Third, promotional solutions profitability; adjust revenue mix and distribution channels moving to a recurring revenue model.
Fourth, our Checks business; gain market share, capture the share while holding margins flat by making smart investments, giving a strong set cash flow to invest in payments and cloud.
The strength of this strategy and our significant progress on our transformation is compelling, and is undeniable despite COVID-19 impacts.
In 2019 we promised to become a sales-driven company, and that's exactly what we did.
We estimate Deluxe delivered full year sales driven growth in 2020 for the first time in more than a decade, excluding COVID impacts of course.
We achieved this result by building an employee ownership and sales culture, fundamentally changing our go-to-market approach.
Instead of having dozens of separate sales organization, calling on a customer selling one product at a time, we built a unified sales team with a complete review of our customers relationship with us.
Complementing [Phonetic] these efforts, we have product experts ready to help close the sale.
This integrated go-to-market strategy is a key part of our One Deluxe strategy, and this strategy is working.
In 2020 we signed more than 3,900 deals.
We added many new logos and expanded many of our existing relationships.
In fact, since we began One Deluxe, we sold 6 of the Top 10 deals of the last decade, including the largest sale in the company's history.
Here's just a flavor of our wins in 2020; [indecipherable] they signed a multi-year deal in our Check business, SunTrust had been a longtime customer of Deluxe, so with the merger of SunTrust and BB&T, we're pleased to have been selected as the trusted partner for the new combined entity; this deal is the single largest total contract value in the company's history.
We further grew Check market share with additional strategic takeaways winning two national or super-regional banks and more.
Our Checks retention rate is the highest in five years.
Synovus expanded it's relationship with us to include our entire receivables as a service platform.
Being selected by Synovus treasury management to be their digital transformation partner, it's clear evidence our integrated receivables as a service platform is what the market demands.
Payments further added or expanded relationships with P&C and Sirius XM Radio.
We also expanded our relationship with Alliance Data and Citibank.
Alliance Data joined our receivables management solutions, and Citibank joined our Deluxe Payment Exchange.
Promotional solutions also built on a key relationship.
As you know for previous calls, we're customer of Salesforce, but importantly, now Salesforce is a customer of the Deluxe.
Salesforce can now utilize our digital Deluxe brand center platform to manage their digital assets promotional products, marketing collateral, and other essential supplies.
With our growing relationship with Salesforce and other opportunities in our pipeline, we're well positioned to expand our sales efforts in the technology industry in 2021 and beyond.
In our telesales centers, we delivered record average order value growing 7.5% over last year, and our sales team find more than 200 cross sell deals totaling $35 million in total contract value.
Cross-sell has been an allusive goal for this company for more than a decade, and we delivered in 2020.
Of course, all of these wins are scheduled to onboard in 2021, timing of which will be dictated by COVID lockdowns and restrictions.
But here is the bottom line; our One Deluxe approach is working, enabling us to set new sales records in the middle of a pandemic.
Now, let's talk division specifics.
Our top growth segment payments, which did not even exist in it's current form until January 2020, had a successful year.
In addition to Synovus, SiriusXM Radio, Alliance Data and all the other newly signed clients and distribution partners; integrated receivables continues to benefit from positive secular outsourcing trends as new and long-standing customers focus on speed and efficiency.
COVID has put a spotlight on an additional Deluxe competitive advantage; the strength of our balance sheet and our leadership.
During the pandemic we've benefited as a number of institutions shifted volume away from our competitors to the safety of Deluxe.
In cloud solutions, our other target growth area; we made important progress in adding a number of new clients.
You can see we did experience significant directly related COVID impact, the financial institutions deferred marketing campaign spend impacting our data driven marketing business.
Additionally, our website services also experienced weakened demand during the year.
We did see encouraging signs for recovery at our corporation services, as we've previously announced.
We're particularly optimistic about data driven marketing as the recovery unfolds.
We're already deeply engaged in planning multiple large-scale marketing campaigns for our financial institution customers adding to our confidence for 2021 and beyond.
Next, we're going to talk about promotional solutions business, and I'm going to talk about two areas.
First is business essentials, where we've delivered custom forms and more that businesses consume in their routine operations.
Second is branded merchandise used to promote a business.
Encouragingly, we saw volume in our business essentials as the year progresses.
We expect to see a rebounded branded merchandise as events and physical promotion return as COVID fades.
Further, I'm extremely proud of the speed with which the promotional services team adapted to the new reality adjusting our product mix.
We saw $31 million of personal protective equipment in 2020, a business we had not been in previously, where we had no source of supply, no way to book an order, and no sales training at the beginning of the pandemic; it's a great example of innovative thinking, and speed this organization can now deliver.
We also find many new customers focused on our turnkey-managed brand services program giving us more confidence in our future profitable growth.
Salesforce is just one of these examples.
Fourth is our Check business.
Consistent with previous economic slowdown, the secular decline in Checks was higher due to the impacts of COVID.
We expect the business to rebound in line with historical secular trends as the economy recovers.
Encouragingly, we witnessed a sequential increase in new check customers resulting from new business start-ups at 2020 unfolded; this is an important evidence of the ongoing necessity of checks.
We were also encouraged to see acceleration of self-service and digital order volume acceleration throughout the year proving our digital strategy works.
Our multiple check wins at expanding market share bring important new revenue providing a partial offset the secular declines.
Clearly, in 2020, we have made significant and measurable progress in all four pillars of our strategy to become a sales-driven growth, trusted business technology company, which we achieved all of this in the middle of a pandemic with a new team.
Next, I want to briefly outline our progress in three areas that are helping to accelerate our transformation.
These three critical areas are talent, technology infrastructure, and efficient operating footprint.
In 2020 we further built on our team expanding products, business development and innovation.
An example of how talent is helping us succeed is our development of the Medical Payment Exchanger, MPX.
MPX is the only healthcare option that digitally attaches a check payment to the explanation of payments, delivery them together electronically; this is important because it doesn't require any workflow changes for anyone.
To accelerate our MPX progress, we announced our joint venture with Eco-Health in April of 2020.
We also continue to foster a culture of empowerment, inclusion, diversity and equity enabling our employee-owner [Phonetic] spring their full authentic cells to work.
In doing so, we're more directly reflected the diverse communities and customers we serve; all of this helped us achieve status as a 2020 Great Place To Work.
Our company had never before been so recognized.
We continue to execute on our previously discussed upgrade advancing optimization and efficiencies.
Third, is an efficient operating footprint.
We took full advantage of the work from home reality to drive efficieny and productivity.
We closed an additional 24 sites during the year, reducing our location count by 60% in the last two years.
We're particularly encouraged by the future operating savings and significant capital avoidance we will achieve by relocating both, our Minnesota headquarters, and Atlanta Technology facilities to more efficient spaces.
I do want to discuss M&A for a moment.
As you know, since I joined DLX, we have paused on acquisitions to reduce debt, strengthen the balance sheet, optimize the portfolio, get our talent and technology infrastructure in place, and importantly, expand our sales capabilities.
As I've outlined today, we've now delivered on all of these fronts and are once again ready to look at opportunistic ways to augment our business through acquisition, particularly in our higher growth engines of payments and cloud solutions.
In summary, we are very encouraged by our success on all four of our strategic pillars, and in our transformative talent, technology infrastructure, and operating footprint initiatives.
Our solid performance in the midst of the pandemic gives us confidence in our future post-pandemic.
For 2021, we look forward to closing the year as a sales-driven mid-single-digit-revenue growth company, with margins in the low-to-mid 20s, continuing to drive enhanced value for all shareholders.
Now, I'll pass it to Keith for more financial details.
As Barry mentioned, DLX delivered in 2020; we delivered EBITDA margin in line with our plan and guidance.
We took swift action to address covert at the onset, and we sustain this focus through the year.
The result, we delivered EBITDA margin in line with our commitments, reduced net debt to it's lowest level in 2.5 years, and we continue to invest for growth.
Before I get into the details, I want to express my gratitude to all my fellow employee owners who worked tirelessly and overcame many challenges this year.
The foundational work we began in 2019 made 2020 a successful year of transformation and continued innovation that produce measurable progress positioning us to deliver full year sales driven growth.
That said, we felt the continuing effects of the COVID-19 in our financial results.
Our total revenue in the quarter was $454.5 million, a decline of 12.9% as compared to the same period last year; however, an increase of 3% from the third quarter.
For the full year, total revenue declined 10.8% to $1.791 billion.
We reported GAAP net income of $24.7 million in the quarter, and $8.8 million for the full year.
A comparison of reported 2019 and 2020 full year results is difficult given each year was impacted by asset impairment charges.
Our measures of adjusted earnings and adjusted EBITDA excludes these non-cash charges along with restructuring, integration and other costs.
These adjustments are detailed in the reconciliations provided in our release.
Our adjusted EBITDA for the quarter was $94.9 million resulting in $364.5 million for the full year.
Adjusted EBITDA margins for the quarter was 20.9% bringing full year performance 20.4%.
As previously committed, our cost containment initiatives improved our adjusted EBITDA margin performance from the first quarter low by more than 300 basis points, this brought both Q4 and full year adjusted EBITDA margin into the low end of our pre-pandemic long-term adjusted EBITDA margin guidance range.
A closer discussion of Q4 segment performance helps demonstrate the resiliency of our new portfolio approach.
As payments continues to experience year-on-year revenue growth, cloud continue to expand EBITDA margins versus prior year.
Promotional expanded revenue went to 15%, sequentially versus Q3 and Check maintained a strong EBITDA margin despite significant COVID-related headwinds to the business.
Consistent with our expectations and as we had shared at the third quarter call, payments grew Q4 revenue 3% to $78 million as compared to prior year, achieving 12% growth for the year and ending at $301.9 million.
We did see less one-time hardware revenue in the quarter against a tough Q4 2019 compare.
Treasury management led the growth with encouraging demand for our integrated receivables.
As Barry mentioned, the team expanded the number of FI partners that have moved to our full suite of capabilities.
We will continue to work with these partners to onboard these services and work to expand the number of full-service clients in 2021.
Adjusted EBITDA decreased in the quarter and for the full year by $4.5 million and $6.3 million respectively.
For the year, adjusted EBITDA margin was 22.6%, well within the range of our pre-pandemic guide on slightly lower revenue performance.
We expect to achieve double-digit revenue growth for the year with Q1 growth in low single-digits as expected while we continue to work on implementing the many new clients we signed in 2020.
We continue to invest to drive growth and as such we're assuming adjusted EBITDA margins in the low 20% area through the year.
Cloud solutions revenue declined 27.1% to $59.2 million in the quarter and ended the year at $252.8 million, resulting in a decline of 20.6% compared to 2019.
Q4 data driven marketing solutions revenue remained flat sequentially versus Q3 but experienced a decline versus prior year consistent with pandemic induced financial industry slowdowns in marketing spend.
But you can't see in the revenue performance as a number of new data driven marketing clients that signed during the quarter and will benefit us in future periods.
Web and hosted solutions saw declines to loss of customers discussed last year, the economic impact of the macroeconomic environment and expected attrition from our decisions to exit certain non-strategic product lines.
In Q4, cloud achieved a 160 basis point improvement in adjusted EBITDA margin versus prior year, and expanded 20 basis points to 24.4% for the full year reflecting solid performance against pre-pandemic guide on significantly less revenue.
We expect the loss of revenue associated with Q4 2020 product exits will continue to impact the business into 2021, but we anticipate cloud margins to remain healthy in the low-to-mid 20% range.
Promotional Solutions fourth quarter 2020 sequential revenue grew by 15.3% from Q3 to $144 million, the year-over-year rate of decline moderated to down 16.6%, reflecting the continued impact of market conditions.
Adjusted EBITDA margin for the fourth quarter was 14%, down from the prior quarter peak.
Full year revenue declined 17.4% to $529.6 million with an adjusted EBITDA margin of 12.6%, and was greatly impacted by macroeconomic conditions in 2020.
In promotional solutions, we are seeing a modest rebound in business essentials, but continue to feel COVID-related impacts most acutely in marketing promotional products where revenues are tied to events and branded merchandise.
We believe the business will continue to improve but we are not expecting a rapid recovery in 2021.
We are anticipating improved adjusted EBITDA margins throughout 2021 in the low to mid-teens as a result of cost actions taken in 2020, including changes in key distribution relationships throughout 2020 and continuing in 2021.
Checks fourth quarter revenue declined 10% from last year to $173.3 million due to the secular trend combined with the impact of the pandemic.
Q4 adjusted EBITDA margin levels of 48.1% held largely steady versus Q3 declining only 10 basis points sequentially despite lower revenue levels, but remained lower than 2019 levels as a result of increased selling costs, new wins, and technology investments in support of our One Deluxe strategy.
Full year Check revenue declined 9.4% to $706.5 million as compared to last year, and adjusted EBITDA margin decreased to 48.4%.
Based on the high renewal rates and new businesses won in 2020, we do anticipate Check recovery rates in 2021 to return to mid-single digit declines, consistent with the recovery from previous economic slowdowns.
Free cash flow defined as cash provided by operating activities less capital expenditures was $155 million for 2020, a decline of $65.1 million as compared to last year.
The decline was primarily the result of lower earnings, partially offset by lower interest, taxes, integration and lower CapEx.
We did not repurchase common stock in Q4, and we will continue to evaluate future repurchases in 2021.
We ended the quarter with strong liquidity of $425 million, including $123 million in cash.
During the quarter we reduced the amount drawn under the credit facility by $200 million, ending the year with $840 million drawn, a reduction of $44 million in the year resulting net debt continue to decrease through the year ending at $717 million, the lowest level in 2.5 years.
Our Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares.
The dividend will be payable on March 1, 2021 to all shareholders of record on February 16, 2021.
Our strong execution and solid financial position, give us confidence to established guidance for the full year of 2021, the specific timing for economic recovery remains uncertain.
Our expectation is though for first quarter of 2021 will feel much like a continuation of the fourth quarter of 2020 as a result of the ongoing pandemic.
We are poised for recovery to begin in the second quarter enabling us to exit the year a sales-driven mid-single-digit revenue growth company.
All of this means, we expect to achieve full-year 2021 revenue growth of 0% to 2% with full year 2021 adjusted EBITDA margin of 20% to 21%.
We expect to invest approximately $90 million in CapEx to continue with important transformation work, innovation investments in building future scale across all our product categories.
Before I pass it back to Barry, I want to summarize for you; our very strong financial stewardship combined with our new leadership team, winning sales strategy, and ownership culture allowed us to not only protect but improve the company's financial strength, while simultaneously positioning us well for 2021 and beyond.
COVID certainly took it's toll but our strong team delivered in the worst of times, and we proved our cash generating business model is highly durable and our transformation is real; all of this gives us much confidence in our future.
Now, back to Barry.
In early 2020, we could not have anticipated the year that was in front of us.
But Deluxe-ers [Phonetic] have always had the grit to succeed.
Our team just put our heads out and went to work.
We're proud of our progress on our strategy and transformation to become a trusted business technology company.
We're proud of our strengthened balance sheet and improved portfolio.
We're proud to be a sales-driven revenue growth company, our cross-sell results, all-time record sales success.
But what's more impressive to me, we did all of this in the middle of a global pandemic.
I now have great confidence we'll be a sales-driven company growing low-to-mid single digit with margins in the low-to-mid 20s over the long-term, and expect to be that company exiting this year.
We've done the work, we've completed the preparations and laid the groundwork, and now our company is well positioned for the future.
I can't close without recognizing the extraordinary contribution of my follow Deluxe-ers [Phonetic].
Our team went to work and got the job done.
We're team living our purpose of values and ownership culture because we are all shareholders too.
Now, we'll take questions.
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deluxe corp qtrly revenue $439.5 million versus $493.6 million.
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And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q3 2021 results and revised full year outlook.
Examples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation, and future operating performance; our expectations regarding the impacts of COVID-19; and any other statements regarding matters that are not historical fact.
Consistent with our prior Q3 calls, my comments today will center on the key trends driving our business now and how we think the technological landscape will develop in the future.
I'll touch on how we are positioned to benefit as 5G deployments accelerate in cloud-native applications in the edge of all, particularly in the United States.
Additionally, I'll spend some time discussing our European markets, where we now have a scaled presence and are poised to create further value as technology evolves there, and then briefly cover what we are seeing in our earlier-stage international markets.
Finally, I'll outline some of the progress we've made in some of those same emerging markets and the platform expansion side, particularly with respect to our investments in sustainability and renewable energy as we continue to lead the industry into a greener future.
At a high level, much of my commentary today will sound familiar to those of you who have listened in on prior technology-focused calls, and we view that as a positive.
Technology is evolving and advancing right in line with our expectations.
In the long-term secular trends that have driven and continue to drive, our business remains strong.
There are also new developments in the marketplace around the overall digital ecosystem that we are excited about and our tenants continue to power ahead with their network augmentation and expansion activities.
Taken together, this is a backdrop that we expect will lead to sustained attractive growth for us over the long term.
Central to this belief is the view that our core global macro tower business will be the foundation of our success and the main driver of our cash flows for the foreseeable future, as macro towers should remain the most cost and technology efficient network deployment solution in most topographies worldwide.
Our conviction in this regard has only grown stronger over time supported by our customers' significant investments in new spectrum assets, record levels of wireless capex spending in markets like the United States, and numerous public statements by them indicating their intention to utilize macro sites to drive aggressive deployments of 5G and other wireless technologies globally.
We continue to view mid-band spectrum, which includes the recently auctioned C-band and the two and a half gig band currently being deployed in the U.S., as the workhorse of the true 5G experience, and we believe to be the fundamental enabler of the immersive next-generation 5G applications and use cases that are set to emerge as coverage improves and advanced devices penetrate the market.
Importantly, we continue to expect the propagation characteristics of the sub-6 gig frequencies, compared to traditionally deployed mobile spectrum to necessitate significant network densification over the long term supporting a multiyear period of strong growth on our tower sites.
today, generating record services revenues, driven by all of the major carriers as they accelerate the early stages of their respective 5G deployments.
Further, application volumes within our property business are strong, supported by expected wireless capex spend in the mid-$30 billion range this year.
Industry experts anticipate that these elevated levels of capital spending will be sustained for a number of years, driven by a mobile data usage growth CAGR of more than 25% over the next five years.
Amazingly, this follows a more than 25% CAGR for the last five years, and cumulative growth of approximately 7,500% over the last decade.
This compelling demand backdrop, coupled with the long-term noncancelable leases that comprise our more than $60 billion global contractual backlog, gives us confidence in our ability to drive organic tenant billings growth in the mid-single-digit range on average in the U.S. through 2027, and to drive higher growth rates abroad in that same period.
I'll touch on this further in a few minutes.
But as a quick reminder, these baseline growth expectations exclude any material contributions from our various platform expansion initiatives.
What they do include are expectations for an extended period of solid growth in our European markets, where we are seeing similar network growth trends to the United States with early stage 5G deployments set to accelerate in the coming years.
We expect that our newly scaled European presence will allow us to drive long-term value creation as the explosion of mobile data usage across the region continues and the need for communications infrastructure accelerates as a result.
Across Germany, Spain, and France, where 5G mobile subscriptions currently make up less than 5% of the total user base, we expect mobile data usage per smartphone to grow by more than 25% annually for the next five years, similar to the United States, and consequently expect capex spend across the three markets to exceed $11 billion annually over a similar time period.
And as happened in the United States, we are already seeing this acceleration in network investment translate into elevated activity.
In fact, in the third quarter, normalizing for the impacts of the Telxius deal co-location and amendment contributions to European organic tenant billings growth rose by around 200 basis points year over year.
Although we expect a significant portion of initial 5G investments to be focused in urban locations across our European footprint where roughly 80% of the population resides, we anticipate urban-oriented consumer demand to be complemented by an ongoing push from European regulators to deliver rural connectivity, which will represent another opportunity for us to drive colocation on our tower sites in those areas.
We believe our balance of rural and recently expanded urban assets positions us well to capture significant market share of upcoming 5G deployments over the next decade.
Finally, in our earlier stage markets across Latin America, Asia, and Africa, we continue to see solid demand for our critical infrastructure largely driven by deployments of legacy network technologies, particularly 4G.
Whether looking at Brazil, Mexico, India, or Nigeria, consumers are rapidly increasing their utilization of smartphones, thereby driving mobile data usage growth higher.
In many of these regions, existing network infrastructure is insufficient to support this deluge of usage as cell site performance is challenged with increased levels of network load.
In response to these trends, we are aggressively marketing our existing assets and continue to look for additional acquisition opportunities to bolster our footprint in these markets.
But at the same time, we have significantly ramped up our new build program given the tremendous need for entirely new infrastructure.
In fact, if you take the nearly 5,900 sites we built last year and add our expected 7,000 sites at the midpoint of our outlook to be constructed this year, it would represent almost as many sites as the previous five years combined.
And as we laid out a few quarters ago, we are targeting the construction of up to 40 to 50,000 new sites over the next five years.
With day one NOI yields on these builds continuing to average above 10%, we are excited about deploying significant capital to these initiatives going forward as we capitalize on the advancement of network technology across the emerging world while helping to connect billions of people.
In addition to the core secular growth trends driving our global tower business, we are seeing indications, particularly in more mature markets like the United States, of a broad evolution within the overall wireless ecosystem.
This evolution is closely intertwined with 5G and includes an increased prevalence of cloud-native network solutions, more emphasis on the various permutations of the network edge and an ever-increasing intersection of the wired and wireless portions of today's converged network architecture.
As networks virtualize, O-RAN or Open RAN, it's expected to become a more important option to improve their economics.
We are now starting to see this phenomenon with DISH in the United States, and in Germany, where one and one has spoken extensively about its intent to utilize this technology.
By utilizing O-RAN, carriers have the potential to optimize network design and drive cost efficiencies, freeing up incremental capital to invest in densification and other network enhancements that help drive growth in site deployments and colocations.
Importantly, the role of the tower in this evolving network design is as critical as ever.
While base station functionality will likely continue to evolve to be cloud native software agile, the radio equipment that is placed on the tower itself, which has always driven our revenue, will continue to reside on the tower.
Importantly, we believe we can leverage our extensive global distributed real estate portfolio to not only drive continued strong growth in our core tower business but also to take advantage of other emerging opportunities as networks virtualize.
This may include multi-access edge computing and potential other edge cloud permutations of neutral host infrastructure.
At the end of the day, modern software-driven networks are becoming smarter, faster, more capable, and more dynamic, and we are focused on ensuring that American Tower has a meaningful role to play in this context on the infrastructure and real estate side of the equation.
One of the areas we focused on is the development of the network edge or, more accurately, the development of multiple layers of the network edge.
With the need for lower latency expected to become more and more critical over time with applications like AR, VR, telemedicine, real-time analytics, autonomous driving, entertainment, streaming, you name it, and many others are beginning to emerge, we continue to believe that this could be a meaningful opportunity for American Tower.
As we've done more work on the evolution of the edge, the concept of multiple edge layers has come into better focus.
Today, for example, by far the most prevalent layer is the regional metro edge owned, for the most part, by the large data center companies where vast amounts of data processing is then centralized.
These locations provide access to cloud on-ramps and are absolutely critical within today's networks.
We expect this need to be the case for the foreseeable future.
In fact, as the volume of data carried across networks continues to explode, we anticipate the demand for these types of large-scale facilities will only grow.
The upside of these locations is their size and capacity.
The downside, to this point, hasn't been all that relevant, is the fairly significant network transit costs and latency built into reaching these central compute functions as the data often has to travel hundreds of miles to reach these destinations.
These transit costs and latency considerations, which we expect to become more important in the future, will necessitate more edge locations as uplink data increases from IoT use cases and demands for distributed computing advance.
The next layer beyond the metro edge, in our view, will be the aggregation edge.
Here, you're likely to post C-RAN hubs and future MEC applications as network virtualization advances, along with distributed data processing, AI inferencing, and other compute functions which will need reduced latency.
The major hyperscalers continue to evolve their edge cloud platforms so that they can extend computing capabilities deeper into the mobile access network at the aggregation edge.
The next layer beyond this, which we turn the access edge is where our existing tower sites are located today, offering an opportunity to meaningfully enhance the value of our legacy real estate.
We expect to eventually see vRAN and O-RAN network functions, AI inferencing, data caching, and a variety of other next-generation AR and VR cloud-native ultra-low-latency applications residing at these locations.
Finally, we've also identified the on-premise edge, which would lie beyond even our tower sites and could eventually help support private networks, smart factories, and a host of other applications located at the end-user site.
At the end of the day, our 20,000-foot view is that all of these edge elements will need to fit together to provide a cohesive framework for full-scale 5G across the network ecosystem.
The goal for us is to figure out what the optimal linkages between the layers look like, who are the key players will be and what elements of the edge we may want to own in order to further enhance the strong long-term growth we expect from our core existing business.
To date, as we seek to connect the dots, we've been active with a number of trial edge compute sites at the access edge while also operating our Colo ATL metro data center interconnection facility in Atlanta.
Through these investments, we have built relationships with key existing and potential future customers, have learned a tremendous amount about key demand trends and have had a front row seat for the beginning stages of the convergence of wireless and wireline networks that I alluded to earlier.
More recently, we acquired DataSite, a data center company, consisting of two multi-tenant data centers in the Atlanta area and in Orlando.
In addition to strengthening our existing position in Atlanta, the addition of a network dense carrier hotel facility in Orlando provides us with a strong Southeastern presence with the profile and characteristics that we believe will be critical in the early evolution of the metro edge as we evaluate its role in the mobile networks of the future.
We expect these facilities, which have 18 megawatts of combined power, an additional four and a half megawatts of expansion capacity, to effectively complement Colo ATL and enable us to enhance our ability to develop neutral-host, multi-operator, multi-cloud data centers to support the broader core to edge connectivity evolution in the United States.
We continue to believe that while a scaled application-driven edge-oriented business model is still likely several years away, it has the potential to be a sizable market opportunity with meaningful potential upside, not only in the United States, but also on a global basis.
Leading global MNOs are now positioning their networks with released 16 5G stand-alone core features to explore edge cloud opportunities.
And with our distributed macro side presence key markets around the world, we think we are well positioned to potentially be a provider of choice on the edge, particularly for large multinational MNOs and other categories of customers who may be looking for a multi-market solution.
Switching gears a bit.
While we believe edge compute will eventually also be relevant in emerging markets, it is unlikely to happen in the immediate future.
Consequently, we have focused our platform expansion efforts across our developing regions and other areas, most notably on increasing the sustainability and efficiency of power provisioning in our sites.
As we highlighted in our recently published 2020 corporate sustainability report, we've continued to make progress toward our goal of reducing diesel-related greenhouse gas emissions by 60% by 2027 from a 2017 baseline.
In 2020, we achieved an additional 8% reduction from 2019, reaching 53% of the 10-year goal.
We are continuing to make solid progress in 2021 with an expectation to spend an additional $80 million toward energy-efficient solutions, primarily in lithium ion and solar power across our Africa footprint, which will bring our cumulative spend to nearly $250 million.
And as we announced earlier this week, we are furthering our commitment to combat climate change by adopting science-based targets, which we expect to help inform our future investments in sustainability.
In addition to the positive environmental benefits from these investments, we are also delivering shareholder value through AFFO per share accretion.
Lithium ion batteries provide significant energy efficiency, density, and lifespan improvements over legacy solutions.
And while, to date, AFFO benefits to American Tower have largely come through fuel savings we anticipate over time that our yields on these investments will further expand as we are able to lengthen battery and generator replacement cycles.
Having already expanded our lithium ion-powered site count from 4,500 in 2019 to 6,700 in 2020, we are targeting another 8,000 sites by the end of 2022 and recently signed a multimillion dollar bulk battery purchase agreement in Africa in support of this goal.
Importantly, we believe that energy efficiency, the use of renewables, and sustainability in our broader sense can represent an important competitive advantage for us, not only from the flow-through to AFFO, but also the differentiation in service quality for our customers.
We continue to view sustainability as a critical component of our company culture, and we'll be highlighting our continued progress in future sustainability reports, which I encourage all of you to read by the way.
In closing, our excitement around 5G on a global basis continues to grow.
Consumers and enterprises are using more advanced devices for more things, resulting in consistent elevated growth in mobile data usage, which, in turn, strains existing wireless networks and necessitates incremental densification and network improvement.
Considerable new spectrum is being deployed.
New entrants in select markets are building greenfield networks, and our macro tower-oriented portfolio remains well positioned to capture a significant portion of wireless investment activity.
In addition, through our platform expansion strategy, we are focused on ensuring that the company benefits from the ongoing convergence of wireless and wireline and the associated expansion of virtualization in cloud-native applications throughout the network ecosystem.
Importantly, as we optimize our core business and look for ways to further enhance our growth path in the broader digital infrastructure world, we are as committed as ever to driving profitability, sustainability, and recurring growth.
We're energized by the future and are excited to be in a vibrant industry that is helping to connect the world.
I hope you and your families are well.
Q3 was another quarter of strong performance for us.
And as you heard from Tom, we are as encouraged as ever by the technological trends that underpin our long-term growth potential.
Before digging into the details of our results and raised outlook, I'd like to touch on a few highlights from the quarter.
First, we closed on our strategic partnership agreements with CDPQ and Allianz, through which they purchased an aggregate of 48% of our ATC Europe business for a total consideration of around EUR 2.6 billion.
In addition, we closed the remaining 4,000 Telxius communication sites in Germany back in August.
With the transaction now fully closed and funded, our teams are working to rapidly integrate the assets, and we are already seeing encouraging activity on the portfolio.
Second, we continued to strengthen our balance sheet, raising roughly $3 billion in senior unsecured notes, including our euro offering earlier this month.
Through our financing transactions, we have been able to maintain an attractive weighted average cost of debt while also continuing to extend our maturities.
As a result of this activity, along with the benefit from a nonrecurring advance payment received from a tenant during the quarter, we finished Q3 with net leverage of 4.9 times.
While we expect net leverage to increase back into the low 5 times range in the fourth quarter, we are right on track with our overall post-Telxius delevering path.
And lastly, we saw another quarter of record services activity in the U.S. as carriers accelerated 5G-related projects.
We view this as a leading indicator of strong levels of gross leasing in our property segment as we head into 2022 and beyond.
As you can see, our consolidated property revenue grew by over 19% year over year or over 18% on an FX-neutral basis to nearly $2.4 billion.
This included U.S. and Canada property revenue growth of around 10% and international property revenue growth of over 31% or 13% when excluding the impacts of the Telxius acquisition.
This strong performance is indicative of a continuation of the long-term secular trends driving demand for our infrastructure assets across the globe.
Moving to the right side of the slide, we also had a solid quarter of organic tenant billings growth throughout the business.
On a consolidated basis, organic tenant billings growth was nearly 5% for a second consecutive quarter.
and Canada segment of over 4%.
Contributions from colocation and amendments were more than 3%.
Escalators came in at 3.2%, and churn was just over 2%.
Moving to our international operations.
We drove organic tenant billings growth of nearly 6%, reflecting a sequential acceleration of around 60 basis points.
Africa was our fastest growing region in the quarter, posting organic tenant billings growth of well over 9% led by Nigeria, where we continue to see 4G investments driving both colocation activity and new site construction.
We also saw a consistent quarter in Latin America, where organic tenant billings growth was right around 7%, driven by solid new business and higher escalators primarily in Brazil.
Meanwhile, European organic tenant billings growth accelerated by around 100 basis points sequentially to nearly 5.5% as expected.
Excluding impacts from the Telxius acquisition, organic tenant billings growth in the region would have been over 4.5% in the quarter, more than 200 basis points higher than the year-ago period, driven primarily by new business contributions.
This positive trend reflects both ongoing 4G activity and early 5G investments leading to solid growth from both colocations and amendments.
Looking to Germany, in particular, we saw a more than 300-basis-point increase in colocation and amendment contributions in our legacy business, as compared to the prior year period, resulting in organic tenant billings growth of over 5.5%, up from 5.2% in the second quarter.
Finally, in Asia Pacific, we saw organic tenant billings growth of 0.7%, up roughly 200 basis points as compared to Q2.
This reflects a modest acceleration in gross new business activity, coupled with a more than 2% sequential decline in churn, which was in line with our expectations.
Turning to Slide 7.
Our third quarter adjusted EBITDA grew more than 19% or over 18% on an FX-neutral basis to nearly $1.6 billion.
Adjusted EBITDA margin was 63.2%, which was down compared to Q3 2020 as a result of adding new lower initial tenancy assets to our portfolio, which we believe will drive strong organic growth and, therefore, margin expansion in the future.
Cash SG&A as a percent of total property revenue was around 7.3%, a roughly 40-basis-point sequential improvement.
Moving to the right side of the slide, consolidated AFFO growth was over 13% with consolidated AFFO per share of $2.53, reflecting a per share growth of nearly 11%.
This was driven by strong performance in our core business, contributions from new assets and around $13 million in year-over-year FX favorability.
Our performance also reflected the benefits of our commitment to driving efficiency throughout our operations and minimizing financing costs despite growing the portfolio by nearly 38,000 sites over the last year.
And finally, AFFO per share attributable to AMT common stockholders was $2.49, reflecting a year-over-year growth rate of nearly 12%.
Let's now turn to our updated outlook for the full year.
I'll start by reviewing a few of the key updated assumptions.
First, our expectations for organic growth across the business are consistent with our prior outlook.
Carriers continue to deploy meaningful capital as they invest in network quality, and we are seeing numerous bands of spectrum being deployed for both 4G and 5G.
We are also slightly increasing our expectations for services revenue for the year to around $235 million as a result of an outsized third quarter, although this implies that services volumes will moderate somewhat in Q4.
Second, as a result of our focus on operational efficiency and cost controls, along with some onetime benefits, we expect to be able to take some costs out of the business as compared to our prior expectations.
Combined with the current services gross margin outperformance, this will drive our adjusted EBITDA margin expectations higher for the balance of the year.
Third, in India, we are encouraged by recent regulatory reforms, which we believe can provide some much-needed breathing room for capital-constrained carriers in the marketplace and improve the telecom environment overall.
While we believe this is a clear positive first step toward market recovery, we continue to expect flat 2021 organic tenant billings growth in the region as we further evaluate the long-term impacts of these developments on the sector.
Finally, incorporating the latest FX projections, our current outlook reflects negative FX impacts of $30 million for property revenue, $20 million for adjusted EBITDA, and $15 million for consolidated AFFO as compared to our prior expectations.
With that, let's move to the details of our revised full year outlook.
Looking at Slide 8, as expected, leasing trends remained strong across our global business, and as a result of an increase in pass-through together with some modest core property revenue outperformance, we are raising our property revenue outlook by $10 million.
This represents 14% year-over-year growth at the midpoint and includes $30 million in unfavorable translational FX impacts as compared to our prior outlook.
Moving to Slide 9.
You'll see that we are reiterating our organic tenant billings growth expectations of approximately 4% on a consolidated basis.
This includes roughly 3% growth in our U.S. and Canada segment where 5G deployments are driving solid activity levels as we exit the year.
As a reminder, we expect the first and largest tranche of contractual Sprint churn to hit our run rate in the fourth quarter of this year.
organic tenant billings growth rate of negative 1%, as we communicated previously.
On the international side, we continue to anticipate organic tenant billings growth in the range of 5 to 6% as carriers continue to focus their efforts on enhancing and densifying wireless networks in the face of ever-rising mobile data demand.
Moving to Slide 10.
We are raising our adjusted EBITDA outlook by approximately $50 million and now expect year-over-year growth of nearly 16%.
This increase reflects continued strength in our services segment, where we now expect to see roughly $145 million in services gross margin for the year, up from the 123 million implied in our prior guidance with year-over-year growth of more than 180%.
On the cost side of the equation, we continue to maintain cost discipline globally, helping to drive adjusted EBITDA margins up by around 40 basis points for the full year as compared to prior expectations.
Turning to Slide 11.
We are also raising our full year AFFO expectations and now expect year-over-year growth in consolidated AFFO of roughly 15% with an implied outlook midpoint of $9.64 per share.
The flow-through of incremental cash-adjusted EBITDA, coupled with the continued cash tax and net cash interest benefits as compared to the prior expectations are being partially offset by around $15 million in negative translational FX impacts.
On a per share basis, we now expect growth of approximately 14% for the year consistent with our long-term growth ambitions that we highlighted at the start of the year.
Finally, AFFO attributable to ATC common stockholders per share is expected to grow by nearly 12% versus 2020, incorporating the minority interest impacts of our strategic partnership with CDPQ and Allianz in Europe.
Moving on to Slide 12.
Let's review our capital deployment expectations for 2021.
As you can see, we remain focused on deploying capital toward assets that drive strong sustainable growth in AFFO per share coupled with a growing dividend, providing our investors with a compelling combination of growth plus yield.
Working our way through the specific categories, our first priority remains our dividend.
For the full year, we continue to expect to distribute $2.3 billion, subject to board approval, which implies a roughly 15% year-over-year per share growth rate.
As a reminder, our dividend growth will continue to be driven by underlying growth in our REIT taxable income, incorporating the impacts of M&A and other moving pieces in the business.
Consistent with our prior comments, we anticipate growing our dividend by at least 10% annually in the coming years.
Moving on to capex.
We reiterate our expectations of spending nearly $1.6 billion at the midpoint with nearly 90% being discretionary in nature.
Driving a good portion of this discretionary capex is our continued expectation to construct 7,000 sites at the midpoint this year with the vast majority in our international markets.
Including contributions from minority partners, we have deployed around $10 billion so far this year primarily for the Telxius transaction.
as well as for smaller transactions, including DataSite.
In total, of our nearly $14 billion in expected capital deployment for the year, we expect over 80% to be composed of discretionary growth capex and M&A.
Moving to the center of the slide.
You can see the composition of our $35 billion in cumulative capital deployments since the start of 2017, including our 2021 full year expectations.
We continue to augment our developed market presence, which we believe positions us optimally to drive value from accelerating 5G deployments and next-generation technology evolutions, as Tom laid out earlier.
We are also allocating capital toward higher growth earlier-stage markets that are typically at least five years behind the U.S. and Europe in their network deployments.
Taken together, we believe that our global footprint positions us to capture multiple waves of investments across the globe over a sustained period of time.
Finally, you can see that more than a quarter or around $9.5 billion of our deployed capital in the last five years has been distributed to shareholders in the form of dividends and share repurchases.
We continue to view these components as critical to total shareholder returns.
Moving to the right side of the chart.
Supporting this phase of significant investment and growth has been our investment-grade balance sheet.
We believe that our access to low-cost, diversified sources of financing has been a key differentiator and are proactively working to extend this critical competitive advantage into the future.
In fact, incorporating our latest financing efforts, we now have a weighted average cost of debt of around 2.4%, a weighted average tenor of debt of approximately seven years, and over 85% of our balance sheet locked into fixed rate instruments.
Finally, on Slide 13, and in summary, in Q3, we continue to capitalize on a strong global demand backdrop, delivering our highest quarter of consolidated AFFO per share on record.
This was driven by solid organic growth, record-setting services volumes, disciplined cost controls, strategic balance sheet management, and accretive portfolio expansion.
As we look ahead, we believe our existing global real estate portfolio is well positioned to drive long-term recurring growth as carriers augment and extend their networks.
And with the strength of our investment-grade balance sheet and diversified pool of funding sources, we expect to continue to deploy capital toward accretive investments that can enhance our growth path and enable us to create additional value.
Given our positioning at the intersection of real estate and technology in an ever more interconnected world, we are excited to continue to deliver connectivity to billions of people worldwide in a sustainable way while driving compelling total returns for our shareholders.
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quarter end assets under management and administration was $1.2 trillion, up 21 percent.
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We are pleased to report robust results for fiscal 2020, highlighted by professional segment growth, primarily from incremental contribution from Charles Machine Works and Venture Products, a record performance from our Residential segment.
We owe our successful performance to our team, which demonstrated perseverance and ingenuity in this challenging year.
We navigated COVID-induced manufacturing inefficiencies, including social distancing and workforce fluctuations.
At the same time, we provided innovative solutions to meet demand from our retailers and customers.
Our employees managed these changes admirably, while working in significantly modified production environments or at home, as they balanced personal challenges resulting from the pandemic.
I am beyond proud of our team and will remember this year as one that highlighted the way we lived our values, while caring for one another and serving our customers with determination.
And to our channel partners, as essential businesses, you served our customers with dedication and passion.
Together, we persevered to maintain and gain market share in key product categories with existing and new customers.
Execution in this challenging year continued to be guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people.
In addition, we enhanced our commitment to the well-being of our employees, service to our customers and support for our community.
Ultimately, staying true to our values enabled us to deliver for our stakeholders.
For fiscal 2020, highlights include record growth in the Residential segment, successful introduction of new battery-powered products for residential and professional applications, increased investments in research and development in key technology areas, strong free cash flow; the continued return of value to shareholders via dividends and the launch of our Sustainability Endures Platform that documents our progress, aligned with long-held values and objectives, and profiles our continued efforts to address environmental, social and governance priorities.
I'll now provide some commentary regarding key results by segment for the full year and fourth quarter, and Renee will go into more detail.
For fiscal 2020, Professional segment net sales were up 3% year over year and earnings were up 12%.
Residential sales were up 24%, and earnings were up 75%.
For the fourth quarter, Professional segment net sales were up 10% versus the same prior year period, and earnings were up 70%.
Residential net sales were up 39% and earnings were up 90%.
I'll now provide some insight into the demand environment for the quarter.
In the Residential segment, we experienced a continuation of trends seen throughout much of fiscal 2020.
Stay-at-home directives and the expansion and strength of our channel were key contributors to high demand for walk power mowers and zero-turn riding mowers.
Innovative features, refreshed brand presence, and extended season sales provided additional momentum.
In the Professional segment, we drove growth with increased demand for our landscape contractor, snow and ice management, golf irrigation, rental and specialty construction, and ag irrigation products.
Strong product offerings, favorable weather and stay-at-home trends drove retail demand throughout the quarter and provided momentum going into fiscal 2021.
The Toro Company is sustainably strong.
The pandemic year of 2020 proved that by focusing on our enterprise strategic priorities and living our enduring values, we are able to deliver strong results.
Our performance this year was only possible because of the resilience and flexibility of our team, the manner in which our operations and businesses resourcefully responded to customer demands, and the dedication of our channel partners.
As a result, I'm optimistic about our momentum going into the new fiscal year.
During the fourth quarter, we continued to build on our sales momentum in both the Residential and Professional segments, while executing well operationally and investing in innovation to position The Toro Company for long-term growth.
We did sell in a challenging and unpredictable environment.
We grew fourth quarter net sales by 14.5% to $841 million.
Reported earnings per share was $0.66 and adjusted earnings per share was $0.64 per diluted share.
This compares with reported earnings per share of $0.35 and adjusted earnings per share of $0.48 per diluted share for the comparable quarter of last year.
For the full year, net sales increased 7.7% to $3.38 billion.
Reported earnings per share was $3.03 per diluted share, up from $2.53 last year.
Full year adjusted earnings per share was $3.02 per diluted share, up from $3 a year ago.
Now, to the segment results.
Residential segment net sales for the fourth quarter were up 38.5% to $187.9 million, mainly driven by strong retail demand for walk power and zero-turn riding mowers.
Full year fiscal 2020 net sales for the Residential segment increased 24.1% to $820.7 million.
The increase was mainly driven by incremental shipments of zero-turn riding and walk power mowers as a result of our expanded mass channel, as well as strong retail demand for these products due to new and enhanced product features, favorable weather and stay-at-home trends.
Residential segment earnings for the quarter were up 90.2% to a record $26.4 million.
This reflects a 390-basis point year-over-year increase to 14.1% when expressed as a percentage of net sales.
This improvement was largely driven by productivity and synergy initiatives and SG&A expense reduction and leverage on higher sales volume.
For the year, Residential segment earnings increased 74.5% to a record $113.7 million.
On a percent of net sales basis, segment earnings increased 390 basis points to 13.8%.
This was a record setting year for the Residential segment and the team deserves well-earned recognition.
Professional segment net sales for the fourth quarter were up 9.5% to $644 million.
This increase was primarily due to growth in shipments of landscape contractor, zero-turn riding mowers and snow and ice management equipment, annual pricing adjustments and lower floor plan costs, as well as incremental sales from the Venture Products acquisition.
For the full year, Professional segment net sales increased 3.3% to $2.52 billion.
Professional segment earnings for the fourth quarter were up 70.2% to $104.2 million, and when expressed as a percent of net sales, increased 580 basis points to 15.2%.
This increase was primarily due to annual pricing adjustments and lower floor plan costs, lower acquisition-related charges, and benefits from productivity and synergy initiatives.
This was partially offset by product mix.
For the full year, Professional segment earnings increased 12% compared to fiscal 2019.
When expressed as a percent of net sales, segment earnings increased 130 basis points to 15.9% from last year.
Turning to our operating results.
We reported gross margin for the fourth quarter of 35.7%, an increase of 230 basis points over the prior year period.
Adjusted gross margin was 35.7%, up 120 basis points over the prior year.
The increases in gross margin and adjusted gross margins were primarily due to the benefits from productivity and synergy initiatives and net price realizations, mainly within the Professional segment.
This was partially offset by product mix.
Reported gross margin was positively affected by lower acquisition-related charges compared with the prior year period.
For the full year, reported gross margin was 35.2%, up 180 basis points compared with 33.4% in fiscal 2019.
Adjusted gross margin was 35.4%, up from 35.1% in fiscal 2019.
SG&A expense as a percent of net sales decreased 290 basis points to 24.6% for the quarter.
This decrease was primarily due to restructuring costs in the prior year period that did not repeat, and cost reduction measures, including decreased salaries and indirect marketing expense.
This was partially offset by increased warranty costs in certain Professional segment businesses.
For the full year, SG&A expense as a percent of net sales was 22.6%, down 40 basis points from fiscal 2019.
Operating earnings as a percent of net sales for the fourth quarter increased 520 basis point to 11.1%.
Adjusted operating earnings as a percent of net sales increased 270 basis points to 11.1%.
For fiscal 2020, operating earnings as a percent of net sales were 12.6%, up 220 basis points compared with 10.4% last year.
Adjusted operating earnings as a percent of net sales for the full year were 12.8% compared with 12.9% a year ago.
Interest expense of $8 million for the fourth quarter was flat compared with a year ago.
Interest expense for the full year was $33.2 million, up $4.3 million over last year, driven by increased borrowings as a result of our Professional segment acquisitions.
The reported effective tax rate was 18.5% for the fourth quarter, and the adjusted effective tax rate was 21.9%.
For the full year, the reported effective tax rate was 19% and the adjusted effective tax rate was 20.9%.
Turning to the balance sheet and cash flow.
At the end of the year, our liquidity was $1.1 billion.
This included cash and cash equivalents of $480 million and full availability under our $600 million revolving credit facility.
We have no significant debt maturities until April of 2022.
Accounts receivable totaled $261.1 million, down 2.8% from a year ago.
Inventory was flat with a year ago at $652.4 million.
We have plans to build inventory in the fourth quarter to partially mitigate potential supply chain and manufacturing constraints.
Instead, the additional production allowed us to fulfill stronger than expected retail demand and satisfy customer needs.
Accounts payable increased 14% to $364 million from a year ago.
Full year free cash flow was $461.3 million with a reported net earnings conversion ratio of 140%.
This positive performance was primarily due to favorable net working capital, the increase in reported net earnings and reduced capital expenditures.
Given our strong cash generation in fiscal 2020, we have already paid down $50 million of debt in November.
We also expect to resume share repurchases in fiscal 2021.
In fiscal 2020, our disciplined capital allocation strategy continued to include investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders.
We also focus on near-term liquidity.
For fiscal 2021, our capital priorities remain the same and include reinvesting in our businesses to support sustainable long-term growth -- both organically and through acquisitions -- returning cash to shareholders through dividends and share repurchases and repaying debt to maintain our leverage goals.
In addition to the $50 million debt pay down in November, we also recently increased our quarterly cash dividend by 5%.
We are providing full-year fiscal 2021 guidance at this time based on current visibility.
Note that there continues to be considerable uncertainty given the potential effects of COVID-19.
This includes potential effects on demand levels and timings, our supply chain and the broader economy.
I will share the guidance highlights and Rick will cover the macro trends and key factors that we will be watching throughout the fiscal year.
For fiscal 2021, we expect net sales growth in the range of 6% to 8%.
This includes four months of incremental sales from the Venture Products acquisition.
We expect continued recovery in Professional segment end market.
The strongest growth will be in the second and third quarter, as those comparable periods last year were most impacted by the pandemic.
We expect Residential segment end markets to return to low single-digit growth, following an exceptionally strong fiscal 2020.
We anticipate a stronger first half than second, given our fiscal 2020 performance.
Looking at profitability, we expect moderate improvement in fiscal 2021 adjusted operating earnings as a percent of net sales compared with fiscal 2020.
This assumes continued productivity and synergy benefits and lower COVID-related manufacturing inefficiencies.
We expect these benefits to be partially offset by material, wage and freight inflation as well as the reinstatement of salaries, incentive and discretionary employee-related costs that were reduced or eliminated in fiscal 2020.
In the Professional segment, we expect earnings as a percent of net sales to improve versus fiscal 2020 due to better volume leverage.
In the Residential segment, we expect earnings as a percent of net sales to be similar to fiscal 2020 on comparable volumes.
We expect full year adjusted earnings per share in the range of $3.35 to $3.45 per diluted share.
This adjusted earnings per share estimate excludes the benefit of the excess tax deduction for share-based compensation.
Based on current visibility, we anticipate adjusted earnings per share to be higher in the first half of fiscal 2020 versus the year ago period.
The majority of the increase will be in the second quarter.
For the second half of fiscal 2021, we expect adjusted earnings per share to be comparable with the same period of fiscal 2020.
We expect depreciation and amortization for fiscal 2021 of about $95 million.
We anticipate capital expenditures of about $115 million, as we continue to invest in projects that support our enterprise strategic priorities.
We anticipate fiscal 2021 free cash flow conversion in the range of 90% to 100% of reported net earnings.
In fiscal '21, we'll continue to execute and adapt to changing environments as we maintain a balance of focusing on the short-term while never losing sight of our long-term strategic priorities.
We look forward to capitalizing on many exciting growth opportunities in fiscal '21 and beyond.
Looking ahead, we'll be watching a number of macro trends, such as the trajectory and duration of COVID-related impacts, including potential global supply chain disruptions and continuing social distancing restrictions impacting production, global economic recovery factors driving general consumer and business confidence and commodity trends and weather patterns for the winter and spring season.
As these trends evolve, we are well positioned for growth within our specific market categories and are closely watching a number of key drivers.
For our Residential and certain Professional businesses, customer interest in home investments; for landscape contractors, improvement in business confidence; for snow and ice management, demand within our new and refreshed product categories; for golf, the anticipation of another strong year for rounds played and the return of food and beverage and event revenue; for grounds equipment, the budgets of municipal and other tax supported entities and their impact on capital equipment purchases; for underground, the funding of 5G and broadband build out and critical need infrastructure rehab and replacement; and for rental and specialty construction, the resumption of fleet upgrades and replacements.
We have a strong and innovative portfolio of products to address these market opportunities.
Some recently introduced products that will continue to drive our business, include TITAN, Z Master, and TimeCutter zero-turn riding mowers for homeowners and contractors; the Flex-Force 60-volt lithium-ion suite of products, including our walk power mower, snow thrower, hedge trimmer, chainsaw and power shovel; the BOSS Snowrator and Ventrac Sidewalk Snow Vehicle; the Greensmaster eTriFlex all electric and hybrid riding Greensmowers; the Ditch Witch JT24 Horizontal Directional Drill; the Toro e-Dingo electric and Dingo TXL 2000 stand-on skid steers, and the Ditch Witch SK3000 stand-on skid steer.
The enthusiastic customer response to these products demonstrates the success of our innovation efforts and we will continue to focus on key technologies like, alternative power, smart connected and autonomous products.
Lastly, we have concluded our three-year Vision 2020 employee initiative.
For fiscal 2021, we have implemented a new one-year employee initiative.
Our stretch enterprisewide performance goals include net sales of $3.7 billion and adjusted operating earnings of at least $485 million.
In closing, for fiscal 2021 and beyond, we believe our diverse portfolio of businesses and strong customer relationships, position us to grow.
Our productivity and synergy initiatives will drive profitability and fund investments.
Our investments in innovative products and emerging technologies will enable us to meet the evolving needs of our customers and, more than ever, our team is the key to The Toro Company's continued success.
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q4 adjusted earnings per share $0.64.
q4 earnings per share $0.66.
q4 sales $841 million versus refinitiv ibes estimate of $772.1 million.
sees fy 2021 sales up 6 to 8 percent.
sees fy 2021 adjusted earnings per share $3.35 to $3.45.
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We appreciate your continued interest in our company.
We are excited to talk to you today about our strong Q2 performance.
Our 2021 financial outlook and recent development on our effort to transform kidney care.
First, let me start the conversation with the clinical highlights.
Kidney transplant is the best treatment option for eligible patients with kidney failure.
DaVita has worked hard over the years to help our patients gain access to transplant through education and direct support for patients to get on and stay on the transplantation waitlist.
The cumulative impact is meaningful.
Last December, we announced a milestone of 100,000 DaVita patients who have received transplant since the year 2000.
Further advance the cause of transplantation are collaborating on a yearlong pilot aim at improving health equity in kidney transplantation with a focus on living donors.
Increasing living donor transplant expands access to transplantation by increasing the availability of organ, which has been the limiting factor in the number of transplants performed annually.
This pilot provides high touch and customized information to patients and families seeking a kidney transplantation from a living donor.
We look forward to learning more from this pilot, improving the health equity of kidney transplant and continuing to be the leader in supporting our patients to receive kidney transplant.
Shifting to the latest update on COVID, we have made incredible progress in our efforts to combat the COVID 19 pandemic over the past several months.
New COVID infections among our patients continue to drop significantly through the last week of June down more than 90% from the peak in early January.
However, similar to the rest of the country, we have started to see an uptick over the last few weeks.
As of last week on a rolling seven day average basis new infection, they're still down more than 90% from the peak.
Thus far, mortality continues to remain low on an absolute basis as we believe that are vaccinated patient are more protected from severe cases of COVID.
We continue to educate our patients about the benefits of vaccine to reduce vaccine hesitancy and we remain confident in our policies and procedures designed to keep our patients and our teammates safe while they're in our care.
Now let me turn to our financial performance in the second quarter, we delivered strong results in both operating income and earnings per share, our margin expanded as we continue to manage cost while delivering quality care.
As a result, we delivered 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in our adjusted earnings per share.
Our free cash flow was particularly strong this quarter, we continue to return cash to our shareholders through our stock buyback.
With the first half of the year behind us.
We are now increasing the midpoint of guidance for the full year.
Let me transition to update our progress in our integrated Kidney Care efforts, otherwise known as by IKC.
Value-based care for our patients with kidney disease is gaining momentum and appears to have reached an inflection point.
We have always believed the core name dialysis care with the broader healthcare needs of KB and SKG patients with simultaneously improve outcomes and reduce total healthcare costs.
For years, we've been participating in a variety of small programs and pilots to build our integrated care capability and better understand the economics we believe we are at that point now where we are ready to shift to the next stage of the evolution of integrated care.
You might be wondering why now, the trend toward value-based care is not new either in kidney care or other segments of healthcare so what's changed to make the development of scale business viable today.
There's a couple of reasons.
First with the growth of Medicare Advantage payers are looking for innovative ways to manage the increasing number of ESKs patients choosing MA plans these patients tend to be more complex and most of them MA patient and should benefit from tailored care management.
Second, CMS recently initiated the payment models and kidney modern in kidney care.
We are preparing to partner with nephrologists and up to 12 markets beginning in January of next year to participate in CKCC voluntary program.
Our participation and CKPKC model will also provide us with operational scale in more geographies to enter into other value based arrangements, we've increased our confidence in our capabilities to deliver clinical and economic value at scale and have lean in on our willingness to take risk.
We believe we're well positioned to win an integrated care because of our strong partnership with nephrologists, our regular and consistent interactions with patients, a broad Kidney Care platform that spans various modalities and care setting.
And a clinical data set and analytics that we used to create develop clinical interventions to support our patients holistically.
We have a demonstrated track record of improving patient outcome care, and lowering costs for patients in risk arrangement for example, in our FCOS [Phonetic], we were able to generate non-dialysis cost savings in the high single digits which translated into more than double the average savings rates compared to the rest of the industry over the life of the program.
With our special needs plan we have been able to lower mortality by 23% relative to other patients within the same-center and county.
To give you a better sense of the scale of the business.
As of today, approximately 10% of our US dialysis patients are in value-based care arrangements in which Tervita is responsible for managing the total cost of care.
This represents almost $2 billion of annual medical cost under management.
In addition, we have various other forms of value based care arrangements with payers in.
We have economic incentives for improving quality and lowering costs.
In 2022, we expect our integrated Kidney Care business to double inside both the number of patients in risk arrangement and the dollars under management.
We also expect to see a dramatic increase in the number of CKB Live we have under risk in 2022.
To prepare for this growth.
We are currently scaling up our clinical team and furthering building out our support.
Because of the investment as well as the delays and cost savings impact of our model of care and revenue recognition.
We expect to incur a net operating loss of $120 million in 2021 in our US ancillary segment this outcome is consistent with the OII headwinds from ITC growth, we called out at the beginning of the year and is of course included in our full year guidance.
The doubling of the business next year could result and an incremental operating loss in our ancillary segment of $50 million in 2022.
We expect significant improvement in our financial performance beginning in 2023 as we begin to recognize savings from the new contracts that we entered in 2021 and 2022.
Over the five-plus-year horizon, we believe that our IKC business could become a sustainable driver of significant operating income growth.
Currently we serve approximately 200,000 dialysis patients across the country, we utilize over $12 billion in health services outside of the dialysis facility, including the cost of hospitalization, our patient procedures and physician services.
In addition, we see an opportunity to manage the care of up streams CKD patients who currently do not dialyzed in our centers.
Assuming that we are managing the total cost of care for more than half of our dialysis patients as well as others CKD patients at low-to-single digit margin, we believe that this could be meaningful financial opportunity.
In summary all of healthcare has been talking about value based for years.
We are excited for DaVita to lead the way.
We had a strong quarter despite the continuing operational challenges presented by COVID primarily as a result of strong RPT performance and continued discipline on cost.
For the quarter, operating income was $490 million and earnings per share were $2.64.
Our Q2 results include a net COVID headwind of approximately $35 million similar to what we saw in Q1.
Primarily the impact of excess mortality on volume and elevated PPE costs partially offset by sequestration relief and reduced travel and meeting expenses.
In Q2 treatments per day increased by 0.4% compared to Q1.
Excess mortality declined significantly in Q2 from approximately 3,000 in Q1 to fewer than 500 in Q2.
At this point, we are cautiously optimistic that the worst is behind us.
But we're closely monitoring the potential impact of the delta Varian especially within pockets of the country that have lower vaccination rates.
Longer term, we continue to believe that we will return to pre-pandemic treatment growth levels with an additional tailwind from lower than normal mortality rate.
Our US dialysis revenue per treatment grew sequentially by almost $6 this quarter, primarily due to normal seasonal improvements from patients meeting their co-insurance and deductible obligations.
We also saw favorable changes in government rate and mix including the continued growth in the percentage of patients enrolled in Medicare Advantage.
Patient care costs and G&A expense per treatment in total were relatively flat quarter-over-quarter.
Our patient care costs decreased sequentially primarily due to reductions in labor costs.
Our G&A increased slightly, primarily due to charitable contributions and increases in personnel costs.
As expected, our US dialysis and lab DSO decreased by approximately six days in Q2 versus Q1.
Primarily due to collections on the temporary billing holds related to the winter storms in the first quarter.
The majority of the impact of the storms on DSO and cash flow, we reversed in Q2.
But we may see an ongoing smaller benefit through the balance of the year.
During the second quarter, we generated a gain of approximately $9 million on one of our DaVita Venture Group investments which hit the other income line on our P&L.
We have a small investment in medical that recently went public.
The value of this investment at quarter end was $23 million going forward market-to-market every quarter.
Now turning to some updates on the rest of this year and some initial thoughts on 2022.
As Javier mentioned, we are raising our guidance ranges for 2021 as follows.
Adjusted earnings per share of $8.80 to $9.40.
Adjusted operating income of $1.8 billion to $1.875 billion and free cash flow of $1 billion to $1.2 billion.
Also we now expect our 2021 effective tax rate on income attributable to DaVita to be between 24% and 26% lower than the 26% to 28% range that we had communicated at the beginning of the year.
These new guidance ranges exclude the potential impact of a significant fourth COVID surge later this year.
I'll call out two notable potential headwind during the second half of the year.
First is COVID we continue to expect the impact of excess mortality will be higher in the back half of the year than in the first half of the year due to the compounding impact of mortality through 2021.
We're also expecting an uptick on costs related to testing, vaccinations and teammate support as a result of the delta variant.
As a result, we are increasing the middle of the range of COVID impact for the full year to $170 million from $150 million.
That implies a $30 million headwind from COVID in the second half of the year compared to the first half of the year.
As a reminder, this is the middle of what is a wide range of possible impacts depending on the impact of the delta or other variance and any additional COVID mandate.
Second, we expect to experience losses in our US ancillary segment of approximately $70 million in the second half of the year compared to $50 million in the first half of the year.
This incremental loss is due primarily to new value based care arrangements and start-up costs associated with the CKCC program that launches in 2022.
Looking forward to 2022 we do not expect anything unusual among the primary drivers of the business, including RPT, cost per treatment or capital expenditures.
However we expect pressure on OI growth from the increased spend on growing our IKC business, the possibility of union activity in 2022 that we did not face in 2021 and the first year of depreciation expense associated with our new clinical IT platform that we have been developing for the past several years.
We will provide more specific 2022 guidance on a future earnings call.
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2nd quarter 2021 results.
q2 earnings per share $2.64 from continuing operations.
sees fy 2021 adjusted diluted net income from continuing operations per share attributable to davita $8.80 - $9.40.
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As Christine mentioned, I'm Christine Cannella, Vice President, Investor Relations with Fresh Del Monte Produce Inc. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Eduardo Bezerra, Senior Vice President and Chief Financial Officer.
You may also visit the company's website at freshdelmonte.com for a copy of today's release, as well as to register for future distributions.
With that, I am pleased to turn today's call over to Mohammad.
I'm pleased with our overall performance in the third quarter.
Net sales totaled $1.1 billion, gross profit increased 42% from last year's third quarter, and we generated earnings per share on an adjusted basis of $0.35 per share, up from a loss per share of $0.14 a year ago.
During the quarter, we continued to make progress on our strategic objectives, as we transform our company to a value-added higher margin business.
Disrupting the legacy of being a volume based banana business.
Much of the improvement came from our fresh and value-added business segment.
Most notably, our fresh-cut fruit product line in North America.
We continue to see strong demand from existing and new customers.
Our new fresh-cut unit in Yokohama, Japan is on track to open in the first quarter of 2020, and we have begun expansion of our existing fresh-cut facilities in the UK.
This will allow us to keep pace with global demand trends and expand our foodservice and retail customer base.
Our vegetable business through Mann Packing also performed well during the third quarter.
As part of our meals and snacks product line, we were excited to see the launch of our Better Break line of vegetable rich convenience snacks.
We are moving ahead, as well with some of our newest and biggest opportunities.
For example, we continue to grow our foodservice partnerships across the Middle East, Asia and Europe, which is increasingly a focus of new business for us.
We are also on schedule to open our fresh food and beverage store in the United States during the first quarter of 2020 in Coral Gables.
This concept has proven itself in the Middle East and we are looking forward to the possibilities in the United States.
We are about to bring our new state-of-the-art avocado packing facilities online in Mexico, which will give us even more control over our supply.
This should improve our margin and secure new additional sourcing opportunities to serve the rapidly expanding consumer market for avocados.
We recently released on our website, the latest corporate social responsibility report highlighting Fresh Del Monte's commitment to making a better world tomorrow.
Sustainability has always been a part of who we are and what we do every day.
We recognize setting and meeting our sustainability goals is an opportunity for us to positively impact people and the environment.
We look forward to building on our momentum as we advance our efforts to meet all our corporate responsibility goals and make a better way tomorrow.
In summary, we remain committed to transforming the company growing our product lines, increasing shareholder value and inspiring healthier lifestyles for generations to come.
Our financial performance in the third quarter demonstrates that our strategy to evolve Fresh Del Monte to our value-added, efficient, profitable and more focused business is under way.
For the third quarter of 2019, adjusted net income per diluted share was $0.35, compared with an adjusted loss per diluted share of $0.14 in 2018.
Net sales were in line with the prior year period.
Adjusted gross profit increased 42% to $75 million in the third quarter of 2019, compared with $53 million in 2018.
Adjusted operating income for the quarter increased to $25 million, compared with $3 million in the prior year.
And adjusted net income was $17 million, compared with an adjusted net loss of $7 million in the third quarter of 2018.
Turning to our business segments and key product lines.
In our fresh and value-added business segment for the third quarter of 2018, net sales were $653 million, compared with $640 million in the prior year period.
Primarily as a result of higher net sales in our fresh-cut fruit, avocado and vegetable product line, partially offset by lower net sales in our pineapple and non-tropical product lines.
Gross profit increased 27% to $54 million, compared with $42 million in the third quarter of 2018, primarily due to higher gross profit in our fresh-cut, pineapple and vegetable product lines.
Our gross profit margin for the segment improved by 1.6 percentage point, maintaining the growth trend of the first half of 2019.
In our pineapple category, net sales decreased to $102 million, compared to $112 million in the prior year period.
The result of lower production volumes, due to adverse growing conditions in our production areas.
The decrease was offset by higher selling prices in North America and Europe.
Overall volume was 20% lower, unit pricing was 14% higher and unit cost was 7% higher than the prior year period.
In our fresh-cut fruit category, net sales were $145 million, compared with $132 million in the prior year period, primarily due to higher sales volume and higher selling prices in North America.
Overall volume was 10% higher, unit pricing was 1% higher and unit cost was 2% lower than the third quarter of 2018.
In our fresh-cut vegetable category, net sales increased to $124 million, compared with $123 million in the third quarter of 2018.
The increase was primarily the result of higher selling prices.
Volume was 9% lower, unit pricing was 11% higher and unit cost was 9% higher than the prior year period.
In our avocado category, net sales increased to $98 million, compared with $85 million in the third quarter of 2018, supported by higher selling prices as a result of tight industry supply.
Volume decreased 8%, pricing was 26% higher and unit cost was 28% higher than the prior year period.
In our fresh vegetable category, net sales increased to $46 million, compared with $40 million in the third quarter of 2018, due to higher sales volume and increased selling prices.
Volume increased 9%, unit price increased 6% and unit cost was 1% lower.
In our non-tropical category, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry and kiwi product lines.
Net sales decreased to $32 million, compared with $42 million in the third quarter of 2018, primarily due to planned rationalization of low-margin products in this category beginning in 2018.
Volume decreased 22%, unit pricing was in line with the prior year period and unit cost was 2% lower.
In our prepared food category, which includes our traditional canned products and meals and snacks product lines.
Net sales increased, due to higher sales volume, gross profit was impacted by lower selling prices in the traditional prepared product lines.
In our banana business segment, net sales were $386 million, compared with $397 million in the third quarter of 2018, primarily due to lower net sales in North America and Asia, partially offset by higher sales in the Middle East and Europe.
Overall volume was 7% lower than last year's third quarter, worldwide price increased 4% over the prior year period and total worldwide banana unit cost was 3% higher than the prior year period and gross profit increased to $17 million, compared with $10 million in the third quarter of 2018, reflecting a 1.7 percentage point increase in gross profit margin.
Now moving to selected financial data.
On selling, general and administrative expenses, we were in line with the prior year period.
Regarding foreign currency, our foreign currency was impacted at the sales level for the third quarter with an unfavorable impact of $7 million, and at the gross profit level the impact was unfavorable by $2 million.
Interest expense, net for the third quarter was $6 million compared with $7 million in the third quarter of 2018, due to lower debt and volume.
Income tax expense was $3 million during the quarter, compared with income tax expense of $1 million in the prior year, mainly due to higher taxable earnings in North America.
At the end of the quarter, our cash flow -- cash from operating activities was $130 million, compared with net cash provided by operating activities of $271 million in the same period of 2018, primarily due to lower accounts payable and accrued expenses, partially offset by higher net income.
At the end of the quarter, we were able to reduce our debt by an additional $50 million to $590 million from $640 million at the end of the second quarter of 2018.
In October 2019, we amended and restated our $1.1 billion unsecured credit agreement and extended the credit facility until October 2024, with a more favorable rate.
We also included an accordion feature that could increase the availability by, up to $300 million.
And we are pleased to have the continued support of our lenders and appreciate the confidence they maintain in Fresh Del Monte's future.
As it relates to capital spending, we invested $94 million on capital expenditures in the first nine months of 2019, compared with $119 million in the same period in 2018.
This is a 33% or $0.02 increase over the dividend paid in September 2019.
This concludes our financial review.
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fresh del monte produce q1 earnings per share $0.90.
q1 adjusted earnings per share $0.88.
q1 earnings per share $0.90.
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I'm Rebecca Gardy, Head of Investor Relations at Campbell Soup Company.
These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
As stated in the release from this quarter onwards adjusted net earnings will exclude unrealized mark-to-market gains and losses on outstanding undesignated commodity hedges until such time that the related exposure impacts operating results.
Accordingly, fiscal 2021 adjusted results and guidance for adjusted EBIT and adjusted earnings per share growth rates reflect this change.
Also beginning this fiscal year, the foodservice and Canadian business formerly included in the Snacks segment is now managed as part of the Meals & Beverages segment.
Segment results have been adjusted retrospectively to reflect this change.
On Slide four, you'll see today's agenda.
Mark will share his overall thoughts on our first quarter performance, as well as in-market performance by division.
Mick will discuss the financial results of the quarter in more detail, and then review our guidance for the full-year fiscal 2022.
Organic net sales were down 4% for the quarter, driven by the expected lapping of prior year retailer inventory replenishment, as well as constrained supply in the current quarter.
We were however, up 5% versus fiscal 2020 and consumption was, up 2% versus prior year and up 9% versus two years ago, signaling strong persistent consumer demand.
This dynamic resulted in a 6 point difference in net sales versus consumption in measured channels, a relationship we do not expect to continue through the remainder of the year.
Like many of our competitors and customers, we faced supply chain pressures, particularly around labor constraints and transportation capacity and our net sales results reflect those pressures.
I'm very proud of how our teams navigated costs related to this volatility.
Their strong execution combined with effective pricing actions across both segments, led to adjusted EBIT and adjusted earnings per share results consistent with our expectations and in line or ahead of two years ago.
On Slide seven, with end-market demand remaining strong across both of our segments and the pricing actions we announced at the end of our prior fiscal year now reflected on shelf.
We feel confident about the outlook for the full fiscal year.
We recently announced additional inflation justified pricing actions to offset continuing increases in ingredient and packaging costs, logistics and labor.
This second round of pricing should be effective in January and evident on shelf in the third quarter.
This will result in some added pressure in Q2 as pricing catches up with more recent inflation, but moving into the second half we expect margin progress and earnings recovery as we use all of our available mitigation tools.
To address labor challenges in our network, we have taken specific actions and see early signs of improvement, such as increased on-boarding, lower absenteeism and improved retention.
We've seen a recent uptick in the volume produced across the plants and we expect to begin to rebuild our inventories in the second quarter, but not fully recover until the second half.
Our ingredient and packaging spend, we are now over 85% covered, thereby reducing the variability in the upcoming quarters, while we continue to deliver on our supply chain productivity improvements and our cost savings initiatives.
In addition, we've made selective supply related reductions in marketing and selling investments in the first quarter, which we expect to reverse and fully return to targeted levels as we move into the second half of the year.
Labor and supply challenges are impacting certain brands to a greater extent than others creating some short-term share and consumption pressure.
We expect this to be evident, particularly through the second quarter as we cycle through recovery on labor and supply.
With the strength of our brands in the share gains that have been so consistent and broaden our business over the last two years.
We remain very confident that share positions will improve, once we return to full capacity and investment in the second half of the fiscal year.
Turning to our Meals & Beverages division, I continue to be pleased by the underlying health of the portfolio and the performance of the brands.
Organic net sales were down 6% versus prior year, lapping 11% growth in the prior year and up 5% versus fiscal 2020.
Consumption though flat year-over-year was, up 9% versus two years ago, reflecting the strength of demand for our products.
Turning to Soup on Slide 10, our Win in Soup strategy continues to show positive results.
We retained households and held share in the quarter.
More people are participating and remaining in the soup category than pre-pandemic levels.
Household penetration on ready-to-serve condensed eating and Swanson broth are all ahead of the prior year.
Additionally, compared to prior year the dollar spent per buyer increased as our pricing actions took effect.
While volume per buyer remained flat reflecting the health, relevance and sustained momentum of our brands.
These compelling data points provide evidence that we are retaining our expanded consumer base, despite consumer mobility increasing, returning competition and our inflation driven higher price points.
US Soup consumption grew 2% over elevated levels in the prior year.
Bringing growth versus two years ago to 9%.
Repeat rates and household penetration remained ahead of two years ago on Pacific Foods, ready-to-serve, condensed and Swanson broth.
Condensed dollar share was down slightly in the quarter, however, we continue to be encouraged by evidence to quick-scratch cooking behavior continues.
And our consumer tracking studies, more than a third of the people surveyed indicated that they cook more compared to the prior month.
Additionally, we are seeing the need for quicker meal preparation as consumer shift to hybrid work arrangements, leading to the need for quicker lunches, while working from home and preparing dinners after returning from the workplace.
This is driving an overall increase in our eating share interestingly with our strongest growth in condensed eating coming from millennials.
As you may have noted in more recent periods, we are seeing some recovery of private label in the condensed segment.
This is not unexpected given the recovery from an extended period of supply constraints.
It's important to note, our two-year share gains remain very strong and we remain very confident in our overall competitive position versus private label as we move forward with continued strong support and programing.
Ready-to-serve increased share in the quarter, including over 3 points of share gains among millennials.
Within ready-to-serve Chunky had a very strong quarter, increasing consumption 8% on top of 2% growth in the prior year quarter and grew share by 0.6 points versus prior year.
This is despite elevated promotional levels from competition.
On Swanson broth, we also grew share by 1.6 points, representing the third consecutive quarter of growth as supply recovery continued.
Our Pacific Foods growth engine delivered its eighth consecutive quarter of holding or growing share, driven by sustained momentum on broth, despite remaining supply challenges due to labor pressures paired with high demand.
Turning to Sauces, Prego remain the number one share leader for 30 straight months.
However, short-term material availability is adding pressure on supply and creating more recent pressure on shares, which we expect to improve as we fully recover on inventory in the second half.
Pay share began to improve in Q1 and grew households, compared to prior year.
We see pace continuing to improve throughout the year.
I want to conclude my comments on Meals & Beverage by highlighting an important underlying trends.
Across the Meals & Beverage portfolio, we continued to show strong performance with younger households.
The percentage of buyers under the age of 35 has increased versus the prior year quarter on nearly all key brands.
Specifically on US Soup, the percentage of buyers under 35 increased almost 2 points this quarter and the average age of Campbell Soup consumers are getting younger.
The millennial cohort is the fastest growing segment in condensed eating, ready-to-serve and broth.
Importantly, as we look beyond the current short-term volatility and begin to assess the ability for Meals & Beverages to continue to contribute growth into the future.
This dynamic is a very important indicator and supports our efforts to increase relevance with a new generation of consumers.
Organic net sales were, down 1%, primarily due to labor-related supply constraints, but grew 4%, compared to fiscal 2020, in-market performance was strong growing 5% over the prior year quarter and 9% on a two-year basis.
This dynamic has resulted in low levels of retail inventory that we're working on and expect to recover through the second half of the fiscal year.
Our power brands continue to fuel performance with in-market consumption growth of 6% this fiscal year and 13% on a two-year basis, driven by double-digit consumption growth across the majority of our brands.
We are pleased to see repeat rates on all eight power brands ahead of the prior year and compared to fiscal 2020.
Goldfish performed very well in the quarter, increasing share by half a point and growing consumption high single-digits versus prior year behind strong marketing activation, improved performance in multi-packs and continued successful limited addition flavor innovations resulting in improved base velocities and increased household penetration.
We are winning with consumers, gaining share and driving significant consumption increases.
Innovation continue to be a key growth driver with limited addition Goldfish Jalapeno Popper being the Number One velocity new item launched in the cracker category in the quarter, marking the second quarter in a row, we achieved this metric with our limited edition flavor innovations.
We also continue to increase the relevance additional [Phonetic] kids audience with 60% of new buyers being households with our kids.
We continued to drive share growth on other brands as well, including Snack Factory pretzel crisps by 2.5 points, Kettle Brand potato chips by more than a point and Cape Cod potato chips 2.6 points.
However, as previously mentioned, labor availability on certain Snacks segments is putting pressure on share in several areas.
In particular, cookies Lance crackers, Late July and Snyder's of Hanover pretzels in the quarter.
We are making good progress on recovering, but do expect some of these headwinds to persist into Q2, more broadly recovering in the second half.
As I mentioned earlier, we continue to be pleased with the speed and progress we have made to address the executional pressures experienced last year.
Although, we will still lap a challenging Q2 as we deal with the [Technical Issues] half of the year with progress on margins and shares.
Given our solid first quarter results and their consistency with our expectation [Technical Issues] our full-year guidance.
As previously mentioned while we expect to still have a difficult comparison in Q2 as we lap year ago strength and begin to recover on labor and supply pressures.
We remain very confident in our expectations of positive second half performance and momentum exiting the year.
We look forward to sharing our strategy to unlock our longer-term full growth potential next week at our Investor Day.
Turning to Slide 17, as Rebecca mentioned at the start of the call from this quarter onwards we will exclude from adjusted net earnings, unrealized mark-to-market gains and losses on outstanding undesignated commodity hedges, until such time that the related exposure impacts operating results.
Our adjusted financial results and guidance reflect this change.
For the first quarter as we left 8% growth in the prior-year, organic net sales declined 4%, due to the anticipated cycling of year ago retailer inventory recovery and supply pressures.
The resulting year-over-year fall in [Phonetic] decline more than offset the favorable impact of net pricing in the quarter.
As Mark highlighted earlier consumer demand remains strong in [Technical Issues] basis were 5% higher, compared to two years ago or the first fiscal quarter of 2020.
Adjusted EBIT decreased 15%, compared to prior year, it was 1% higher on the two-year basis, despite the significant levels of inflation on ingredients, packaging, labor, warehousing and logistics.
Our adjusted EBIT margin was 17.4%, compared to 19.5% in the prior year and slightly down from fiscal 2020.
Adjusted earnings per share from continuing operations decreased $0.12 or 12% versus prior year to $0.89 per share, but remains well ahead of fiscal 2020.
On the next Slide, I'll break down our net sales performance for the first quarter.
As I mentioned, the impact of lapping the post-COVID search retailer inventory recovery and supply constraints largely related to industrywide labor challenges along with select material constraints, held back our ability to meet the continued elevated demand.
The operations team continue to execute well in a challenging environment.
Organic net sales decreased 4% during the quarter, driven by a 6 point volume headwind, which reflects lapping of the prior year retailer inventory recovery and the before mentioned supply constraints.
Favorable price and sales allowances drove a 4 point gain in the quarter, which was partially offset by a 2 point headwind due to some spend back on promotional spending in the quarter closer to pre-pandemic levels.
The impact of the sale of Plum subtracted 1 point.
All in our reported net sales declined 4% from the prior year.
Turning to Slide 19.
Our first quarter adjusted gross margin decreased by 200 basis points from 34.5% last year to 32.5% this year.
Mix had a negative impact of approximately 70 basis points on gross margin as we cycled last year's retail inventory recovery and favorable operating leverage.
Net price realization drove a 190 basis point improvement, due to the benefits of our recent pricing actions, partially offset by increased promotional spending.
Inflation and other factors had a negative impact of 470 basis points with the majority of the decline driven by cost inflation as overall input prices on a rate basis increased by approximately 6%.
Along with other industry participants, we experienced significant inflation across all input cost categories, including ingredients, packaging, labor, warehousing and logistics.
That said, our ongoing supply chain productivity program contributed 120 basis points to gross margin, partially offsetting these inflationary headwinds.
Our cost savings program, which is incremental to our ongoing supply chain productivity program added 30 basis points to our gross margin.
The previously described initiatives to mitigate inflation highlighted on the next page, include price increases and trade optimization, supply chain productivity improvements and cost saving initiatives and a continued focus on discretionary spending across the organization.
We remain focused on inflation mitigation as we continue to expect core inflation for the year to be high single-digits with a more pronounced impact in the second half of fiscal 2022.
As you saw on the previous page, the progress we made in the first quarter to mitigate these inflationary pressures reduced the impact to 130 basis points on our adjusted gross margin.
Moving to the next Slide.
We have achieved $15 million in incremental year-over-year savings and remain on track to deliver our cumulative savings target of $850 million by the end of fiscal year.
We are working toward expanding our plan to $1 billion and we'll share more details next week at our Investor Day.
Moving on to other operating items.
Marketing and selling expenses decreased $38 million or 18% in the quarter on a year-over-year basis.
This decrease was driven by lower advertising and consumer promotion expense or A&C and lower selling expenses.
Although, A&C declined 31% as investment was moderated to reflect supply pressure, we expect it to normalize as supply strengthened throughout the year.
Overall, our marketing and selling expenses represented 7.6% of net sales during the quarter and 130 basis point decrease, compared to last year.
Adjusted administrative expenses increased $17 million or 12% largely, due to expenses related to the settlement of certain legal claims as higher general administrative costs were largely offset by the benefits of cost savings initiatives.
Adjusted administrative expenses represented 6.9% of net sales [Technical Issues] to summarize the key drivers of performance this quarter.
As previously mentioned adjusted EBIT decline 15% as the net sales declined and the 200 basis points gross margin contraction, resulted in a $36 million and $44 million EBIT headwinds respectively, partially offsetting this was lower marketing and selling expenses, contributing 130 basis points to our adjusted EBIT margin.
This was a short-term action targeted in areas by supply constraints were most significant and we expect to fully return to targeted investment levels as soon as labor is in place and supply recovers.
Higher adjusted administrative and R&D expenses had a negative impact of 110 basis points and lower adjusted other income had a 30 basis point impact.
Overall, our adjusted EBIT margin decreased year-over-year by 210 basis points to 17.4%.
The following chart breaks down our adjusted earnings per share change between our operating performance and below the line items, a $0.17 impact of lower adjusted EBIT was partially offset by a $0.02 favorable impact from lower interest expense and a $0.04 impact of lower adjusted taxes, due to the favorable resolution of several tax matters in the quarter.
This resulted in better-than-expected adjusted earnings per share of $0.89, which was down $0.25 per share, compared to the prior year.
Turning to the segments, in Meals & Beverages organic net sales decreased 6%, as favorable price and sales allowances in the quarter were more than offset by volume declines across US retail products, including V8 beverages, Prego pasta sauces and US Soup, as well as in Canada.
Volume decreased primarily as a result of cycling the retailer inventory recovery in the prior year quarter and due to supply constraints, increased promotional spending relative to moderated levels in the prior year, partially offset the impact of recent price increases.
Sales of US Soup decreased 2%, cycling 21% increase in the prior year quarter.
Operating earnings for Meals & Beverages decreased 17% to $280 million, the decrease was primarily due to a lower gross margin and sales volume declines, partially offset by lower marketing selling expenses.
The lower gross margin resulted from higher cost inflation, higher levels of promotional spending, higher other supply chain costs and unfavorable product mix, partially offset by the benefits of recent pricing actions and supply chain productivity improvements.
Overall, within our Meals & Beverage division, the first quarter operating margin decreased year-over-year by 260 basis points to 22.1%.
Within Snacks, organic net sales decreased 1% to $1 billion, as favorable price and sales allowances were more than offset by volume declines and increased promotional spending, compared to moderated levels in the prior year quarter.
Declines in partner brands Pop Secret popcorn, driven by elevated prior year demand and Late July snacks due to supply pressures were partially offset by gains in Goldfish crackers and Pepperidge Farm cookies.
Sales of power brands increased 30%.
Operating earnings for Snacks decreased 5% for the quarter, driven by increased administrative expenses, due to the settlement of certain legal claims and a slightly lower gross margin, partially offset by lower marketing and selling expenses.
The slight decline in gross margin resulted from higher cost inflation, unfavorable product mix and higher level of promotional spending, largely offset by the benefits of recent pricing actions.
Supply chain productivity improvements and cost savings initiatives and lower other supply chain costs.
Overall within our Snacks division first quarter operating margin decreased year-over-year by 60 basis points to 13.2%.
I now turn to cash flow and liquidity.
Fiscal 2022 cash flow from operations increased from $180 million in the prior year to $288 million, primarily due to lower working capital related to outflows mostly from accounts payable and accrued liabilities, partially offset by lower cash earnings.
Our year-to-date cash outflows for investing activities were reflective of the cash outlay for capital expenditures of $69 million, which was comparable to prior year.
In light of the current operating environment, we are reducing our planned full-year capital expenditures from $330 million to approximately $300 million for fiscal 2022.
Our year-to-date cash outflows for financing activities were $220 million, the vast majority of which are $179 million, represented the return of capital to our shareholders, including a $160 million of dividends paid and $63 million of share repurchases during the quarter.
At the end of the first quarter we had approximately $475 million remaining under the current $500 million strategic share repurchase program.
We also have $250 million anti-dilutive share repurchase program, of which approximately $176 million is remain.
We ended the first quarter with cash and cash equivalents of $69 million.
Turning to Slide 28, as covered earlier, adjusted net earnings now excludes unrealized mark-to-market gains and losses on outstanding underestimated commodity hedges and the guidance for adjusted EBIT and adjusted earnings per share growth rates reflect this change.
We continue to expect full-year fiscal 2022 net sales, adjusted EBIT and adjusted earnings per share performance to be consistent with the guidance we provided during our fiscal year-end earnings call.
Overall, we expect accelerating inflationary pressures and higher labor-related costs to be partially mitigated with sustained in-market momentum, while at prior year results in the second quarter, we expect topline performance to improve sequentially year-over-year, as supply begins to recover.
However, with respect to margin, we expect continued pressure driven by additional core inflation across commodities and higher labor-related costs without the benefit of our second wave of pricing, which will not be in place until the end of the second quarter.
As we move into the second half of the year, we expect our inflation mitigation actions collectively along with the continuous recovery of labor to result in margin progress and earnings recovery through the year.
For the full-year, we expect organic net sales to be minus 1% to plus 1%.
Adjusted EBIT of minus 4.5% to minus 1.5% and adjusted earnings per share of minus 4% to flat versus the adjusted fiscal 2021 results.
The sale of Plum is estimated to have an impact of 1 percentage point of fiscal 2022 net sales.
I'm truly grateful for their continued dedication and commitment and look forward to sharing our strategy to unlock our full growth potential at our Investor Day next week.
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q1 adjusted earnings per share $1.02 from continuing operations.
increases quarterly dividend by 6% to $0.37 per share.
qtrly organic net sales increased 8%.
sees q2 2021 net sales up 5% to up 7%.
sees q2 2021 adjusted earnings per share $0.81 to $0.83.
remains on track to deliver annualized savings of $850 million by end of fiscal 2022.
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First, I hope you're all safe and healthy in light of the current challenges.
, we continue to control what we can control, and to make the health and well-being of our teams, our customers and the communities we serve, our highest priority.
Fortunately, with good planning and careful execution, we have been able to protect our people effectively.
I'm very pleased to report that our team continues to excel in this environment.
At times like these resilience, the ability to adapt, fast decision making and strong execution are proving critical to win and our team has exhibited every one of these trades at every turn.
This crisis continues to test us all and now with second waves in multiple places, it is clear that we are not running a sprint by the Marathon.
We continue to stay focused on servicing our customers well; managing our cost structure tightly; optimizing margins and controlling our inventories balance sheet and liquidity.
You are doing a great job and you make us very proud.
I will now spend a few minutes on our results for the third quarter and then I will touch on how we are approaching the holiday selling season.
After that I will comment on our strategic business planning process and highlight key accomplishments for the period.
I'm pleased to report that we had a very good third quarter where we exceeded our top line expectations and delivered a very strong bottom line, reporting adjusted earnings per share of $0.58 versus $0.22 last year.
In the quarter, we more than doubled our adjusted operating profit and achieved an adjusted operating margin of 9.7%, which represents a 600 basis points expansion versus last year.
It's worth noting that we delivered strong earnings on an 8% decrease in revenues for the period.
In a very challenging environment, we achieved very solid gross margin performance and deliver healthy operating margin expansion in most of our businesses.
The most significant improvement was driven by our business in Europe, which benefited from increased wholesale revenues.
We enable the increased revenues when we elongated the fall winter season shipping window and canceled the development of the pre-spring-summer line.
This proved to be a great strategy and represented a revenue increase in the period for Europe of about $50 million.
Total Q3 revenues for Europe increased 16% and operating profit exceeded $51 million delivering a margin expansion of 900 basis points for the period.
As we continue to focus on key product categories that represent the foundation of our business for women's and men's.
During the quarter essentials, active wear, denim, accessories and shoes outperform the overall business.
We managed our balance sheet well and ended the period with cash and equivalents of $365 million and inventories 24% below last year's levels.
As we look into the holiday season, we believe that we are well positioned with our product; our marketing plans and our teams preparedness across the globe.
Let me give you some color of what we are experiencing in our business now and then Katie will quantify the financial impact of each factor.
Starting with retail, customer traffic into our stores continues to be challenged by the pandemic, especially during traditionally high traffic periods like Black Friday.
That said those customers coming into the stores have a higher intention to purchase and this has consistently resulted in higher conversion rates.
Temporary government mandated shutdowns are also impacting several markets, especially in Europe and Canada, where we have significant businesses.
We are pleased to see that our e-commerce business is accelerating, partially offsetting the negative store trends.
Regarding our wholesale business in Europe, as I mentioned, we made the decision to cancel the development of the pre-spring-summer line to consolidate the development of spring-summer products into one main collection versus two in the past.
This change will result in a smaller percentage of the shipments of that main collection occurring in the fourth quarter, that compared to last year.
With the majority of the shipments to be completed in Q1 of next year.
In connection with this, we recently closed the spring-summer sales campaign, which delivered orders that were only slightly below the two collections combined in the previous year.
This results exceeded our expectations and demonstrate the great momentum that the brand is enjoying with our wholesale customers across Europe.
I believe that many of our wholesale customers are concentrating their price within fewer, stronger, highly reliable brands and we are clearly one of those preferred brands.
So we are getting a bigger share of their base.
We continue to plan our business based on expected demand and size, our inventories and expenses accordingly.
We are confident in our assortments and our product ownership and have been pleased to see that the level of promotional activity in the marketplace remains moderate.
As we said in our previous call, we are in the process of updating our strategic business plan and we will schedule an event to share our plan at a later date.
Let me just confirm today that we still believe that the opportunities we had identified to expand operating margins by 500 basis points are still intact.
For now, I will update you on the progress that we are making on some of our key initiatives and how we are leveraging the crisis to accelerate change.
I will speak specifically about the elevation of our brand, our customer centricity initiative and our organizational development strategy.
Elevating the customers' perception of our brand starts with our product; product in our business has always been and continues to be king; offering a consistent line of product across all markets is a very ambitious goal when you have a global presence that reaches nearly 100 countries.
I am thrilled to report that for the first time ever, we now have one global line of products across all categories; including women's and men's apparel, at leisure, lingerie, all accessories including handbags, footwear, kids MARCIANO for women's and men's and jewelry.
Having one global line will enable us to represent our Guess?
brand consistently across all markets and significantly reduce product development costs throughout our supply chain.
Hundreds of starts per season, which in the past were developed in each region and now represented by one common line for all markets.
Just as an example, the new line development for the next pre-fall/winter season for Guess?
apparel resulted in a style reduction of 38% and this is after expanding the offering with multiple colors per stall, for e-commerce that represented a 7% increase of product choices online.
I think that Paul and the product teams in all of our regions did an incredible job to make this happen.
It took strong vision, tremendous courage and great teamwork to achieve this, and deliver a line of product that can serve all global markets effectively.
To elevate the brand takes a strong commitment to raise the quality of everything we do.
This commitment starts with the quality of our products.
In order to accomplish this, we reviewed every product, challenge the styling, Guess?
DNA alignment, the quality and sustainability of full [Phonetic] fabrics and materials; make and fit; perceived value and price.
Today, we have a line that speaks to a larger audience with consistent stalling between genders solidly grounded in the Guess?
DNA, offering a strong point of view on differentiation in the marketplace.
We have beautiful products offering our customers tremendous value for the price and quality of each item.
I strongly believe that our product strategy will contribute to profitable market share gains.
We continue to make great progress with our sustainability goals.
In fact PR News recently named Guess?
the winner for best sustainability CSR Report 2020.
We were honored to be recognized alongside iconic global brands like PepsiCo and Johnson & Johnson.
Our commitment to elevate the quality of everything we do is also impacting other areas of the business; including the customer experience in stores, our websites, digital media and marketing campaigns.
The focus assortments and boutique feeling that you experience when you walk into our stores now represent a stark contrast to what we had a year ago.
I just visited stores in Italy a few weeks ago, I was very impressed with the overall experience.
As an example for next summer in Europe, we planned an SKU reduction in stores of about 35% and then SKU expansion online of 9%.
We planned to run the business with an omnichannel customer focus, regardless of where the customer chooses to shop and engage with our brand.
Our goal is to leverage our entire assortment and inventory ownership with omnichannel capabilities; such as buy online, ship from store or buying store from our larger assortment online and ship from the e-commerce warehouse.
These capabilities are available in the Americas today and will be fully implemented in Europe next year.
Next is our initiative about customer centricity, which we introduced last year.
As you know since the pandemic began, we have been working hard to accelerate the implementation of our plan.
We are pleased to report that we have completed the implementation of the salesforce platform in the US and Canada and all over Europe except for Russia, which is scheduled for next February.
We are very pleased with the speed and overall performance of the platform and are confident it enables a significantly faster and improved customer experience, better conversion and engagement and it will contribute to significant growth of our digital business.
We also made significant progress with our Customer 360 project.
This suite has also been developed by salesforce and is an integrated tool to optimize customer data capture, journey engagement, personalized marketing and results analysis.
We have already implemented the customer service and marketing cloud solutions, which are part of the suite and we are currently working on the social studio obligation.
We plan to complete the full implementation of the Customer 360 solution by the end of next year.
The third initiative relates to our global organizational development strategy.
We plan to optimize performance management and accountabilities.
We'll be eliminating redundancies across our global organization, leveraging technology to do a lot more with less in every area of our operation.
Our goal is to complete the implementation of this project by the end of next year as well.
In closing, since Guess?
started 40 years ago, the company has always adapted its business very effectively to the challenges presented by the market, the environment and new customer preferences.
Throughout its entire history, this company has evolved successfully time and time again.
I strongly believe that today presents our company with yet another opportunity to transform our business and increase our earnings power.
I also believe that we have the team to accomplish this and I look forward to the years of growth to come.
With that, let me pass it to Katie.
So today is my one-year anniversary at Guess?
, exactly a year ago we were presenting our strategic business plan to you, little did I know then that we were going to have the year that would follow.
Today, I am very proud to report our results for the third quarter, which I believe demonstrate the power of agile planning and solid execution.
In the midst of a very challenging environment, we delivered substantial sequential improvement in sales, exceeding our expectations, significantly expanded operating margins and tightly managed inventory and working capital.
We are extremely happy with our liquidity position, which is especially strong given the extraordinary circumstances that we have faced so far this year.
This is evidence that we've been able to adjust our cost structure and capital spending to partially offset the deceleration in demand that our industry has experienced throughout the pandemic.
But as importantly as knowing what the cut is knowing when and where to invest to fuel future growth in the company, while maintaining liquidity and profitability.
We continue to support our efforts in digital and omnichannel initiatives, as well as investments to support long-term cost savings.
And we continue to return value to our shareholders.
Our Board has approved the payment of the cash dividend again this quarter.
As I said, last time we spoke, our long-term capital allocation strategy has not changed.
Now, let me take you through some of the details on our performance for the quarter.
Let's start with sales.
Third quarter revenues were $569 million, down 8% in US dollars and 10% in constant currency.
The biggest driver in our improvement versus last quarter was wholesale in Europe, which was up 39% in constant currency versus last year.
As Carlos mentioned, we elongated the fall/winter season shipping window and canceled the development of the pre-spring/summer line, which resulted in higher revenues this quarter versus last year.
In retail store comps in the US and Canada were down 23% in constant currency in line with Q2 as momentum in the US was offset by softening in Canada, due to traffic declines as a result of the pandemic.
Europe and Asia, both showed an improvement in store sales this quarter.
Store comps were down 18% in Europe in constant currency, we have strong momentum was tempered in the last week of the quarter by shutdowns, due to the second wave of the pandemic.
Store comps were down 17% in Asia in constant currency, driven by strengthening in China and Korea.
Across the globe, we continue to see traffic declines, partially offset by significantly higher conversion with our tourist-centric stores experiencing a tougher recovery.
Our e-commerce business in North America and Europe was up 19% for the quarter, an improvement from up 9% in Q2, driven by momentum in Europe.
Our Americas wholesale business was down 34% in constant currency, still under pressure from the deceleration in demand, but improving each quarter.
Licensing revenues also improved versus Q2, down 12% in Q3.
Gross margin for the quarter was 42.1%, 480 basis points higher than prior year.
Our product margin increased by 200 basis points this quarter, primarily as a result of higher IMU, as well as lower promotions.
Occupancy rate decreased 280 basis points as a result of business mix and rent relief.
This quarter we booked roughly $8 million in rent credits for fully negotiated rent relief deals, mostly in Europe.
We continue discussions with our landlords and we'll realize any additional credits as the negotiations are finalized and signed.
Adjusted SG&A for the quarter was $184 million, compared to $206 million in the prior year, a decrease of $22 million.
We continue to benefit from changes to our expense structure particularly more streamline hourly labor-staffing at the store level, corporate headcount and travel reductions and lower professional fees.
In addition, there were some one-time benefits from government subsidies and decreased advertising in the period versus last year, but these were offset by higher variable costs associated with wholesale shipments.
Adjusted operating profit for the third quarter was $55 million, a 140% more than the operating profit in Q3 last year of $23 million.
Our third quarter adjusted tax rate was 16%, down from 24% last year, driven by the mix of statutory earnings.
Inventories were $393 million, down 24% in US dollars and 25% in constant currency versus last year.
We ended the third quarter with $365 million in cash versus $110 million in the prior year, and we had an incremental $260 million in borrowing capacity.
Capital expenditures for the first nine months of the year were $12 million, significantly lower than what we spent in the same period of the prior year.
Free cash flow for the first nine months of the year was an inflow of $83 million, an increase of $162 million versus an outflow of $79 million last year.
This year we benefited from lower capital expenditures, extended payment terms with our vendors and unpaid rent to landlords while we finalize negotiations.
In addition, last year's outflow included the non-recurring payment of the $46 million European Commission fine.
Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance.
However, let me walk you through how we are thinking about the fourth quarter.
We expect fourth quarter revenues to be down in the low to mid-20s to prior year.
As Carlos mentioned, there are three main factors driving this decrease.
As the pandemic persist worldwide, we expect the continued pressure on customer traffic to negatively impact store sales.
At the same time, the momentum in our e-commerce business will partially offset this decline.
We expect the net effect of these two trends to represent approximately half of the revenue decline in the fourth quarter.
Our businesses in Europe and Canada are currently being impacted by government mandated store closures.
Well, at the height of the closures in November, we had over 200 stores closed, more than half of these have reopened and we expect further openings in the coming days.
These temporary closures, as well as some permanent closures are expected to represent a quarter of the decline.
The last quarter of the revenue decrease is a result of the shift of wholesale shipments in Europe for the spring/summer collection into next year.
In terms of profit, gross margin in the fourth quarter is expected to be slightly down to last year, as IMU improvement is expected to be more than offset by deleverage on lower sales.
Given the expected level of revenue, the seasonality of our business, as well as the mix, we expect SG&A as a percent of sales to delever by approximately 400 basis points versus the prior year.
In closing, I am very pleased with how our company continues to navigate this crisis.
We have proven that our brand is relevant and resilient.
We continue to showcase our team's ability to manage the business through a very fluid situation.
And while we realize that our path to growth may not be linear over the next few months given the uncertainty around the global health crisis, we are as confident as ever in our long-term strategic initiatives.
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compname reports q3 adjusted earnings per share $0.58.
q3 adjusted earnings per share $0.58.
not providing detailed guidance for q4 or full fiscal year ending january 30, 2021.
qtrly asia retail comp sales including e-commerce decreased 15% in u.s. dollars and 18% in constant currency.
expect revenues in q4 of fiscal 2021 to be down in low to mid-twenties.
during q3, continued to experience lower net revenue compared to same prior-year period as it remained challenged by lower demand.
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My name is Larry Sills, Chairman of the Board.
Jim will talk a little more about operations.
Nathan will take a deeper dive into the numbers, and then we'll open it to questions.
Overall, we're very pleased with our performance in the quarter.
We set records for sales and profits.
We were able to consummate a major acquisition with terrific strategic value, and we were able to accomplish this while continuing to navigate the complexities of the ongoing pandemic, including the related supply chain challenges.
We would not have been able to have done this without the tireless efforts of our skilled and dedicated employees who we are just so proud of.
We achieved sales of over $340 million in the quarter, up 38% from the prior year with both divisions having all-time highs.
Comparisons to 2020 are not particularly relevant.
As you are well aware, that was the trough of the downturn for us.
However, when comparing to a more normalized 2019, we are favorable by 12%.
I believe that this has been somewhat aided by a shift back toward the DIFM business, a trend we expect will continue.
Coming out of the pandemic, DIY sorted as people had a certain amount of disposable money to spend and chose to upgrade their vehicles.
We felt that this was not necessarily a durable long-term trend, what was required was for vehicles to get back on the road.
We're now seeing that.
Vehicle miles traveled are nearing normal levels and deferred repairs are occurring.
And while this is good for the whole industry, we believe it is especially so for us as our product categories are more technical in nature and therefore, lend themselves to professional installation.
Let me now go into a review of our two product segments, beginning with Engine Management.
Our top line sales remained quite strong, up 35% versus last year, but also up 7% over 2019.
As discussed on previous calls, we entered 2021 with the loss of a major account.
Therefore, we are pleased to have been able to post positive numbers despite this.
As noted in the release, there were several contributors.
First, we implemented programs with all of our customers to pursue market share gains at the street level.
Early indications are that these were very successful.
Second, we have been aggressively pursuing new business wins with our existing customers, and we are very pleased with our results as our new business awards recover over 1/3 of the lost business on an annualized basis.
Some of this rolled in during the second quarter, while much of it is yet to begin.
Third, we've been busy on the M&A front, and I'll speak more on this in a minute.
And lastly, the general market conditions have been favorable.
Customer POS is well into the double digits over both 2020 and 2019 and was consistently strong month-over-month.
Turning to Temperature Control.
I think it is helpful to remind people that this is a highly seasonal and weather-dependent business.
The first quarter is always light, it's almost entirely preseason and can swing year-to-year depending on the timing of these orders.
The second quarter tends to have two parts.
April and May tend to be a continuation of preseason.
And then in June, the summer heat begins and the channel starts selling through and reordering.
This year, things shifted forward a bit.
We began seeing very strong POS early on in the year, which suggested that the purchases intended to load shelves were selling through, and this trend has continued.
We saw early heat in many parts of the country.
And when combined with the return of miles driven and the associated vehicle maintenance, we enjoyed a record-setting quarter for sales, up nearly 50% from last year and up over 25% compared to 2019.
Customer sell-through has remained very high with elevated summer heat in much of the country, we believe we are in for a good third quarter.
However, similar to Engine Management, here too, we are facing difficult third quarter comparisons to 2020, which was up 25% from '19 and was far and away the biggest third quarter we had ever had in Temperature Control.
Overall, gross margins dipped slightly from the first quarter.
Jim will go into more depth on the drivers when he discusses our operations, but at a high level, margins were aided by strong absorption in our plants due to elevated production levels as we sought to rebuild our inventory.
However, offsetting this, we are also experiencing inflationary headwinds across many of our cost inputs.
Our operating expenses were elevated due to a combination of distribution expenses related to higher sales as well as the cost increases in freight and labor.
However, we were able to achieve very good leverage on our costs due to our strong sales performance, and Nathan will dig a little deeper on this later on the call.
All of these elements combined for record profits as we posted earnings per share of $1.26, which is more than 140% greater than 2020 and nearly 40% greater than 2019.
However, looking forward, it is important to point out that the cadence of the last 18 months was very unusual, making the future difficult to predict.
From a top line perspective, although we entered the third quarter with indications of strong customer sell-through, it's hard to predict how long that can last.
The past 12 months have seen outsized market expansion, which likely includes a certain amount of pent-up demand, and at some point, it will not be a sustainable rate of growth.
From a gross margin standpoint, we anticipate certain pressures as the nonrecurring benefits of favorable absorption fade and elevated supply chain costs persist, though we do believe that the market is amenable to a pass-through of inflation.
Additionally, we will begin to see a slight mix shift to our OE business, which I'll discuss in a bit, and that segment has a different margin profile from the aftermarket.
Lower gross margins, but also lower operating expenses, so it ends up comparable at the bottom line.
When you put all these together and acknowledging the difficulties in forecasting these unusual times, we believe 2019 may provide a better benchmark for second half performance.
I would like to now spend a couple of minutes discussing our progress toward expanding our original equipment business.
For the last several years, we have been growing our penetration in the OE space.
And while we do have a certain amount of passenger car OE, our efforts have been more in niche areas, specifically heavy-duty and commercial vehicles, where product life cycles tend to be longer, technology tends to be more stable and price pressures tend to be less.
This year, we have made two acquisitions in this arena, both previously announced.
On our first quarter call, we discussed the acquisition of a high-tech emission sensor product line from Stoneridge Inc., which we are in the process of integrating into existing SMP locations.
Then at the end of May, we made a larger acquisition.
We acquired Trombetta, a worldwide leader in mechanical and electronic power switching and power management devices, generating about $60 million in annual sales.
Trombetta is headquartered in Milwaukee, Wisconsin, is run by a strong and seasoned management team and employs approximately 350 associates globally in four locations.
They sell to a broad group of blue chip OE customers across multiple commercial vehicle channels, including construction, agricultural, medium and heavy truck, lawn and garden and power sports.
From a product standpoint, they offer an expansive portfolio of both well-established electromechanical parts as well as a growing assortment of sophisticated electronics devices.
The majority of their offering is considered powertrain neutral, meaning that their parts either service other systems on the vehicle where are equally suited to conventional or electric powertrains.
And we believe this is extremely beneficial as they are well positioned to capitalize on the eventual shift to electric vehicles, and we believe we will be able to leverage this in our aftermarket business.
From an operations standpoint, Trombetta brings a highly complementary manufacturing footprint to SMP.
There are two plants in Wisconsin, including a high-tech electronics facility.
There is a low-cost plant in Tijuana, Mexico, and there is majority ownership in a joint venture in Wuxi, China, geared toward pursuing the fast-growing industrial market there.
While oftentimes, the synergies of an acquisition come from the cost savings of closing plants and eliminating duplicate costs, that is not the strategy here.
With Trombetta, the synergies come from the combination of their strengths and ours, cross-selling opportunities through combined product portfolios and customer lists and collaboration between our engineering groups and advanced technologies.
We're in the early stages, but we are delighted with the potential.
We believe that this acquisition takes us to the next level in this OE space.
When combined with previous activities, including organic business wins such as our compressed natural gas injection program and other acquisitions, such as the Pollak deal in 2019, we have grown this business to an annual run rate of around $250 million.
We now have the critical mass to be a significant supplier and are excited to see where we can take it.
And to reiterate, we believe that this channel is highly complementary to our core aftermarket business from the product and technology standpoint as well as from an engineering and production.
At this point, I'll hand it over to Jim to review our operations.
I would also like to reiterate what Eric stated that we are very pleased with our year-to-date performance, considering the challenges facing manufacturers.
Supply chain difficulties have been significant, and our supply chain and manufacturing teams continue to battle a host of challenges such as material source supply, including semiconductor chips, resins, which continue on allocation limitations, extended lead times, which add to challenges of forecasting demand and managing inventory levels and transportation of goods only adds to the difficulties once your vendors can provide the components.
Container and vessel management has become a critical path to managing the manufacturing process.
Fortunately, we believe our global footprint and being a basic manufacturer has helped us with these challenges.
Our low-cost operation in Mexico and domestic manufacturing facilities in North America ease the challenges of sourcing strictly from Asia.
Our low-cost operation in Poland is also easier to schedule containers and vessels as compared to China.
And in addition, this reduces any negative tariff impacts out of China.
Availability of labor has also been a struggle at times but not to the same magnitude of material supply.
With the significant increases in customer demand, the primary challenge has been to secure distribution personnel to get the product out.
We have managed this labor shortage with the help of our dedicated distribution teams working six or seven days per week and daily over time.
We also have adjusted wages for existing and new hires as we compete for a limited labor pool.
Despite these challenges, our internal teams are focused on meeting our customer demand for availability and timely deliveries.
We have received many accolades from our customers for higher fill rates than other vendors in the industry.
On the inflation front, the low supply and demand tends to set pricing.
We are not immune to these pressures and are incurring increases in materials for chips, resins and commodities across the board.
Transportation for international impact on containers and vessels as well as domestic transportation cost increases and labor supply for wage adjustments and over time.
We do our best to offset some of these increases with make-first-buy efforts and low-cost vendor sourcing.
However, we are also passing on price increases to our customers.
Availability of product and better fill rates than other vendors help support the need and acceptance for these price increases.
Now turning to the numbers.
I'll walk through the numbers for the second quarter and first six months, also cover some key balance sheet and cash flow metrics.
Looking first at the P&L.
Consolidated net sales in Q2 '21 were $342.1 million, up 94.8% versus last year, and our consolidated net sales for the first six months of 2021 were $618.6 million, up $116.4 million or 23.2%.
Looking at it by segment.
Engine Management net sales in Q2 were $233.2 million, up $60.1 million versus the same quarter last year.
And for the first six months, were up $71 million to $445.2 million.
These large increases of 34.7% and 19% for the quarter and first six months, respectively, largely reflect the softness we experienced in Q2 last year in the midst of the pandemic.
Given the volatile results in 2020, it's better to compare our results through 2019, where Engine is up 7% for the quarter and up 3.2% for the first six months despite the loss of a large customer.
These increases are a result of the successful customer initiatives, new business wins and generally robust demand highlighted before.
Additionally, the acquired Trombetta and soot sensor businesses provided approximately $9 million of revenue in the second quarter of 2021.
Temperature Control net sales in Q2 '21 were $106.5 million, up 47.1% versus the second quarter last year and were up 36.4% to $168.9 million for the first six months.
And like we said for the Engine segment, it's better to compare our 2021 results to 2019.
And on that basis, Temp Control sales were up 10.2% for the first six months, with the increases mainly reflecting an earlier-than-usual start to the summer selling season, as Eric alluded to before.
Our consolidated gross margin in Q2 '21 was 29% versus 26% last year, up three points.
And for the first six months, it was 29.6% versus 26.8% last year, up 2.8 points with increases for both the quarter and year-to-date periods coming from both of our segments.
Looking at the segments.
Second quarter gross margin for Engine Management was 28.9%, up 2.2 points from Q2 last year.
And for Temperature Control, was 26.9%, an increase of 4.1 points from 22.8% last year.
The higher margins in both segments were mainly the result of the higher sales volumes we experienced and favorable plant absorption from building our inventory back to sufficient levels.
And were partly offset by higher costs and labor raw materials and exportation as was expected, given the inflation occurring across the spending categories.
For the first six months, Engine Management gross margin was up 2.3 points to 29.8%, while Temp Control was up 3.3 points to 26.4%.
The increases in our first half margins were also due to higher sales and higher fixed cost absorption given elevated production levels and were again partly offset by inflationary cost pressures.
Moving now to SG&A expenses.
Our consolidated SG&A expenses in Q2 increased by $14 million to $62.3 million, ending at 18.2% of sales versus 19.5% in Q2 last year.
For the first six months, SG&A spending was $116.8 million, up $12.6 million, but ending lower at 18.9% of net sales versus 20.7% last year.
Expenses increased for both the quarter and first half, mainly due to higher selling and distribution costs due to both higher sales levels and inflation and costs.
The improvement as a percentage of sales mainly reflects improved expense leverage due to our higher sales volumes and continued focus on cost control around discretionary spending.
Our consolidated operating income before restructuring, integration and acquisition expenses and other income net in Q2 was $37.7 million or 11% of net sales, up 4.5 points from Q2 last year.
And for the first six months was 10.8% of net sales, up 4.7 points from the first six months last year.
As we note on our GAAP to non-GAAP reconciliation of operating income, our performance resulted in second quarter 2021 diluted earnings per share of $1.26 versus $0.52 last year.
And for the first six months, diluted earnings per share of $2.23 versus $0.95 last year.
The increase in our operating profit for both the quarter and first half was mainly due to higher sales volumes, higher gross margin percent and improved SG&A expense leverage.
Turning now to the balance sheet.
Accounts receivable at the end of the quarter were $211.8 million, up $48.8 million from June 2020 and up $13.7 million from December 2020.
The increase over June last year was due to the increase in sales during the quarter, while the smaller increase from December reflects both higher sales and management of our supply chain factoring arrangements.
Inventory levels finished the quarter at $404.9 million, up $51.6 million from June last year and up $59.4 million from December 2020.
The increased inventory levels reflect higher sales levels and the need to carry higher balances to support our customers.
And as a reminder, our inventories were depleted during 2020 due to strong sales in the last half of the year, and we expected to build our inventories back this year.
Looking now at cash flows.
Our cash flow statement reflects cash generated from operations in the first six months of 2021, $23.2 million as compared to cash used of $0.9 million last year.
The $24.1 million improvement was mainly driven by an increase in our operating income.
And while we saw some large swings in working capital balances, the changes were largely offsetting.
The changes in working capital in the first six months were mainly driven by sales performance during the period.
Inventory balances finished higher as we replenished ourselves and made sure we had sufficient inventory to serve our customers, but cash used for inventory was partly offset by an increase in accounts payable.
Additionally, we use significantly less cash and funding accounts receivable versus last year due to both timing of collections and management of our factoring programs, but this was partly offset by cash used to pay customer rebates that were earned and accrued last year.
We used $11.7 million of cash for capital expenditures during the first six months, up from $9 million last year.
We also used $109.3 million to fund our acquisitions of the aforementioned Trombetta and soot sensor businesses.
Financing activities included $11.1 million of dividends paid and another $11.1 million paid for repurchases of our common stock.
Financing activities also included $127.3 million of borrowings on our revolving credit facilities, which were used mainly to fund our acquisitions, but also for investments in capital and returns to shareholders through dividends and share buybacks.
And while after making significant acquisitions in the first six months, we still finished the quarter with total debt of less than 1 times EBITDA given our strong operating performance and ended Q2 with total outstanding borrowings of $137 million and had more than sufficient remaining available capacity under our revolving credit facility of $112 million.
In summary, we are very pleased with our operating results for the first half of the year.
These results led to strong cash flow generation, which supported two great acquisitions in the Trombetta and soot sensor businesses as well as continued returns to shareholders and helped us finish the second quarter with low levels of debt and a substantial amount of liquidity.
Our financial performance has been strong both in sales and profits.
We've been active in M&A, closing two very strategic deals and have done so while navigating the complexities of the ongoing pandemic, keeping our people safe, managing through supply chain challenges.
And I absolutely feel we are a stronger organization for it.
We're pleased with the overall state of the industry and of our standing within it, and we are very excited about the future.
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q2 sales $342.1 million versus $247.9 million.
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As we have navigated the last two years, we have learned to operate in highly uncertain and volatile environment.
And we have done it with success on almost any metric.
We've had to accomplish our mission while keeping our people safe.
Our company values of Mission First People always have served us extremely well throughout these unprecedented times.
We had an exceptional third quarter at EMCOR, especially against a very difficult comparison in the prior year.
As you may recall, in the third quarter of last year, we were bringing about a third of our company back to full operations.
We had projects poised and ready to resume or start, delay service that needed to be completed.
And buildings, campuses and production facilities that we helped our customers reopen as they resumed operations.
Further, we had yet to bring back our full complement of staff that we need to sustain and build our operations.
Said simply, we had an abundance of work had all the materials and a lower cost base, as we were still returning to full operations after the extreme cost reductions we had taken in response to the pandemic.
Against that backdrop in comparison for the third quarter of 2021, we were able to post $1.85 and earnings per diluted share, versus $1.76 of adjusted diluted earnings per share in the year ago period.
We grew revenues to $2.52 billion, with 14.5% overall revenue growth and 12.2% organic revenue growth.
We posted 5.4% operating income margins despite strong headwinds from supply chain issues and labor disruptions caused by the Delta Variant.
I believe this is very good performance considering the operating conditions we faced in the quarter.
We grew remaining performance obligations or RPOs 18.7% from the year ago period to $5.38 billion.
We generated operating cash flow of $121 million, despite the strong organic revenue growth.
All-in-all, we had a very successful quarter that continues to show the strength and diversity of our business.
But more importantly, the outstanding leadership provided by our teams at the subsidiary, segment and corporate level.
Our electrical and mechanical construction segments had excellent performance in the third quarter of 2021.
Both segments posted strong operating income margins, and had strong organic revenue growth.
Through careful planning on our large projects, and excellent supplier relationships we mitigated a lot of the supply chain disruptions facing our operations.
However, we have seen cost increases of 10% to 20% and anticipate that such increases will continue in the near future.
And that is only part of the issue, as we have seen lead times increased by two to three times their normal levels.
Our success in the quarter points to the continued resiliency of our teams, the ability to navigate these issues, deliver for our customers and continue to keep our workforce productive and safe.
We continue to have a robot pipeline of data center, warehousing and healthcare projects.
And we had strong bookings with our manufacturing clients in the quarter.
Building Services had the most difficult comparison a quarter as a deep cost cuts taken at the height of the shutdown were most severe in the segment.
We still post a decent operating income marked as a 5% against the year ago period of 6.9%.
However, we were most affected in this segment by supply chain issues and diminished productivity.
Although demand for our retrofit project work is very strong, we had some issues with a synchronization of our supply chain with our labor planning, resulting in reduced productivity.
To mitigate these issues, it has become a common practice that daily communications on deliveries and price changes on our quick term project and service work.
Further, this segment also bears the brunt of the dollar per gallon increase in the fuel, which gasoline and diesel year-over-year due to its large fleet and this had an impact of 20 to 30 basis points on operating income margins.
We can pass some of this increase on our customers that had just repriced into our time and material rates in June.
We will do so again between now and January across the majority of our building services operations.
This is the second increase this year, which is not our usual practice of executing which is once a year, usually in June.
Demand remained strong and we will continue to improve our planning over the next quarter or two.
Industrial Services continue to operate as we expected.
We improved on a year-over-year basis with respect to revenue and operating income.
We had some impact with respect to the storms in the Gulf Coast.
But that mainly just pushed out work to later in the year or into next year.
And we did have some disruption to our shop work in Louisiana.
Demand for our services continues to build.
Refinery utilization is at a very high level.
And we expect to and we expect to execute a better fourth quarter turnaround season this year versus the year ago period.
We also anticipate much improved demand as we exit the year and move into the first quarter of 2022.
The U.K. continues to execute well for its customers with double digit revenue growth and good operating income margins.
Demand remained strong for our services.
But like in the United States, we are also battling supply chain issues for our quick term project work in the United Kingdom.
We'll leave the quarter with a pristine balance sheet, strong fundamentals and record RPOs.
Over the next several slides I will augment Tony's opening commentary on EMCOR's third quarter, as well as provide a brief update on our year-to-date results through September 30.
So let's revisit and expand overview of EMCOR's third quarter performance.
Consolidated revenues of $2.52 billion are up $320 million or 14.5% over Quarter 3, 2020 and represent a new all-time quarterly revenue record for EMCOR.
Each of our reportable segments experienced quarter-over-quarter revenue growth.
Excluding $50.3 million of revenues attributable to businesses acquired, pertaining to the time that such businesses are not owned by EMCOR and last year's quarter, revenues for the third quarter of 2021 increased nearly $270 million or a strong 12.2% when compared to the third quarter of 2020, which was still somewhat impacted by the effects of the COVID-19 pandemic.
The specifics of each reportable segment are as follows: United States Electrical Construction revenues of $527.9 million increased $55.9 million or 11.8% from 2020s third quarter.
Excluding acquisition revenues within the segment of $29.5 million this segment's revenues grew organically 5.6% quarter-over-quarter.
Increased project activity within the commercial healthcare and institutional market sectors were the primary drivers of the period over period improvement.
United States mechanical construction segment revenues of $999.6 million increased $108.1 million or 12.1% from Quarter 3, 2020.
The results of this segment represent a new quarterly revenue record.
Revenue growth during the quarter was driven by increases within the manufacturing, healthcare and commercial market sectors.
With respect to the manufacturing market sector, we are in the early phases of construction on several food processing plants, which will accelerate further as we move into 2022.
From a healthcare market sector perspective, there continues to be greater demand for our services, as we are engaged in a number of projects ranging from mechanical system retrofits to complete installations in both new and existing healthcare facilities.
Lastly, within the commercial market sector, we continue to see strong demand for data center project work given growth in digital storage and cloud computing across the United States.
And we continue to assist our e-commerce customers with the build out of the warehouse and distribution network through both traditional mechanical as well as fire protection services.
Third quarter revenues from EMCOR's combined United States construction business of $1.53 billion increased $164 million or 12%, with 9.9% of such revenue growth being organic.
This combined revenue performance eclipses the quarterly revenue record established by this group during the second quarter of this year.
Despite this record revenue performance, each of our construction segments have increased the remaining performance obligations both year-over-year as well as sequentially.
United States Building Services Quarterly revenues of $632.5 million increased $75.9 million or 13.6%.
Excluding acquisition revenues of $20.8 million the segment's revenues increased at 9.9% organically.
Revenue gains were reported within our mobile mechanical services division due to increase project, service repair and maintenance activities.
Our commercial site based services division as a result of new contract awards, and our government services division given an increase in indefinite delivery indefinite quantity project volumes.
EMCOR's industrial services segment revenues of $232.2 million increased $60.7 million or 35.4% due to improve demand for both field and shop services, as we are beginning to see some resumption of maintenance and small capital spending in the energy sector.
United Kingdom Building Services revenues of $129.5 million increased $19.4 million or 17.6% from last year's quarter.
Revenue gains for the quarter resulted from the continuation of strong project demand from the segment's maintenance customers who previously deferred such work during 2020 as the result of the COVID-19 pandemic in the related prolonged U.K. government lockdown measures.
Additionally, the segment's revenues were positively impacted by $8 million, a favorable foreign exchange rate movements within the quarter.
Selling, General, Administrative expenses of $243.9 million represent 9.7% of third quarter revenues and compared to $226.8 million or 10.3% of revenues in the year ago period.
The current year's quarter includes approximately $5.3 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $11.9 million.
Consistent with my commentary during our second quarter earnings call, the prior year period benefited from substantial cost reductions resulting from our actions taken in response to the COVID-19 pandemic.
A significant percentage of such savings pertained to employment costs, including furloughs, headcount, reductions, and temporary salary reductions.
Conversely, EMCOR's considerable revenue growth in 2021 has necessitated an increase in headcount in the current year.
Additionally, our SG&A for the current period reflects an increase in healthcare costs, as the result of a normalization in the level of medical claims, as well as greater travel and entertainment expense due to a partial resumption of certain business activities by our workforce, when compared to the same timeframe in 2020.
The reduction in SG&A as a percentage of revenues as a result of the aforementioned increase in quarterly revenues without a commensurate increase in certain of our overhead costs, as we were able to successfully leverage our cost structure during this period of strong organic revenue growth.
Reported operating income for the quarter of $137.4 million or 5.4% of revenues, compares to operating income of $135.9 million or 6.2% of revenues in 2020's third quarter.
The 80 basis point reduction in operating margin loss due to reductions in gross profit margin within several reportable segments due to a less favorable revenue mix, which I will elaborate on during my individual segment commentary.
Despite this reduction in quarter-over-quarter operating margin, EMCOR's $137.4 million of operating income represent a new third quarter record.
Specific quarterly performance by segment is as follows: Our U.S. Electrical Construction segment operating income of $44.1 million decreased $1.9 million from the comparable 2020 period.
Reported operating margin of 8.3% represents a reduction from the 9.7% margin reported in 2020's third quarter.
The decrease in both operating income and operating margin is due to a decline in gross profit within the commercial and transportation market sectors given a change in the composition of project work performed quarter-over-quarter.
In addition, and as disclosed in last year's third quarter, the results from the prior year period benefited from the settlement of final contract value on two projects, which favorably impacted this segments Q3, 2020 operating income and operating margin by $4.4 million and 70 basis points respectfully.
Third quarter operating income for U.S. Mechanical Construction Services segment of $82.3 million represents a $2.3 million increase from last year's quarter, while operating margin of 8.2% represents an 80 basis point reduction from the 9% earned in 2020's 3rd quarter.
From an operating margin perspective similar to our Electrical Construction segment the reduced profitability can be attributed to a less favorable mix of work during the quarter.
Most notably, this segment experienced a decrease in gross profit margin within the manufacturing market sector, as the results for the period include increased revenues from certain large food processing projects, for which we are for which we are acting as the construction manager and carry lower than average gross profit margins when compared to our traditional subcontractor arrangements with our customers.
Further, the results for the year ago period benefited from the favorable close out of several manufacturing projects, which resulted in incremental operating margin contribution.
To be clear, the impacts within the quarter for both our Construction Segments relate to discrete projects or events.
Our combined U.S. Construction business is reporting $126.4 million of operating income with an 8.3% operating margin.
This level of operating income represents a new third quarter record for our combined construction business.
I would like to add that though below that of the prior year, the operating margins today in 2021 for each of our Electrical and Mechanical Construction segments exceed both their three year and five year average margins.
Operating income for U.S. building services is $31.6 million or 5% of revenues.
This represents a reduction of $6.9 million and 190 basis points of operating margin quarter-over-quarter.
Growth and operating income within the segment's commercial site based and government services divisions was not enough to offset the clients within its mobile, mechanical and energy services divisions.
As I commented during last quarter's call, our Mobile Mechanical Services Division has a large number of fixed price capital projects currently in process, which traditionally have a lower gross profit margin profile than the segments call out service and small project work.
In addition, during the quarter, we experienced some productivity issues partially due to the delayed receipt of certain equipment and materials, which has impacted our profitability both in terms of dollars and margin.
Lastly, growth in the segment's SG&A expenses due to headcount additions to support revenue growth, as well as incremental amortization expense related to businesses acquired further compressed operating income and operating margin.
Our U.S. Industrial Services segment operating loss of $3 million represents a $5.9 million improvement from the $8.9 million loss reported in 2020's 3rd quarter.
Development improvement, this segment continues to be impacted by difficult market conditions within the oil and gas industry.
Additionally, though, not as severe as in the prior year quarter, this segment experienced lost workdays due to both temporary plant and certain customer site closures, resulting from named storm activity in the Gulf Coast region during the 2021 quarter.
U.K. Building Services operating income of $6.6 million or 5.1% of revenues represents an increase of $1.3 million and a 30 basis point improvement and operating margin quarter-over-quarter.
Approximately $400,000 of this period-over-period improvement is due to positive foreign exchange movement, with the remainder attributable to an increase in project activity primarily within the commercial market sector.
We are now on slide nine.
Additional financial items of significance for the quarter not addressed in the previous slides are as follows: Quarter three gross profit of $381.3 million is higher than the comparable quarter by $18.2 million or 5%, gross margin of 15.1% as lower than the 16.5% and last year's third quarter due to the shift in revenue mix in each of our U.S. Electrical and Mechanical Construction segments as well as their U.S. building services segment as I just referenced during my segment operating income discussion.
Diluted earnings per common share of $1.85 represents a new quarterly record for the company and compares to $1.11 per diluted share in last year's third quarter.
Adjusting 2020's earnings per share for the negative impact and our prior year income tax rate resulting from the non-deductible portion of last year's non-cash impairment charges recorded during 2020 second quarter.
Non-GAAP diluted earnings per share for the quarter ended September 30, 2020 was $1.76 when compared to our current quarter's performance, we are reporting a $0.09 or 5.1% quarter-over-quarter earnings per share improvement.
With my quarter commentary complete, I will touch on some high level highlights with respect to EMCOR's results for the first nine months of 2021.
Revenues of $7.26 billion represent an increase of $747.8 million, or 11.5%, of which 9.4% of such revenue growth was generated by organic activities.
Operating income of $387.8 million or 5.3% of revenues represents a significant increase from reported operating income for the first nine months of 2020 and a double digit increase from the corresponding adjusted non-GAAP operating income figure for that period.
Year-to-date diluted earnings per share is $5.17 and represents an increase of approximately 14% over 2020's adjusted non-GAAP earnings per share for the nine month period.
Although not shown on the slide, my last comment on our year-to-date results is with respect to operating cash flow.
For the first nine months of 2021, we have generated approximately $114 million of operating cash flow, which is well below 2020s record performance.
As I commented last quarter, our substantial organic revenue growth has required increased working capital investment.
This contrast to 2020 where for a large part of the year, we were liquidating our balance sheet due to the revenue declines resulting for the from the COVID-19 pandemic.
Further, it is important to note that last year's nine month operating cash flow was favorably impacted by $82.3 million due to government stimulus measures that allow for the deferral of certain tax payments in both the United States and the United Kingdom.
As previously communicated, my expectation for full year 2021 was operating cash flow in excess of $300 million.
With our upward revision in 2021 revenue expectations, I am still targeting the same level of operating cash flow performance, but it is possible that we may not eclipse the $300 million target should our working capital investment be greater than expected during the fourth quarter.
EMCOR's balance sheet remains strong and liquid.
Cash on hand is down from year-end 2020 driven by cash used in financing activities are approximately $213 million, inclusive of $183 million used for the repurchase of our common stock and cash used in investing activities of $137.5 million, most notably due to payments for acquisitions that have cash acquired totaling approximately $114 million.
These uses of cash were partially offset by cash provided by operations of $114 million as I noted just a few moments ago.
Working capital has increased by nearly $20 million.
Increases in accounts receivable on contract assets resulting from our substantial organic revenue growth during the period were partially offset by the decrease in our cash balance just referenced as well as our increase in contract liabilities.
The increase in goodwill is predominantly a result of the five businesses acquired during the first nine months of this year.
Net identifiable intangible assets increased by $19 million as the impact of additional intangible assets recognize the connection with the previously referenced acquisitions which was largely offset by $48 million of amortization expense during the year-to-date period.
As a reference point, on a full year basis we anticipate depreciation and amortization expense, including both depreciation of property, plant and equipment, as well as amortization of intangible assets to be approximately $112 million for 2021.
Total debt exclusive of operating lease liabilities is fairly consistent with that of December 2020.
And EMCOR's debt-to-capitalization ratio has reduced to 11.4% from 11.9% at year-end, 2020.
EMCOR remains well positioned to capitalize on available opportunities as our balance sheet, combined with the borrowing capacity available to us under our credit agreement provides us with great flexibility and pursuing numerous organic and strategic investments.
I would like to give a call back to Tony, Tony?
And I'm going to be on page 12 remaining performance obligations by segment and market sector.
We had another strong project bookings quarter here at EMCOR.
Each of our five reporting segments are RPO growth year-over-year, while as we mentioned earlier, simultaneously increasing revenue over the same period.
We also saw RPO growth in seven of the eight market sectors in which we report.
So it's fair to say that we're currently seeing strong future demand across all of our segments and market sectors.
While September 30, is a single point in time, and project certainly ebb and flow, we are well positioned moving into 2022.
As mentioned earlier, total company RPOs at the end of the third quarter were just under $5.4 billion, up $849 million or 18.7% when compared to the year ago level of $4.5 billion.
Organic RPO growth was strong 15.6%.
Year-to-date for the nine months completed in 2021 total RPOs have increased $784 million, or just over 17%.
The strong booking activity across the company trends related to a book-to-bill ratio well over one, despite the company generating record revenues.
Our two domestic construction segments experienced strong construction project growth in the quarter, with RPOs increasing $606 million or 16.5% from the same period last year.
RPOs were lifted slightly by two Midwestern Electrical Construction Services acquisitions completed this year.
Building Services or RPO levels increased 180 million or almost 29% from the year ago quarter, 142 million and 180 million was organic.
We continue to see widespread small and short duration project demand and believe this will remain active through the end of the year and into 2022 as workers returned to buildings, campuses, factories and institutional facilities across the country post COVID and as the Delta variant hopefully continues to subside.
Our Industrial Services segments, our RPO increase of $53 million from September 2020.
Work within our heat exchanger shops has been building and while still are lower than historical levels, pricing appears to be improving a bit.
Further, we continue to build capability, execute fixed price contract work, in both our electrical and mechanical trades in this segment.
While this segment remains challenged due to macroeconomic forces, we are starting to see signs of increased activity, much as we expected as we move into 2022 and that is good news.
In summary, we continue to see strong momentum in our core markets and our scale, diversity of demand, and ability to pivot to more resilient sectors has allowed us to continue to have strong bookings in RPO growth, but also very strong organic revenue growth.
I'm now going to finish our discussion on pages 15 and 16.
We are closing in on yet another record year performance at EMCOR despite a very difficult operating environment.
At the beginning of the year, we expected that margins would be under some pressure.
But we believe that we would have the necessary revenue growth to offset any margin compression.
We foresaw the supply chain issues, but quite frankly, they are worse than we expected.
We not only have seen increasing and volatile pricing, but lead times that extend through two to three times normal levels.
Energy prices, especially gasoline and diesel costs have increased by more than we anticipated.
We also expect COVID to be much less impactful than it was as a Delta variant caused disruption on some job sites and send some key supervision into quarantine.
Working in this challenging environment, we continue to deliver in a no excuses manner and execute well for our customers while keeping our employees safe.
Despite such headwinds, we are raising our guidance.
Our new guidance is diluted earnings per share of $6.95 to $7.15 and we now expect our revenues between $9.80 billion and $9.85 billion.
As we close on 2021, we do expect to continue to be challenged by supply chain and productivity issues.
But we will work through them as we are resilient.
We expect the non-residential market to show mid-single digit growth in 2021 and expect that momentum to continue into 2022.
We, like all large employers will have to navigate complying with the pending emergency temporary standard or ETS with respect to mandatory vaccination and testing and the executive order mandating vaccination on federal contracts.
The ETS has not been released and therefore the related costs to comply and the impact to our productivity are unknown.
We expect to energy generate additional operating cash flow in the fourth quarter.
And we expect to continue to be balanced capital allocators.
To date into 2021, we have repurchased $183 million in EMCOR stock, paid $21 million in dividends and invested $114 million in acquisitions that will continue to position EMCOR for long term and sustained growth.
Our board of directors just authorized a new and our largest share repurchase authorization of an additional $300 million.
We continue to have a very active acquisition pipeline.
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emcor group q3 revenue rose 14.5% to $2.52 billion.
q3 earnings per share $1.85.
q3 revenue rose 14.5 percent to $2.52 billion.
sees fy earnings per share $6.95 to $7.15.
sees fy revenue $9.8 billion to $9.85 billion.
authorizes additional $300 million share repurchase program.
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We're very pleased with the performance of all of our business lines as 2021 is off to a very strong start.
In the first quarter, we delivered core FFO per share of $1.26, which exceeded the high end of our guidance of $1.17.
Due to this outperformance and strong visibility into our second and third quarter transient RV bookings, we are raising our 2021 core FFO per share annual guidance range by $0.13 to $5.92 to $6.08 and our expected same community NOI growth for the full year by 190 basis points to a range of 7.5% to 8.5%.
The momentum we experienced in our RV resorts in 2020 has only accelerated this year as the country continues to reopen.
For the quarter, same community NOI growth was 2.7% over last year, despite the continued Canadian border closure and the California stay-at-home order which dictated the closure of our California resorts through early February.
We achieved total portfolio occupancy of 97.3%, a 60 basis point improvement over the first quarter of 2020 by selling 514 revenue-producing sites.
We also delivered approximately 350 ground-up and expansion sites in the first quarter, which include the grand opening of our premier 250 site Sun Outdoors San Diego Bay Resort.
Since the beginning of the year, we have deployed $183 million into acquisitions, comprised of two manufactured housing communities, six RV resorts, and four marinas.
Our team continues to find ways to add irreplaceable assets to our portfolio that serve to reinforce the high quality of our brand, enhance our offerings to our guests and foster continued growth of our revenues and earnings over time.
In our manufactured housing business, our operations are benefiting from sustained strength and fundamentals and demand for affordable housing, evidenced by new, pre-owned, and brokered home sales.
Furthermore, applications to live in a Sun community remain at record high levels, up 21% over this time last year.
Our RV business, while impacted by the closures and the travel restrictions associated with the pandemic during the quarter, is showing resilience with forward bookings well ahead of both 2020 and 2019.
As we emerge from the pandemic and as the percentage of the vaccinated population rises, we anticipate our best-in-class resorts to remain a preferred vacationing option.
Our assertion is supported by the RV Industry Association stating record-year unit sale expectations for 2021 as well as our strong advance bookings for the second and third quarters.
A broader segment of the population rediscovered the outdoors during 2020 and we are seeing that interest carry forward.
In an environment impacted by COVID, RV provides travelers with an incremental level of safety and control.
Moreover, we believe that increased demand is being driven by the continued desire of consumers to get back to a degree of normalcy, resuming vacation and leisure travel after last year's travel restrictions.
In our marina business, results continue to track ahead of our underwriting and the team is preparing for an active boating season.
According to multiple industry sources, boat sales have increased in demand year-over-year.
With our expanded presence in this sought-after and scarce asset class, we are well-positioned to benefit from the increased demand for slips and moorings.
We are relying on our four core investment strategies to support long-term resilience and the growth of our platform, further solidifying our position of delivering industry-leading results.
An important part of these core strategies includes expansion and ground-up development.
We wanted to highlight the recent opening of Sun Outdoors San Diego Bay first announced nearly four years ago.
It is now open for guests and we are pleased to continue to realize meaningful accretion from our capital deployment activities.
In early March, we executed a $1.1 billion equity raise to secure capital to fund our growing acquisition pipeline and other opportunities.
We will match fund these growth initiatives with this equity.
Key contributors to the success of our franchise are our ongoing efforts with regard to our environment and its sustainability, our social ecosystem and careful attention to governance.
With that said, we wanted to provide some important updates with regard to our ESG initiatives.
This month, we launched a new partnership with the National Park Foundation in support of the foundation's outdoor exploration program.
Sun RV resorts has committed to contribute toward the National Park Foundation's mission to connect this and future generations with the social, mental and physical health benefits of national parks and outdoor discovery.
With respect to our commitment to diversity, equity, and inclusion, Sun has engaged with a consultancy team with 30 years of experience in the field of equality and justice.
This group has deep expertise in the importance of breaking through unconscious bias and social injustices in the workplace.
Together, we are assessing the current state of inclusion, diversity, equity, and accessibility at Sun, and developing an organizationwide strategy to create positive change.
Before handing the call over to John and Karen, I wanted to point out that we have enhanced our financial disclosures.
With the addition of Safe Harbor, we took the opportunity to provide better insight into the primary drivers of our business.
Karen will walk you through the changes we have implemented after John shares details about our operational performance.
Sun delivered a strong first quarter across the board, setting the stage for a solid year.
Our results reflect the combination of the stability of our manufactured housing business line and our same community portfolio, as well as the incremental benefits of our growth initiatives across MH, RV, and marina business lines.
For the first quarter, combined same community NOI increased 2.7%.
The growth in NOI was driven by a 3.5% revenue gain, supported by a 1.9% increase in occupancy to 98.8% and a 3.5 weighted average rent increase.
This was offset by a 5.5% expense increase.
As part of our revised disclosures, we are now providing same community NOI for our manufactured housing and RV businesses.
Same community manufactured housing NOI increased by 4.9% from 2020 and same community RV NOI declined by 4%.
RV revenues were impacted by the Canadian border closure during the first quarter which affected our snowbird season and the California shelter-in-place order that ran through early February.
Combined, these two events had a $6 million impact on our transient RV same community revenue as compared to our previously communicated estimate of $8 million to $10 million.
With respect to RV revenue, we anticipate a significant rebound in the second and third quarters.
RV resorts are beneficiaries of the reopening trade and we are fully participating.
Our second quarter transient forecast is already ahead of our original budget by over 20% and trending 57% higher than 2019, which we believe to be a better comparable given COVID-related disruptions in 2020.
Likewise, our third quarter transient RV forecast is currently ahead of the original budget by approximately 5% and this is trending ahead of 2019 by almost 40%.
In addition, we have a great deal of visibility into our reservation for rest of the year through Campspot, our proprietary RV reservation of revenue management software.
Today, digital reservations comprise over 60% of our total reservations for our same community portfolio as compared to 60% [Phonetic] just two years ago.
Moving onto total MH and RV portfolio, in the first quarter, we gained 514 revenue-producing sites as compared to 300 in the first quarter of 2020, bringing our total portfolio occupancy to 97.3% from 96.7% a year ago.
Of our revenue-producing site gains, over 380 transient RV sites were converted to annual leases with the balance being added in our manufactured housing expansion communities.
A key component of our four core growth initiatives is the development of ground-up and expansion sites.
In the first quarter, we delivered approximately 350 sites, 250 of which in the ground-up development in San Diego and 100 were in MH expansion sites at Sunset Ridge in Texas.
These completed expansion and ground-up development sites will contribute to RPS gains in 2021 and beyond as they fill up and stabilize.
As of the end of the quarter, we have approximately 9,700 zoned and entitled sites in our portfolio that once built will contribute to growth in the coming years.
Home sales in the quarter were particularly strong.
We sold 835 homes, an increase of 9.4% versus the first quarter of 2020.
Of these, 149 were new home sales, up over 25% and 686 were pre-owned home sales, up 6.5% as compared to the same period last year, respectively.
Average home prices for both new and pre-owned homes rose 17.6% and 9.8%, respectively, underscoring the overall geographic market mix as well as sustained demand for our product and the strong desire to live in a Sun community.
Brokered home sales throughout Sun's portfolio saw 36% increase year-over-year, as the resale market continues to show strength.
Average brokered home prices in our communities increased by over 20%, as compared to the first quarter of 2020.
We believe that a vibrant resell market for homes in our communities demonstrates the benefits of the consistent reinvestment in our properties, creating equity value for our homeowners and increasing the overall value of our portfolio.
Moving on to Safe Harbor.
During the quarter, the marina portfolio contributed over $31.4 million to total NOI.
The marinas are performing ahead of our underwriting, and the team continues to source acquisitions in irreplaceable locations, which for the first quarter, include two marinas on Islamorada in the Florida Keys and two marinas on Martha's Vineyard.
We are optimistic about the underlying trends we are observing across all of our business lines.
With the vaccination rate increasing across the country, we are anticipating accelerated growth in our RV and marina businesses.
We are well positioned to see follow-through of this quarter's outperformance and look forward to sharing our progress with you in the coming quarters.
Karen will now discuss our financial results in more detail.
For the first quarter, Sun reported core FFO per share of $1.26, 3.3% above the prior year and $0.09 ahead of the top-end of our first quarter guidance range.
During and subsequent to quarter-end, we acquired $183 million of operating properties comprised of two manufactured home communities, six RV resorts and four marinas.
To support our growth activities, we completed a $1.1 billion equity raise, representing approximately 8 million shares of our common stock.
To date, we have settled 4 million shares, receiving $538 million in net proceeds, which was used to pay down borrowings on our credit facility.
We expect to settle the remaining 4 million shares no later than March 2022.
We ended the first quarter with $4.4 billion of debt outstanding at a 3.4% weighted average rate and a weighted average maturity of 9.5 years.
As of March 31, we had $105 million of unrestricted cash on hand and a net debt to trailing 12-month recurring EBITDA ratio of 6.1 times.
On a pro forma basis, including the estimated full year EBITDA contribution from Safe Harbor and other acquisitions, our net debt to trailing 12-month recurring EBITDA ratio is in the low-5 times.
As a result of our outperformance during the quarter, we are raising our core FFO expectations for full-year 2021 to a range of $5.92 per share to $6.08 per share.
We expect core FFO for the second quarter to be in the range of $1.57 per share to $1.63 per share.
We are also revising full year same community NOI growth guidance to a range of 7.5% to 8.5%.
As Gary mentioned earlier, we enhanced our financial disclosures this quarter.
The addition of the marina portfolio gave us the opportunity to reenvision how we report key aspects of our business.
To provide more insight into each of our business lines, we now have a same community schedule which details performance by our MH and RV portfolio separately.
Additionally, our same community revenues now include rental home program revenue and vacation rental home revenues.
So the entire payment for these rentals is now included in real property revenue.
Same community property operating expense now includes the related costs for these rental home programs.
We are also netting all utility income against utility expense, which provides a better view on what Sun's direct utility costs are since the majority of these costs are passed through to our customers.
We have retained our legacy disclosures for our rental program and have added a new page on the marina portfolio.
Please see the 2021 summary of reporting changes document, which is contained in the Investor Relations section of our website for additional information and an illustration of these changes.
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plans incremental capacity investments in mexico to support continued strong growth of core beer portfolio.
affirms fiscal 2022 operating cash flow target of $2.4 - $2.6 billion and free cash flow projection of $1.4 - $1.5 billion.
now sees 2022 comparable basis eps of $10.50 - $10.65.
sees fy 2022 beer business net sales growth 10 -11%.
total capital expenditures for beer business expected to be $5.0 billion to $5.5 billion over fiscal 2023 to fiscal 2026.
sees fy 2022 wine and spirits business net sales decline 21-22%.
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Our SEC filings can be found in the Investors section of our website at unum.com.
Net income for the third quarter of 2021 included the after-tax impairment loss on internal-use software of $9.6 million or $0.05 per diluted common share, the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share, the net after-tax reserve decrease related to reserve assumption updates of $143.3 million or $0.70 per diluted common share, and a net after-tax realized investment loss on the Company's investment portfolio of $100,000 or a de minimis impact on earnings per diluted common share.
Net income in the third quarter of 2020 included after-tax costs related to an organizational design update of $18.6 million or $0.09 per diluted common share, and a net after-tax realized investment gain on the Company's investment portfolio of $3.8 million or $0.01 per diluted common share.
Excluding these items, after-tax adjusted operating income in the third quarter of 2021 was $210.5 million or $1.03 per diluted common share compared to $245.9 million or $1.21 per diluted common share in the year ago quarter.
We saw top-line growth in our business lines at good returns.
We also recognized the continued challenge that COVID presents on our near-term results.
It has cast a shadow on our core returns, but we still see a great business that we believe will return to the levels of profitability that we expect.
Let me start with the overall operations before commenting on these COVID trends.
I would first highlight that core premium growth has been steady and tracking to the expectations we previously laid out for you.
On a year-over-year basis in the third quarter, Unum US generated an increase in premium income of 1.2%.
Colonial Life was slightly better than breakeven, falling three previous quarters with negative comparisons, and our International lines also generated positive premium trends.
This premium growth momentum is building back as sales growth reemerges, persistency remains favorable, and the external environment of employment growth and wage inflation benefits our business.
Outside of the COVID-related impacts, we remain very encouraged with the benefits experience and operating income contributions from our other business lines.
The supplemental and voluntary lines, Colonial Life, our International businesses and our Closed Block segment all showed generally stable results and made substantial contributions to income this quarter.
We're also pleased with our overall investment results this quarter.
It was another quarter for strong returns from our alternative investments and also another quarter of higher than normal bond call premiums.
The underlying credit quality of the portfolio is excellent and the investment team remains diligent in their analysis of our credits through the changing market dynamics.
With this backdrop of strength, we were also highly affected by the evolving nature of the COVID pandemic.
Given the breadth of our customer base across the U.S., we have seen this quarter we have been impacted by the resurgence of higher infections, hospitalizations and mortality brought on by the Delta variant.
As we have discussed throughout the pandemic, the best way to monitor COVID's impact on our results is to follow national mortality and infection rates.
Differently in this quarter, we also need to focus on how the demographics of the incremental mortality relate specifically to our customer base.
To put it in context, in the third quarter, the U.S. experienced a significant increase in national COVID mortality counts to approximately 94,000 lives, which is almost double the 52,000 in the second quarter.
The dramatic increase over the course of the third quarter occurred very rapidly and consistently throughout the quarter.
In fact, just 90 days ago, most experts were estimating a third quarter mortality count of approximately 44,000 deaths, an estimate that has more than doubled over the course of the quarter.
The absolute increase in mortality has certainly been impactful to our industry and for us, most notably in our Unum US group life business, although we also saw impacts in our voluntary benefits lines.
Beyond the higher mortality counts in aggregate, data from the CDC also shows that the third quarter working-aged individuals comprised approximately 40% of the COVID-related mortality, double that of the fourth quarter of 2020 and first quarter of 2021 before vaccinations began to widely be available.
This shift in demographics impacts us three-fold.
First, we announced the higher impacts in the working-age population, our primary customers who are covered by our group and voluntary products.
In addition, these younger working-aged individuals tend to have higher benefit amounts that we saw before.
An additional, but smaller impact that we see is that Delta -- the Delta variant has brought on a resurgence of infections and hospitalizations, leading quickly to higher claims at our short-term disability business and pressure on our group disability benefit ratio.
While COVID impacts are evident in our results this quarter, we believe as the pandemic continues to come better under control with increased vaccinations and advanced treatments, then we will see a strong reemergence of growth and profitability in our business.
The recovery from COVID has been delayed longer than we anticipated by the Delta variant, but we do expect to see a recovery ahead.
It is because of that view that we're excited to begin to deploy a portion of the Company's excess capital in a way that we believe can create value for our shareholders.
We start first with a capital position that remains very healthy with holding Company cash of $1.6 billion and weighted average risk-based capital ratio for our traditional U.S. -- U.S.-based life insurance companies at approximately 380%.
This gives us the opportunity to begin to deploy a portion of that capital to enhance shareholder value, while also maintaining a healthy position for opportunities that could materialize in the future.
Last week, we were pleased to announce the $250 million share repurchase authorization approved by our Board, which we intend to initiate in the fourth quarter with an execution of an accelerated share repurchase of $50 million.
We expect to continue the program through the end of 2022.
In addition to buying shares, we also plan to accelerate recognition of the premium deficiency reserve for the Long-Term Care Block by a similar amount over this same timeframe.
We see value in accelerating the recognition ahead of the original seven-year schedule and could see its completion as early as the end of 2024 under certain market conditions.
Even with the additional capital we plan to allocate to share buybacks and accelerated PDR recognition, we will continue to maintain a strong capital position and flexibility.
While we remain optimistic over the long-term, given the volatility of the pandemic, we will move our traditional December Analyst Meeting to the first quarter of 2022 to discuss with you our full-year outlook.
The area to stay focused on is our continued premium growth in our core business lines looking into 2022, as well as the impact of our capital deployment plans.
We expect the impact of the pandemic to subside over the course of next year, but we do expect fourth quarter of this year to be impacted similarly to the third quarter.
We are watching the national numbers as are all of you, and as the Delta wave subsides, we look to return to the growth and profitability we believe that we can deliver.
Now, I'll ask Steve to cover the details of the third quarter results.
I will also describe our adjusted operating income results by segment, excluding the impacts from our GAAP reserve assumption updates.
The biggest component of the actuarial reserve review was the release of $215 million before tax in the Unum US long-term disability line.
Claim reserves should represent our best estimate of the future liability, and since the last GAAP reserve review, investments in our operations have impacted our claims management and resulted in improvements in claim recoveries over the past several years, which we now believe are sustainable.
As such, these reserves have been adjusted to better reflect the expected costs of claims.
This reserve update will have little impact on our forward expectations for earnings from this line or the expected benefit ratio.
The reserve review also determined that reserves should be increased in three lines within the Closed Block reporting segment.
For the Closed Group Pension Block, policy reserves were increased by $25.1 million before tax.
For the Closed Disability Block, claim reserves were increased by $6.4 million before tax.
And finally for Long-Term Care, claim reserves were increased by $2.1 million before tax.
Although the net of these reserve updates are excluded from adjusted operating income, they did contribute $0.70 per share to the Company's book value.
I'll start the discussion of our operating results with the Unum US segment, where COVID significantly impacted our results this quarter, driving higher mortality and a higher average claim size in the group life business and higher short-term disability claims in the group disability business.
For the third quarter in the Unum US segment, adjusted operating income was $88.5 million compared to $179.3 million in the second quarter.
Within the Unum US segment, the group disability line reported adjusted operating income, excluding the reserve assumption updates of $39.5 million in the third quarter compared to $59.9 million in the second quarter.
The primary driver of the decline was an increase in the benefit ratio to 78.9% in the third quarter compared to 74.7% in the second quarter, which was primarily driven by increased claims in the short-term disability line related to the COVID Delta variant and the current external environment.
Premium income declined slightly on a sequential quarter basis, but we were pleased to see an uptick in growth to 2.6% on a year-over-year basis.
While short-term disability results were challenged this quarter, our long-term disability line performed in line with our expectations as new claim incidence showed an increase mostly driven by the flow-through of STD claims to LTD status, which was offset by continued strong claim recoveries.
It is likely that we will continue to see an elevated overall group disability benefit ratio as COVID and the current external environment continue to impact our STD results.
We do feel that COVID is a key driver of the higher benefit ratio for the group disability line and that as direct COVID impacts lessen over the first part of next year, we will see improvement in the benefit ratio.
Adjusted operating income for Unum US group life and AD&D declined to a loss of $67.1 million in the third quarter from income of $5.2 million in the second quarter.
This quarter-to-quarter decline of roughly $70 million was largely driven by the changing impacts from COVID that Rick described in his comments.
We were impacted by the deterioration in COVID-related mortality from our reported 52,000 national deaths in the second quarter to approximately 94,000 in the third quarter along with the age demographic shifting to higher impacts on younger working-aged individuals.
Estimated COVID-related excess mortality claims for our Group Life Block increased from approximately 800 claims in the second quarter to over 1,900 claims in the third quarter.
Accordingly, our results reflect mortality to level that represents approximately 2% of the reported national figures compared to a 1% rate experienced through 2020 when mortality was more pronounced in the elderly population.
With a higher percentage of working-age individuals being impacted, we also experienced higher average benefit size, which increased from around $55,000 in the second quarter to over $60,000 this quarter.
Finally, non-COVID-related mortality did not materially impact results in the third quarter relative to the experience of the second quarter.
Looking ahead to the fourth quarter, our current expectation is for U.S. COVID-related mortality to continue to worsen to approximately 100,000 deaths.
With continued higher mortality among working-aged individuals, we believe that group life results will remain under pressure with the expected fourth quarter loss similar, if not potentially worse than the experience of the third quarter.
Now looking at the Unum US supplemental and voluntary lines, adjusted operating income totaled $116.1 million in the third quarter compared to $114.2 million in the second quarter, both very good quarters that generated adjusted operating returns on equity in excess of 17%.
Looking at the three primary business lines.
First, we remain very pleased with the performance of individual disability recently issued block of business which has generated strong results throughout the pandemic.
We continue to see very favorable new claim incidence trends and recovery levels in this block.
The voluntary benefits line reported a strong level of income as well, though income was slightly lower on a quarter-to-quarter comparison.
The uptick in the benefit ratio in the third quarter to 46.6% from 44.2% in the second quarter was driven by increased COVID-related life insurance claims, which offset generally favorable results in the other VB product lines.
Finally, utilization in the dental and vision line improved, leading to an improvement in the benefit ratio to 75% this quarter from 77.1% in the second quarter.
Looking now at premium trends and drivers, total new sales for Unum US increased 7.7% in the third quarter on a year-over-year basis compared to the declines that we experienced in the first half of the year.
For the employee benefit lines which do include LTD, STD, group life, AD&D and stop-loss, total sales declined by 2.5% this quarter, primarily driven by lower sales in a large case market and generally flat sales in the core market, which are those -- which are those markets under 2,000 [Phonetic] lines.
Sales trends in our supplemental and voluntary lines rebounded strongly in the quarter, increasing 21.8% in total when compared to the year ago quarter.
We saw sharp year-over-year increases in the recently issued individual disability line up 22.9% and in the dental and vision line up 48.2%.
Voluntary benefit sales also recovered following lower year-over-year comparisons in recent quarters, growing 13.7% in the third quarter.
We also saw overall favorable persistency trends for our major product lines in Unum US.
Our group lines aggregated together showed a slight uptick to 89.4% for the first three quarters of 2021 compared to 89.1% last year.
Both the voluntary benefits and dental and vision lines also showed year-over-year improvements, while the individual disability line declined slightly.
The solid persistency numbers and improving sales trends provide a good tailwind for premium growth as we wrap up this year and move into 2022.
Now let's move on to the Unum International segment.
We had very good -- we had a very good quarter with adjusted operating income for the third quarter of $27.4 million compared to $24.8 million in the second quarter, a continuation of the improving trend in income over the past several quarters.
The primary driver of these results is our Unum UK business, which generated adjusted operating income of GBP18.4 million in the third quarter compared to GBP16.8 million in the second quarter.
The reported benefit ratio for Unum UK improved to 79.2% in the third quarter from 82.5% in the second quarter.
The underlying benefits experience was favorable for our Group Income Protection Block, primarily due to lower new claim incidence through -- though claim recoveries continue to lag our expectations somewhat.
The Group Life Block experienced adverse mortality primarily from non-COVID-related claims incidence and higher average size.
We did not see much impact this quarter from COVID in our UK Life Block.
Benefits experience in Unum Poland was also favorable this quarter helping generate a slight improvement in adjusted operating income.
Premium growth for our International businesses was also favorable this quarter compared to a year ago.
Looking at the growth on a year-over-year basis and in local currency to neutralize the benefit we saw from the higher exchange rate, Unum UK generated growth of 2.9% with strong persistency and the continued successful placement of rate increases on our in-force block.
Additionally, sales in Unum UK rebounded in the third quarter, increasing 40.2% over last year.
Unum Poland also generated growth of 12.5%, a continuation of the low double-digit premium growth this business has been producing.
Next, results for Colonial Life are in line with our expectations for the third quarter with adjusted operating income of $80.1 million compared to the record quarterly income of $95.8 million in the second quarter.
As with our other U.S.-based life insurance businesses, Colonial's life insurance block was negatively impacted by COVID-related mortality, which was the primary driver in pushing the benefit ratio to 55.9% in the third quarter compared to 51.7% in the second quarter.
We estimate that adverse COVID-related claims experienced in the life block impacted results by approximately $16 million, the worst impact we have seen from COVID throughout the pandemic and a level that is likely to persist through the fourth quarter.
Experience in the other lines being accident, sickness and disability and cancer and critical illness remained in line with our expectation and continue to drive strong earnings for this segment.
Additionally, net investment income increased 25% on a sequential basis in the third quarter, largely reflecting unusually large bond call activity this quarter.
We do not expect the benefit from bond calls to net investment income to continue at this level in the fourth quarter.
We were very pleased with the improving trend we are seeing in premium growth for Colonial Life, which was flat this quarter on a year-over-year basis after showing year-over-year declines in each of the past three quarters.
Driving this improving trend in premiums is a continuing rebound in sales activity at Colonial Life increasing 28.6% on a year-over-year basis this quarter and now showing a 21.1% increase for the first three quarters of 2021 relative to last year.
Persistency for Colonial Life continues to show an encouraging trend at 78.9% for the first three quarters of 2021, more than a point higher than a year ago.
In the Closed Block segment, adjusted operating income which does include -- which excludes the reserve assumption updates and the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction that did fully close earlier this year was $109.8 million in the third quarter and $111.2 million in the second quarter, both very strong results driven by favorable overall benefits experience in both the Long-Term Care line and Closed Disability Block, and strong levels of investment income to -- due to higher than expected levels of miscellaneous investment income, which I will cover in more detail in a moment.
Looking within the Closed Block, the LTC Block continues to produce results that are quite favorable to our long-term assumptions.
The interest adjusted loss ratio in the third quarter was 74.8% and over the past four quarters is 71.8%, which are both well below our longer-term expectation of 85% to 90%.
In the third quarter, we continue to see higher mortality experience in the claimant block, where accounts were approximately 5% higher than expected which is similar to our experience in the second quarter.
LTC submitted claims activity was higher in the third quarter, though much of the increase has not resulted in significant ongoing claim costs.
Looking out to the end of 2021 and into 2022, we do anticipate that the interest adjusted loss ratio for LTC will likely trend closer, though slightly favorable to our long-term assumption range, as mortality and incidence trends continue to normalize from the impacts of COVID.
For the Closed Disability Block, the interest adjusted loss ratio was 58.2% in the third quarter compared to 69.6% in the second quarter, both very favorable results for this line.
The underlying experience on the retained block, which largely reflects the active life reserve cohort and certain other smaller claim blocks we retained performed very favorably relative to our expectations, primarily due to lower submitted claims again this quarter.
So overall, it was a very strong performance again this quarter for the Closed Block segment.
Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the segment, driven by both higher than average bond call premiums, as well as strong performance in our alternative asset portfolio.
Looking ahead, we estimate the quarterly adjusted operating income for this segment will over time run within a range of $45 million to $55 million, assuming more normal trends for investment income and claim results in the LTC and Closed Disability lines.
First, we saw a high level of bond calls again this quarter as many companies refinanced higher coupon debt and took advantage of today's favorable credit market conditions.
We recorded approximately $20 million in higher investment income from bond calls this quarter relative to our historic -- our historical quarterly averages.
The Closed Block and Colonial Life segments were the primary beneficiaries of higher investment income this quarter.
Unum US was in line with historic averages, but lower this quarter than what we received in the second quarter.
While these calls enhance current period investment income, they are volatile from quarter-to-quarter.
Second, we continue to see strong performance in our alternative investment portfolio, which earned $38.2 million in the third quarter, following earnings of $51.9 million recorded in the second quarter.
Both quarters are well above the expected quarterly income on the portfolio of $12 million to $14 million.
The higher returns this quarter were generated from all three of our main sectors being credit, real estate and private equity, and reflected the strong financial markets and strong economic growth.
It is hard to predict quarterly returns for miscellaneous investment income, but for the fourth quarter, we believe that they will moderate to our expected quarterly returns.
Moving now to capital, the financial of the Company continues to be in great shape, providing a significant financial flexibility.
The weighted average risk-based capital ratio for our traditional U.S. insurance companies improved to approximately 380%, and holding company cash was $1.6 billion as of the end of the third quarter, both of which are well above our targeted levels.
In addition, leverage has trended lower with equity growth and is now 25.7%.
As Rick mentioned, we're very pleased to clarify our capital deployment plans for the balance of 2021 and for 2022.
For context, with the capital measures that I just discussed, we are in a very strong capital position with substantial financial flexibility.
Our strategy for deployment has not changed and our priorities remain consistent, including first, funding growth in our core businesses; second, supporting our LTC Block; third, executing opportunistic acquisitions that support our long-term growth; and fourth, returning capital to shareholders in the form of dividends and share repurchases.
We began to roll our plans out last week with the announcement of the authorization by our Board of Directors and to repurchase up to $250 million of our shares by the end of 2022.
We plan to begin this program with the execution of an accelerated share repurchase of $50 million in the fourth quarter.
We also plan to allocate capital to accelerate the recognition of the premium deficiency reserve for the LTC Block by a similar amount by the end of 2022.
We feel that this combination strikes a good balance of repurchasing our shares at what we believe are very attractive prices, while also fully fund in the PDR ahead of the original 2026 target to help lessen the valuation drag on our stock from the LTC exposure.
With this additional deployment of capital, we continue to project having a very solid capital position at the end of 2022 with holding company cash around $1 billion and an RBC ratio well above our target.
Now shifting topics, I wanted to give you a brief update on our progress in adopting ASC 944 or Long Duration Targeted Improvements.
As a reminder, this accounting pronouncement applies only to GAAP basis financial statements and has no economic statutory accounting or cash flow impacts to the business.
We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023, and we'll be sharing some qualitative information in our Form 10-Q filing, which is later today.
Although we continue to evaluate the effects of complying with this update, we do expect that the most significant impact of the transition date will be the requirement to update our liability discount rate with one that is generally equivalent to a single A interest rate.
We expect this will result in a material decrease to accumulated other comprehensive income and primarily be driven by the difference between the expected interest rates from our investment strategy and interest rates indicative of a single A rated portfolio.
As we continue to progress our work, we plan to provide updates to you in 2022 as we near adoption.
So let me close with an update on our expectations for the remainder of 2021.
With COVID-related mortality expected to increase further in the fourth quarter to approximately 100,000 nationwide deaths, we expect to see similar, if not slightly worse trends for mortality impacts on our life insurance businesses in the fourth quarter than we did experience in the third quarter.
The Unum US group disability benefit ratio is also likely to remain elevated due to continued high levels of STD claims.
In addition, we do not anticipate miscellaneous investment income to be as strong in the fourth quarter as it was in this quarter.
These impacts will likely pressure our fourth quarter results relative to what we experienced here in the third quarter.
As Rick mentioned, we plan to update you on our 2022 outlook during the first quarter of 2022 when we expect to have a more informed view of COVID mortality and infection trends.
We feel confident that premium growth in our core business segments in 2022 can build off of the momentum that began to reemerge this year and then we'll also see the benefits of executing our share buyback authorization.
With that said, future COVID trends will be a very important factor in our expected benefits experience.
We do continue to be pleased with the operational performance of the Company through what has been an extraordinary environment.
We believe we're really well positioned to benefit from today's strong business conditions and we have to remain vigilant as COVID-related mortality and infection rates continue to persist.
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q3 adjusted operating earnings per share $1.03.
will not provide an outlook for remainder of 2021.
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We refer to certain of these risks in our SEC filings.
Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research.
Last evening, we released our second quarter earnings results Core FFO was at the top end of our guidance range and above consensus expectations.
We will, of course, discuss those results, but we know our transformation that we announced on June 15 is top of mind for investors and the key focus of this management team.
Today I will update you on the progress of our strategic commercial portfolio sales and our research-led Southeastern markets expansion.
I will also address the strengthening Washington Metro multifamily market as well as Southeastern markets, and the status of our value creation opportunities.
Steve will discuss recent multifamily performance and trends, our views on strategic differentiators that we believe will continue to help us succeed, our second quarter results, and our strengthened balance sheet as we execute our transformation.
Then, I will wrap up by recapping our priorities for the balance of 2021 as we complete our transformation and move forward as a multifamily REIT.
Let me start with our progress on our strategic transformation.
Since our mid-June announcement of the transformation, we have completed the sale of our office portfolio.
Excluding our best office asset, Watergate 600, for which we believe we can drive even greater value for $766 million.
We have also given notice that we are redeeming the $300 million 2022 notes and expect to complete that redemption in late August.
We also are now under a binding agreement to sell our remaining retail assets to a single buyer for $168.3 million and expect that transaction to close in the third quarter.
I'd like to turn now to our progress on multifamily capital deployment.
As you know, we are in the final stages of a strategic transformation that has taken place over several years.
We went from four asset classes to one, and we are moving forward as a multifamily REIT with proven research driven strategies, a solid pipeline of investment opportunities, and a good economic backdrop.
Following these transactions, not only will we have recycled only -- over $5 billion of assets to improve our portfolio, but we also decreased leverage, increased liquidity, and lengthened our debt ladder.
These actions increased our financial flexibility and unencumbered the right side of our balance sheet to position us for growth.
In office, we were facing challenging and increasing headwinds, including increase in capital requirements and we expect those headwinds to continue.
This contrasts in growth prospects boosts our confidence that will create more values for our investors going forward through our portfolio recalibration.
We understand that these transactions are dilutive to earnings and FFO yet we believe they are initially NAV neutral and offer a far greater opportunity to increase NAV, not only in the near-term, but over the long-term as well.
Because of this, we have enough capital to execute these transformative steps and have access to capital beyond that.
Additionally, we have a road map to continue to grow and create value for our shareholders.
We are focusing on middle-income renters, which is a strong, underserved, and growing cohort in Southeastern markets that we are targeting, as well as here in DC where we have successfully been executing our affordability based investment and operational strategies.
Over the past several months, we have been actively underwriting deals in the Southeastern markets where we believe our strategies can successfully achieve long-term rent growth and outperformance.
These markets include Atlanta, Raleigh/Durham, and Charlotte.
We are positioning ourselves to acquire assets that have the targeted renter cohorts and growth opportunities by Vintage to allow us to execute our Class A Minus, Class B Value-Add, and Class B portfolio strategies.
We are targeting submarkets with attributes that we believe are most likely drive rent growth and channelling our specific investment strategy to best create value, just as we've done in the Washington Metro region.
Our pipeline has been active, and while we have passed on some deals that do not fit our strategies, we see opportunities ahead that make us confident we can allocate this capital appropriately over the balance of this year.
At this point, we have an initial asset under contract in suburban Atlanta and are in the process of acquiring additional assets that fit our strategies and our submarkets, where we expect to be able to grow rents.
We will provide more color through ongoing updates as we close on asset acquisitions.
The markets that we are targeting are projected to be among the best in the nation in population growth and net migration over the next decade, and the already strong rent growth that we've been tracking accelerated further throughout the second quarter.
Year-over-year effective rents for Atlanta, Raleigh/Durham, and Charlotte grew by 14.3%, 10.3%, and 10.6%, respectively, in June as reported by RealPage.
New lease trade outs were even stronger, averaging 17.9% across the three markets and a 670 basis point inflection between April and June.
Average concessions remained in the low-single digits in each market, averaging just 5.5%, catching up slightly over the quarter from 5.1% in the first quarter.
However, the breadth of the market offering concessions retreated markedly with just 15% of units across the three markets offering concessions in the second quarter, down 630 basis points over the quarter.
Annual demand also serves across these markets as in-migration and household formation drove record setting absorption.
Reported first quarter annual demand had already exceeded the 5-year average in each target market yet it jumped nearly 30% higher in the second quarter.
Raleigh/Durham and Charlotte posted second quarter annual demand at 156% and 151% of their 5-year averages, respectively, while Atlanta's second quarter annual demand topped 186% of its 5-year demand trend.
These market data points further illustrate the rationale behind our expansion into these markets, where we believe strong demand and rent growth outperformance will continue to power our expanding portfolio over the near and long-term.
Here in our home based markets, we also have great optimism for growth ahead.
The Washington apartment market also experienced a performance inflection during the second quarter with significant improvement from April through June, as reported by RealPage.
Year-over-year effective rents turned positive in June for the first time since April 2020, with particular improvement in June as effective rents climbed 214 basis points higher than the second quarter average.
Suburban Virginia's performance followed a similar pattern but with even stronger growth with year-over-year effective rent growth accelerating to 5.9% in June, 245 basis points better than the second quarter average.
Average concessions in the Washington market declined 200 basis points in the second quarter to 9.1%.
The breadth of the market offering concessions also declined with 19.7% of units in the Washington market offering concessions in the second quarter down 250 basis points versus the first quarter.
Our current same-store multifamily portfolio has approximately 6,700 units, and is 96% occupied.
Our average monthly rent is just under $1,700 per door.
Our suburban Virginia apartments have performed well during the pandemic, and continue to do well, much like the Sun Belt markets, we have researched and analyzed the last several years.
We are slightly above 96% occupied in suburban multifamily assets and 95.8% overall.
And effective rents continue to be strengthening.
Furthermore, two-thirds of our current 2,800 unit renovation pipeline is in our suburban assets.
We have activated the renovation programs and are targeting low double-digit ROIs at a minimum.
Urban effective rents have grown stronger every month since December buy-ins and urban blended lease rates have turned positive on an effective basis.
Meanwhile, suburban lease rate growth has been exceptionally strong, reaching over 5% on an effective basis for July move-ins.
We have now fully delivered and invested in Trove which delivered only $200,000 of NOI in the first quarter and approximately $425,000 in the second quarter, but most importantly, its lease-up now has tremendous momentum.
Since April 1, we have signed 160 leases or slightly over 40 leases per month, well above the regional average of 13 leases per month.
This increased demand allowed us to further push market rents by over 8% while also reducing concessions.
We now expect Trove to stabilize near year-end as opposed to our prior expectation of May of 2022.
Our multifamily rent collections have remained strong at 99% throughout the pandemic as our research has led us to focus on renters with solid credit in areas that offer a higher relative exposure to the strongest employment sectors.
The combination of the strong spring and summer leasing seasons and the vaccination-led end of pandemic restrictions leads us to believe that further strengthening from here is underway.
Over the long-term, our research-forward approach has positioned us with a multifamily portfolio in submarkets with strong supply and demand fundamentals.
From a demand perspective, the Washington Metro region has a significant housing shortage and an affordability crisis that is only getting worse as the cost of homeownership continues to rise.
From a supply perspective, our region has been under producing housing product at the price point that would address the growing demand, and therefore most matters remain underserved by new supply.
Our ability to successfully position ourselves to benefit from a large and growing target rental market and limited competitive supply over the long-term in our Washington Metro markets sets us up well to expand the key elements of our strategy into the targeted Southeastern markets.
We intend to utilize the learnings from the Washington Metro market and further adapt to continue our growth as we geographically diversify.
We are extremely grateful to all the WashREIT team members who have diligently reshaped this company over the past several years, and while we will miss those moving on to further their commercial portfolio careers, we are also excited by the team in place to continue to build our multifamily future.
We are augmenting our multifamily operational leadership and team for the new markets, and we are following the road map that we have created over the last year to build on our infrastructure for the future.
We believe we will create efficiencies as well as further enable our ability to scale up very effectively.
I will first cover our multifamily trends and results as well as our overall reported results for the quarter.
I will also address our views and strategic differentiators that we believe will continue to help us succeed, recap our balance sheet focus to allow us to continue to be strong even after our initial deployment of this transformation capital.
And finally, I will discuss our outlook.
We ended the second quarter on a positive note, and we are starting to experience the significant inflection that we had anticipated.
All signs point to increased demand momentum and we are seeing pricing power return.
Concessions are pulling back dramatically, effective lease rates have turned positive, and available rents indicate further improvements throughout the summer months.
Rate growth for new lease executions has improved over 10% over the last seven weeks, on a gross basis.
The average concession per unit for move-ins scheduled for July and August is 70% lower than the second quarter average, representing a $630 decline in concessions per unit.
Blended lease rate growth improved 460 basis points from the first quarter to the second quarter on an effective basis.
Yet the most significant growth occurred during the last two weeks of June.
The acceleration has continued into July and blended effective lease rates have already improved by another 240 basis points thus far, in July on an effective basis.
New lease rates has shown the most significant improvement with average new lease rate growth improving over 600 basis points from June to July on an effective basis.
Our suburban properties continue to outperform our urban properties and average new lease rate growth increased 5% thus far in July on a year-over-year basis.
And urban new lease rates have reached their inflection and turn positive on a blended basis for the first time on leases executed in late-July.
Both urban and suburban lease executions with August and September move-in dates indicate further improvement.
Looking at our rents on our available homes, this upward trend is continuing into the third quarter.
Applications and move-in activity remains strong as net applications increased 35% during the second quarter compared to the prior year.
Same-store occupancy grew 60 basis points post quarter end to 95.8%, allowing us to continue to push rents.
And on the renewal side, there have been very good demand and renewal lease rate growth is currently tracking above 3% on average, with suburban renewal lease rate growth tracking above 5% on an average.
Trove is now fully invested, and should begin to grow with NOI contribution significantly.
Leasing momentum continues to grow with Trove now over 76% occupied and 81% leased.
We expect Trove to be a key growth driver in 2022 and 2023.
As Paul said, two-thirds of our 2,800 unit renovation pipeline is in our suburban communities, where occupancy and effective lease rates are the strongest.
When the pandemic hit, we temporarily paused our renovation program, but have since activated these programs at properties that have appropriate affordability gaps and new renewal lease rate growth.
We began by rolling out market test renovations, winding up the materials and contracts, and executing the renovations at certain assets on turns.
Year-to-date, we have fully renovated our 90 units and invested capital in upgrading 80 additional units.
We are securing rent increases on renovated and improved units that meet or exceed our targeted ROIs and we are picking up the pace of renovations through the summer months while unit turnover is seasonally high.
Just this month, we completed 30 renovations and we are optimistic this momentum will further increase this summer.
Now turning to our financial performance.
Net loss for the second quarter of 2021 was approximately $7 million or $0.08 per diluted share compared to a net loss of $5.4 million or $0.07 per diluted share in the prior year.
Core FFO of $0.35 per diluted share was at the top end of our guidance range driven by stronger than expected results from both our multifamily and office portfolios.
On a year-over-year basis, Core FFO per share declined by $0.04 due primarily to the impact of the pandemic on rental and other income on the comparative period basis, and higher interest in G&A expenses.
Multifamily same-store NOI declined 2% on the GAAP and cash basis for the second quarter compared to the prior year, primarily driven by the combination of lease rate declines and higher concessions on leases signed during the pandemic.
While revenue comparisons for this quarter are still negative relative to the prior year, we have seen multifamily lease rates increase significantly and sequentially since their December lows.
Following the significant inflection in lease rate growth, which started in the second half of June and into July, we expect improving multifamily same-store results during the second half of the year.
Other same-store NOI declined 4.6% on the GAAP basis and 1.7% on the cash basis in the second quarter compared to the prior year period, primarily due to lower cost recoveries and higher utility expenses.
To briefly summarize commercial leasing activity we signed approximately 24,000 square feet of new office leases and approximately 88,000 square feet of renewal office leases in the second quarter.
Office rental rate were flat on a GAAP basis and declined 4% on a cash basis for new office leases and increased 37% on the GAAP basis, 5% on the cash basis for office renewals.
This renewal improvement was primarily related to the Sunrise lease at Silverline Center.
Our multifamily collections continue to be excellent, tracking well above national averages.
We collected over 99% of cash and contractual rents during the first quarter, and our rent collections through July are in line with our quarterly trends.
Year-to-date residents have and received over $1 billion of local government rent assistance.
We expect that number to grow as local governments continue to work through the backlog of claims and the pace of distributions ramp up throughout the second half of the year.
That said, our resident credit has been excellent, and this helps on the margin.
We have provided case studies to demonstrate how we use research to lease and executed those very same strategies successfully today, including investing in our suburban apartments ahead of the pandemic as over 70% of household formation is expected to take place in those markets over the next several years.
Our affordability and growing mid-market renter cohort demand has been steady, not only in our current market, but also in these other markets for years.
And we have confirmed that the same dynamics of housing needs for these renters exist as adjusted on a scale for income levels in those markets.
We have proven the importance of staying disciplined to not only compete at price levels with new supply that is beyond control but understand the importance of leading indicators for rental growth beyond broad market statistics.
Our tools include our predictive analytics capabilities using radian [Phonetic], the proprietary model developed by us with a research firm that analyzes employment and demographic data that we correlated with real estate data.
We analyzed many factors to find the highest r-squared correlation predicting rent growth, which leads us to target vintages in submarkets with increasing mid-market jobs by analyzing job creation and expectancies for cohorts we target.
Our analysis considers predicted job creation by submarket and the multiplier benefits of additional higher profile jobs, the patterns of in-migration as well as housing affordability and other factors to differentiate how we invest.
Often the submarkets that attract the newest Class A developments in the high Class A acquisitions are far more competitive and have lower projected rate growth.
And we have the capital to reinvest from our transformative sales as well as having additional value in Watergate 600 to harvest, we maintain our balance sheet strength to allow access to financing the growth and simplified our business model, making it more straightforward to attract investors who were previously concerned by our office exposure.
We expect to execute our strategy, create additional value, and win the supportive investors for further growth going forward.
Now turning to our outlook for the balance of the year.
This represents approximately 2% of 4% same-store multifamily growth in the second half of 2021.
Trove is expected to contribute between $3 million and $3.5 million of 2021 NOI and occupancy is now expected to stabilize near year-end.
Once concessions burn off that are incurred pre-stabilization, we expect Trove to contribute $7 million to $7.5 million of NOI annually, and then grow from there.
We have now fully invested Trove so all future lease-up increases profitability.
Finally, as we've discussed, at least for the balance of this year we expect to retain Watergate 600, the best office asset that we had owned, an estimate that it will contribute between $12 million and $12.5 million of NOI in 2021.
We've also previously disclosed, we closed on the after-sales on July 26 for gross proceeds of $766 million.
We've given notice to redeem the $300 million of 2022 bonds and expect that reduction to occur on or about August 26.
We also are now under definitive agreement to sell our remaining retail assets for $168.3 million, and expect that transaction to close in the third quarter.
We plan to pay down $150 million of Term Loans on or about the timing of closing the retail sales.
Over the balance of the year we expect to acquire $450 million of multifamily assets in the Southeastern markets we are targeting.
Our expectation is we will average initial first year cap rates in the low to mid-fours, and we hope to exceed that in some of the markets.
We have estimated total transaction costs for the transformation to be approximately $56 million, inclusive of debt breakage costs as we also plan to pay down debt with sales proceeds.
We are not providing guidance on interest expense since the timing is not completely finalized, although we have provided detailed guidance on debt repayments and its timing.
We also are not providing guidance on G&A for the year as we are executing many moving parts over the next few quarters.
We expect to establish full-year guidance for 2022 on our year-end earnings call.
Finally, we reset our dividend to levels we expect to cover in 2022 at a 75% FAD payout ratio or better.
We believe our strategic executions will enable stronger FAD growth going forward as we allocate capital out of office assets that have protracted downtime and a recurring CapEx to NOI burden of 20% and to multifamily assets for which we have maintained high occupancy, excellent collections, and historically required recurring CapEx to NOI of only 6%.
Our leverage will be very low as we execute sale transactions and when we are fully reinvested, we believe we will be able to sustain operating at even lower leverage levels than our prior governors.
While we may be in the mid to high-5 times net debt to adjusted EBITDA range in the first year after executing these transactions, as we progress to second and third years of multifamily NOI growth, we would aspire to operate in the lower half of the 5 to 6 times range.
Assuming the deleverage plan, we will have very little debt maturing in the near-term, none earlier than 2023 and our equity versus debt ratio is expected to get close to 80% to 20%, which would be very strong.
We have no secured debt in our capital structure, which provides us with flexibility to take on some agency debt or other secured debt as we have acquire apartments.
Moreover, we believe we will continue to have most of our line available so strong liquidity will be maintained.
Prior to redeeming the bonds and completing the sale of retail assets, we currently have approximately $1.35 billion of liquidity, including the full availability of our $700 million line of credit.
As we said when we announced the transformation last month, these transactions will help us achieve the following, one, accelerate our transformation into a multifamily focused REIT, which is the strongest asset class we've operated in and further de-risk our portfolio.
Two, provide us with capital to prudently invest in high growth of Southeastern markets.
Three, we set earnings growth and geographically diversified utilizing our research in the last several years.
Four, streamline and simplify our business model to promote sustainable growth and investor returns.
Five, improve our cash flow characteristics providing lower volatility and lower CapEx, and greater growth going forward.
And finally, delever to a targeted mid to high-5 times net debt to adjusted EBITDA range, assuming the repayment of debt and the redeployment of cash in the future multifamily investments.
We have operated both multifamily and commercial assets, and we know from experience that multifamily of the asset class that provides the most attractive long-term growth profile, delivers stronger and steadier cash flows, has lower capital requirements, and generates more consistent returns.
Concentrating on multifamily strengthens our growth prospects and simplifies our story for investors, making access to capital even stronger, which further improves our business and credit profiles.
Our research-led multifamily investment strategy has led us to invest in value-oriented multifamily assets that offer both favorable, long-term supply and demand fundamentals, and expanding into the selected Southeastern markets is a natural extension of the value creation strategies that we have proven in our local markets.
Our multifamily strategies are differentiated and our execution track record convinces us that this is the best path forward for our shareholders, despite absorbing initial FFO dilution.
For the balance of 2021, we are focused on allocating capital to our targeted Southeastern markets and taking steps to acquire additional talent and expand our presence in these markets, maintaining our leasing momentum at Watergate 600, scaling our renovation program, and sharpening our pencil as we evaluate our shovel ready development opportunity at Riverside, as well as others in our portfolio, as the market improves.
We are excited about delivering value to our shareholders in this next important phase of WashREIT.
We look forward to talking to many of you about our transformation over the coming weeks and months, and we plan to provide updates as we move forward.
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washreit q2 core ffo per share $0.35.
q2 core ffo per share $0.35.
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Let's dive right into a discussion about the quarter.
There were a number of puts and takes impacting our results in Q2, and Garth and I will spend time walking through them.
However, the fundamentals of our business remain solid, and consumer demand for our brands, particularly our core beer portfolio, remains strong.
In addition, we repurchased a significant number of shares in Q2 at prices that are favorable as we believe Constellation stock is undervalued at current levels.
We've received some feedback from investors on this topic in recent weeks, and we'll address key themes that emerge from these discussions in our remarks.
As we walk through our Q2 performance and outlook for the remainder of the year, there are several key takeaways we'd ask you to keep in mind.
Number one, the momentum of our core imported beer brands provides a point of competitive strength versus industry peers as we're the leading share gainer in the high end of the U.S. beer market.
The majority of our growth continues to be driven by Modelo Especial, supported by strong consumer demand for Corona Extra and Pacifico, and we expect this to continue for the foreseeable future.
We continue to believe that Modelo Especial in particular, has a long runway for growth, given the steadily increasing household penetration for this brand among non-Hispanic consumers and continued strong velocity.
Now we've admittedly had some supply challenges this fiscal year driven by several external factors, the most relevant being the ongoing robust demand for our beer brands.
We expect to return to more normal inventory levels by the end of Q4.
Despite these challenges, we continue to be on track to deliver a better-than-expected year for our beer business.
In fact, our strong performance to date gives us the confidence to increase guidance for our beer business as we now expect to achieve 9 to 11% net sales growth and 4 to 6% operating income growth for fiscal '22.
Our view is reinforced by recent 12-week IRI trends showing the Constellation's beer business is significantly outpacing the high end and total U.S. beer industry.
As it relates to our hard seltzer business and building off our last point, we're unique in our position versus our competitors in this space as our primary growth is coming from our core beer portfolio, and we're not reliant on the growth of hard seltzers and AVAs to achieve the medium-term growth goals for our beer business.
The hard seltzer landscape has shifted considerably in recent months.
Therefore, we've lowered our growth expectations for Corona Hard Seltzer resulting in a sizable obsolescence charge taken for Q2, which includes our view of the total impact for the fiscal year.
Going forward, we plan to focus on competing in this space in where we offer meaningful points of differentiation and unique value to consumers.
I'll have more to say on this topic in a moment.
Number three, while our wine and spirits business was challenged in the quarter by underperformance of several mainstream brands due to tough COVID comparisons, our recent route-to-market transition, and supply chain challenges for our imported wine brands, we continue to see the benefits of our premiumization strategy take hold.
We're performing well in the high end of the wine segment, which represents the vast majority of expected industry growth over the next several years, and we continue to strengthen our capabilities in emerging growth channels key to long-term success such as e-commerce and DTC.
Number four, we continue to enhance our approach to innovation with a more consistent, strategic, disciplined, and consumer-led approach with a focus on high-growth segments aligned with consumer trends.
Our innovation agenda is designed to complement our organic growth, and we're developing sustainable products that are incremental to our business while further premiumizing our portfolio into margin-accretive price points.
Over the years, we've been able to extend some of our brands into new spaces, recruiting new drinkers and expanding occasions, and we've achieved a healthy balance between growth from the core and from innovation.
Number five, our capital allocation strategy remains unchanged since I assumed the role of CEO almost three years ago.
Since then, we've made significant progress in reducing debt and achieving our goal of returning 5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases.
In fact, to date, this fiscal year, we have repurchased 1.4 billion of our shares.
And when combined with our dividend, we have achieved nearly 60% of our 5 billion goal.
To be clear, our shareholder value equation is based on outsized growth combined with return of dollars to shareholders.
One of the most important capital allocation priorities is to continue reinvesting in our beer business to keep up with robust demand for our products.
Despite initial challenges associated with the build-out of a third brewery in Mexico, we have moved on to other capacity alternatives in the country.
Our expansions in Nava and Obregon helped ensure we have adequate production capacity for the medium term and will create much needed redundant capacity that better enables us to manage through unexpected events like we've experienced these past two years.
We continue to work with the Mexican government to solidify plans for a new brewery in Southeastern Mexico with adequate water supply and an available talented workforce.
Now let's move on to a more fulsome discussion about our performance within the quarter.
During the quarter, the Modelo brand family posted depletion growth of 17% for the quarter and single-handedly drove total import share gains in IRI channels on a dollar basis.
2 beer brand in dollar sales in the entire U.S. beer category, Modelo Especial is the only major beer brand growing household penetration and is leading the way as the No.
1 share gainer among high-end brands.
Modelo Chelada has become the No.
2 brand family in the Chelada space, posting depletion growth of more than 50% and for the second quarter.
Corona Extra continues its growth trajectory as the second fastest share gainer and the No.
1 loved brand in the import category, driven by a return to growth in the on-premise, which currently represents approximately 11% of our beer business volume.
In addition to the comments I made earlier about our hard seltzers, I'd like to discuss industry trends and our refreshed approach to this sector of the beer market going forward.
In the short to medium term, we believe that there will be consolidation within the hard seltzer/ABA space primarily due to the chaos of SKU and brand proliferation with too many new entrants that don't have the velocity or consumer demand to warrant shelf space.
We also believe this subcategory will evolve beyond low-calorie, low-carb offerings, and open up to more distinctive consumer value propositions that include things like more flavor, different alcohol bases, and functional benefits.
We've already started to innovate in this way with distinct products like Refresca and Lemonada.
We've also discovered that consumers are looking for more robust taste and flavor in their seltzers.
As a result, we will be altering the flavor and taste profile of our seltzer portfolio to better align with the changing consumer preferences while also introducing single-serve packages to better serve the growing convenience channel, our largest trade channel.
And we have a solid lineup of innovation that we have yet to introduce.
We have several great examples of our innovation strategy at work within our wine and spirits portfolio.
This business continues to drive growth from recently launched innovations, including Meiomi cabernet sauvignon, Kim Crawford Illuminate, the Prisoner cabernet, and chardonnay, all of which are among the top 10 innovations across high-end wine in IRI channels during the quarter.
And our wine and spirits innovation pipeline is ready to go with further consumer-led new products as we head into our peak-selling period, including the expansion of our SVEDKA ready-to-drink platform and the introduction of Woodbridge wine seltzers and box wines.
In addition to driving growth through innovation, we're making progress with our core wine and spirits portfolio despite the previously mentioned challenges.
We continue to take price to further premiumize our mainstream portfolio as these steps are critical to maintain brand equity and to improve profitability, which will serve our brands well over the long term.
Our high-end super premium plus portfolio grew net sales double digits during the quarter.
In on-premise channels, our investments are paying off with enhanced wine offerings at major restaurant chains.
We're driving in critical emerging channels like three-tier e-commerce and direct-to-consumer, which continued to drive high-end growth, where we're outpacing category performance at key accounts, such as Instacart, Amazon, and Albertsons with the resurgence of online shopping due to the COVID pandemic.
For example, Constellation's fine wine share has expanded significantly in the latest 12 weeks due to the robust growth of the Prisoner on Instacart and Robert Mondavi Winery on wine.com.
In fact, e-commerce and DTC sales are up nearly three to four times versus 2019, and they comprise roughly 3 to 5% of our business versus 1% pre pandemic.
Going forward, we will continue to focus on becoming a category leader in e-commerce and DTC as we believe these channels will make up a significant portion of our mix over time and will continue to be an opportunity for high-end growth.
harvest, which is about 70% complete at this point, while our production facilities, wineries, and tasting rooms remain untouched by recent wildfire activity.
This quarter, our ventures activities included investments in adaptogen-infused hot water and Aaron Paul and Bryan Cranston's artesanal Dos Hombres mezcal.
Hop water is a nonalcoholic calorie-free sparkling water, infused with adaptedgens and new tropics to provide the perfect balance of function and flavor for health-conscious consumers.
The nonalcoholic segment of total beverage alcohol grew almost 40% in 2020 in dollar sales through IRI channels.
And according to IWSR research, 60% of consumers are switching between nonalcoholic or low alcoholic and full-strength drinks within the same occasion.
Dos Hombres is an award-winning handcrafted mezcal brand created by Breaking Bad co-stars who have developed an exceptional liquid that receives frequent praise from both the industry and consumers.
The overall U.S. mezcal category grew 14% in 2020 according to IWSR, and super premium mezcal priced above $30 per barrel is projected to be the largest and fastest-growing segment within the category.
Moving on to Canopy Growth.
We're encouraged by the recent introduction of the cannabis opportunity in Administration Act draft bill, which was introduced by Senators Booker, Wyden, and Schumer in July.
More than 90% of Americans are in favor of cannabis legislation for medical purposes and two-thirds of those are in favor of legalizing for recreational use as well.
In fact, nearly two out of three Americans already have legal cannabis access as 37 states have legalized for medical use and 18 states for adult use.
While we're optimistic about federal legislation within this congress, Canopy is not waiting for this reality to materialize.
Canopy's U.S. business grew 91% year over year in their most recent quarter, driven by robust consumer demand for their CBD and CPG products, including Martha Stewart-branded products, quatro beverages, stores and vape products, and BioSteel's new RTDs.
business is expected to grow significantly as it benefits from increasing distribution and new product introductions.
Once THC permissibility becomes a reality in the U.S., Canopy expects their U.S. business to make a substantially greater contribution to their results.
non-THC business with more opportunities in a world post federal permissibility.
Overall, we're comfortable with Canopy's progress, and we're looking forward to the growth and legalization prospects for the business.
In closing, I'd like to reiterate our main takeaways for this quarter.
First, continued strong demand for our core imported beer brands provides a point of competitive strength versus industry peers led by the No.
1 share gainer in the beer category, Modelo Especial, which we feel has ample runway for growth well into the future, given the steadily increasing household penetration rates among non-Hispanic consumers and continued strong velocity.
The short-term supply disruption to our imported beer business does nothing to dampen our long-term prospects as we expect to return to more normal inventory levels by the end of Q4, and we're on track to deliver a better-than-expected year for our beer business.
Second, we continue to see the hard seltzer and broader ABA space as a meaningful sector within the beer market.
Going forward, we plan to focus on competing in this space in ways where we can offer meaningful points of differentiation and unique value to consumers, and we have some upcoming innovation in this space that we're optimistic about.
Number three, we continue to see benefits of our wine and spirits premiumization strategy take hold.
We're performing well in the higher end of the wine segment, and we continue to strengthen our capabilities in emerging growth channels key to long-term success, such as e-commerce and DTC.
Fourth, we continue to enhance our approach to innovation with a more consistent, disciplined, and consumer-led approach focused on high-growth segments aligned with consumer trends to complement our organic growth while developing sustainable products that are incremental to our business at margin-accretive price points.
And fifth, and certainly not least, our shareholder value equation continues to be based on outsized growth combined with the return of dollars to shareholders.
And let me reiterate, our capital allocation strategy remains unchanged.
We remain committed to our goal of returning 5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases.
Our strong operational performance and cash flow generation allowed us to make significant share repurchases in Q2 aligned with our commitment, which contributed to the increase in our earnings per share guidance for the year.
At the same time, we remain committed to continuing to reinvest in our business with an emphasis on our beer business to keep up with the robust demand for our products.
Q2 certainly reflected yet another strong quarter of marketplace performance for our beer business.
Due to continued robust consumer demand for our core beer portfolio, we now expect to exceed our initial, top line, and operating income targets for our beer business.
Additionally, our strong cash flow generation enabled us to continue to repurchase shares during the quarter.
And through September, we've repurchased 6.2 million shares of common stock for $1.4 billion.
As a result, we've increased our full-year fiscal 2022 comparable basis diluted earnings per share target, and we now expect to be in the range of $10.15 to $10.45.
This range excludes Canopy equity and earnings impact and reflects the increase in beer operating income guidance and decrease in the average -- in the weighted average diluted shares outstanding based on shares repurchased through September partially offset by an increase in the tax rate for fiscal year 2022.
Now let's review Q2 performance and our full-year outlook in more detail, where I'll generally focus on comparable basis financial results.
Net sales increased 14%, driven by shipment volume growth of nearly 12% and favorable price partially offset by unfavorable mix.
Depletion volume growth for the quarter came in above 7%, driven by the continued strength of Modelo Especial and Corona Extra, as well as the continued return to growth in the on-premise channel.
Depletion trends tempered in Q2 versus Q1, driven by out-of-stocks due to ongoing robust consumer demand, as well as lost shipping days for some of our distributors due to severe weather events, including hurricanes and wildfires.
We estimate that these factors hampered Q2 growth by approximately two to three points.
As Bill mentioned, on-premise volume accounted for approximately 11% of the total beer depletions during the quarter and grew strong double digits versus last year.
As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre COVID and accounted for only 6% of our depletion volume in Q2 fiscal 2021 as a result of the on-premise shutdowns and restrictions due to COVID-19.
Selling days in the quarter were flat year over year and will also be flat in Q3.
Wholesaler depletions continued to outpace cases shipped during Q2, resulting in a lower-than-normal distributor inventory on hand at the end of the quarter.
To rectify this gap, shipment case volume is expected to exceed depletion case volume throughout the second half of the fiscal year, resulting in a gradual improvement of distributor inventories during Q3 and Q4 as inventories are expected to return to normal levels by the end of the fiscal year.
Moving on to beer margins.
Beer operating margin decreased 530 basis points versus prior year to 37.2%.
Benefits from favorable pricing, mix, and foreign currency were more than offset by unfavorable COGS, increased marketing investments, and higher SG&A.
The increase in COGS was driven by several headwinds that include the following: First, a Q2 obsolescence charge of $66 million.
As a result of our production constraints earlier in the year, we prebuilt hard seltzer inventory in advance of the key summer selling season based on our best estimates for fiscal year 2022.
Due to the overall slowdown in the hard seltzer category in the U.S., some of that growth is not going to materialize in the fiscal year, resulting in excess inventory.
Second, increased brewery costs, driven by labor inflation in Mexico, increased headcount, and incremental spend related to capacity expansion.
Third, a step-up in depreciation expense, largely due to the incremental 5 million hectoliters at Obregon.
And finally, as expected, increased material costs predominantly driven by increased commodity prices and inflationary headwinds on pallets, cartons, and aluminum.
These COGS headwinds were partially offset by favorable fixed cost absorption.
Marketing as a percent of net sales increased 150 basis points to 9.9 versus prior year as we returned to our typical spending cadence, which is weighted more heavily toward the first half of the fiscal year.
As a reminder, marketing spend in the first half of the prior year was significantly muted resulting from COVID-19-related sporting and sponsorship event cancellations and or postponements.
Lastly, the increase in SG&A was primarily driven by an increase of approximately $12 million in legal expenses, as well as higher compensation and benefits.
As mentioned earlier, we are increasing full-year fiscal 2022 net sales and operating income guidance for our beer business.
We are now targeting net sales growth of 9 to 11%, reflecting the strength of our core beer portfolio and pricing actions that are higher than initially planned.
Furthermore, we are now targeting operating income growth of 4 to 6%, which implies operating margin in the low to midpoint of our stated 39 to 40% range.
Please note that the updated guidance includes all obsolescence charges and legal expenses incurred in the first half of the fiscal year.
We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and our cost savings agenda are expected to be more than offset by several cost headwinds.
However, the mix and magnitude of these headwinds have changed from our original assumptions presented at the beginning of our fiscal year.
First, we're still estimating a significant step-up in depreciation expense, which began to accelerate in Q2.
However, some of this depreciation started later in the year versus planned.
As such, we are now estimating total beer depreciation expense to approximately $250 million, an increase of approximately $55 million versus last year, or a $10 million decrease versus our original planned estimate.
Second, we still expect expect substantial inflationary headwinds across numerous cost components to continue during the second half of our fiscal year as commodity prices continue to rise, specifically across aluminum, diesel, and pallets resulting from a rather volatile inflationary market.
And third, due to the growth moderation within the hard seltzer market, as well as lower ACV levels across the category on new items, we do not expect our hard seltzer SKUs to meet originally planned volume expectations, which results in a positive mix benefit versus our original estimate.
Conversely, due to the slowdown in the hard seltzer sector, excess inventory resulted in a fiscal year-to-date obsolescence charge of approximately $80 million.
Please note that these losses cover our hard seltzer obsolescence exposure and as such, we do not expect to take any additional obsolete charges in the back half of the fiscal year for hard seltzers.
From a marketing perspective, we continue to expect full-year spend as a percentage of net sales to land in the 9 to 10% range, which is in line with fiscal 2021 spend of 9.7% of net sales.
Looking ahead to Q3.
I'd like to remind everyone of the difficult buying overlaps we will encounter as we're facing a 28% and 12% growth comparison for shipment volume and depletion volume, respectively.
Additionally, we expect to perform our normal annual brewery maintenance during Q3, which will result in less throughput versus Q2 as we have to shut down production for a few days.
As such, we are estimating low single-digit shipment volume growth for Q3.
Moving to wine and spirits.
Q2 fiscal 2022 net sales declined 18% on shipment volume down 36%.
Excluding the impact of the wine and spirits divestitures, organic net sales increased 15%, driven by organic shipment volume growth of nearly 6%, favorable mix and price and smoke-tainted bulk wine sales.
Robust mix driven by the Prisoner brand family, Meiomi, and Kim Crawford accounted for approximately nine points of the year-over-year organic net sales growth.
Shipments were negatively impacted by port delays for our international brands and route-to-market changes, which also impacted depletions.
Depletion volume declined 2% during the quarter and was additionally impacted by the challenging overlap the consumer pantry loading behavior especially for our mainstream brands that experienced robust growth during the beginning of the COVID-19 pandemic.
However, as we head into the second half of the fiscal year, we feel as though most of these challenges are behind us and expect shipment volume and depletion volume to generally align in the second half of fiscal 2022.
Moving on to wine and spirits margins.
Operating margin decreased 620 basis points to 19.7% as mix benefits from the existing portfolio and divestitures combined with favorable price were more than offset by increased marketing and SG&A spend, higher COGS, and margin-dilutive smoke-tainted bulk wine sales.
Higher COGS were driven by unfavorable fixed cost absorption and increased transportation costs.
These headwinds were partially offset by lower great raw materials and other cost savings initiatives.
Keep in mind that we're lapping lower SG&A spend in Q2 fiscal 2021 due to COVID and having smaller business post divestitures, resulting in significant marketing and SG&A deleveraging, impacting operating margins.
For full-year fiscal 2022, the wine and spirits business continues to expect net sales and operating income to decline 22 to 24% and 23 to 25%, respectively.
This implies operating margin to approximately 24%, which is flattish to prior year on a reported basis, which shows significant margin expansion on an organic basis.
Excluding the impact of the wine experience divestitures, organic net sales is expected to grow in the 2 to 4% range.
From a Q3 perspective, keep in mind that we are lapping unfavorable fixed cost absorption of $20 million in the prior year resulting from decreased production levels as a result of the 2020 U.S. wildfires.
We expect this favorable overlap to be partially offset by a continued increase in transportation costs and incremental unfavorable fixed cost absorption due to the New Zealand frost.
Also, we continue to expect marketing and SG&A deleveraging as a result of the wine and spirits divestitures.
As such, we expect marketing and SG&A to continue to be a significant drag to operating margins in Q3 fiscal 2022.
Now let's proceed with the rest of the P&L.
Fiscal year-to-date corporate expenses came in at approximately $117 million, up 7% versus last fiscal year.
The increase was primarily driven by higher consulting services and compensation and benefits partially offset by a favorable foreign currency impact.
We now expect full-year corporate expenses to approximate $245 million, driven by increase in compensation and benefits.
Comparable basis interest expense for the quarter decreased 4% to approximately 96 million versus prior year primarily due to lower average borrowings.
We now expect fiscal 2022 interest expense to be in the range of 355 to $365 million.
The slight decrease versus our previous guidance reflects early redemption of higher interest rate debt, as well as $1 billion of senior notes issued in July at attractive rates.
Our Q2 comparable basis effective tax rate, excluding Canopy equity earnings, came in at 21.8% versus 16.9% in Q2 of last year, primarily driven by the timing of stock-based compensation benefits and a higher effective tax rate on our foreign businesses.
We now expect our full-year fiscal 2022 comparable tax rate, excluding Canopy equity and earnings, to approximate 20% versus our previous guidance of 19%.
This increase is primarily due to a higher effective tax rate on our foreign earnings than originally estimated.
I would also note that we expect stock-based compensation tax benefits to be weighted toward Q4.
As a result, we expect our Q3 tax rate to be higher than our full-year estimate at approximately 21%.
We also now expect our 2022 weighted average diluted shares outstanding to approximate 192 million, reflecting the impact of our September year-to-date share repurchases previously discussed.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
We generated free cash flow of $1.2 billion for the first half of fiscal 2022, which is flat to prior year, reflecting strong operating cash flows offset by an increase in capex.
Capex totaled $353 million, which included approximately $295 million of beer capex, primarily driven by expansion initiatives at our Mexico facilities.
Our full-year capex guidance of 1 to 1.1 billion, which includes approximately 900 million targeted for Mexican beer operation expansions, remains unchanged.
Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of 1.4 to $1.5 billion.
This reflects operating cash flow in the range of 2.4 to $2.6 billion and the capex spend previously outlined.
In closing, I want to iterate that while we had our fair share of challenges during the first half of our fiscal year resulting in several puts and takes impacting our results, the fundamentals of our business remain strong, and consumer demand for our products, particularly our imported beer portfolio, remains robust, providing us with strong momentum as we head into the second half of our fiscal year.
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state street - q2 earnings per share $2.07.
announced common share repurchase program of up to $3 billion.
investment servicing auc/a as of quarter-end increased 27% to $42.6 trillion.
investment management aum as of quarter-end increased 28% to $3.9 trillion.
state street corp - q3 2021 cash dividend of $0.57 per share of common stock, an increase of 10% from $0.52 per share of common stock in prior quarter.
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Hope you're all well.
I'll start with a brief comment on earnings and Joe will provide more detail.
The quarter was about as we expected with the reported earnings strength, driven by a reserve release.
Beyond that, the margin continues to be a headwind but credit [Phonetic], overall deposit fees and the strength of our financial services businesses are tailwinds.
From a business line perspective, commercial is flat, ex-PPP and muni loans, but the pipeline is growing back post-COVID quicker than we expected; that's good news.
The mortgage business is strong with the biggest pipeline we've ever had.
The payoffs are elevated also.
So the book is growing more slowly than it might otherwise.
The indirect lending business had a great Q2 with outstandings up 8% over Q1.
Deposit service fees continue to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020.
And like the entire industry, deposits are up.
Our financial services businesses were the star performers of the quarter with combined revenues up 14% and pre-tax earnings of 25% over 2020.
We are also pleased to announce, earlier this month, the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota.
The benefits space is very active right now in terms of opportunities and we expect more to come.
The benefits of a diversified revenue model have never been so apparent.
As we announced last week, our Board has approved a $0.01 per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases and we think a validation of our disciplined and diversified business model.
As we announced in March, we have appointed Dimitar Karaivanov as our Executive Vice President for Financial Services and Corporate Development and he began in this role in June.
He joined us from Lazard, where he was a Managing Director in the Financial Institutions Group and has over a dozen years of experience in investment banking, serving clients in the banking benefits and FinTech space.
I've known and worked with Dimitar for nearly his entire career and am thrilled to have him on board supporting our growth initiatives.
Looking ahead, we will be doing our best to manage the changing winds.
We have the headwind in margin pressure but growth, credit, the momentum of our financial services businesses and liquidity deployment are all tailwinds.
As Mark noted, the second quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.88.
The GAAP earnings results were $0.22 per share or 33.3% higher than the second quarter of 2020 GAAP earnings results, and $0.12 per share or 15.8% better on an operating basis.
The improvement in earnings per share was led by lower credit-related costs and a significant increase in non-interest revenues, particularly in the company's non-banking businesses.
Comparatively the company recorded GAAP earnings and operating earnings per share of $0.97 in the linked first quarter of 2021.
The company reported total revenues of $151.6 million in the second quarter of 2021 a $6.7 million or 4.6% increase over the prior year's second quarter revenues of $144.9 million.
The increase in total revenues between the periods was driven by a $5.3 million or 13.7% increase in financial services business revenues and a $1.2 million or 8.6% increase in banking-related non-interest revenues.
Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter 2020 results.
Total revenues were down $0.9 million or 0.6% from the linked quarter first quarter driven by a $1.9 million decrease in net interest income, offset in part by higher non-interest revenues.
Although net interest income was up slightly over the same quarter last year, the results were achieved on a lower net interest margin outcome.
The company's tax equivalent net interest margin for the second quarter of 2021 was 2.79%.
This compares to 3.03% in the first quarter of 2021 and 3.37% one year prior.
Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low-yield cash equivalents we maintain on the company's balance sheet.
The tax equivalent yield on earning assets was 2.89% in the second quarter of 2021 as compared to 3.15% in the linked first quarter and 3.56% one year prior.
During the second quarter, the company recognized $3.9 million of PPP-related interest income, including $2.9 million of net deferred loan fees.
This compares to $6.9 million of PPP-related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees.
The company's total cost of deposits remained low, averaging 10 basis points during the second quarter of 2021.
Employee benefit services revenues were up $3.4 million or 14.2% over the prior year's second quarter, driven by increases in employee benefit trust and custodial fees.
Wealth management revenues were also up $1.9 million or 29.2%, driven by a higher investment management advisory and trust services revenues.
Insurance services revenues were consistent with prior year's results.
The increase in banking-related non-interest revenues was driven by a $2.3 million or 17.6% increase in deposit service and other banking fees, offset in part by a $1 million decrease in mortgage banking income.
During the second quarter of 2021, the company reported a net benefit in the provision for credit losses of $4.3 million.
This compares to a $9.8 million provision for credit losses reported in the second quarter of 2020, $3.2 million of which was due to the acquisition of Steuben Trust Corporation with the remaining $6.6 million largely driven by pandemic-related factors.
During the second quarter of 2021, the company reported 3 basis points of net loan recoveries and the post-vaccine economic outlook remain positive.
In addition, at the end of the second quarter, there were only 12 borrowers representing $2.4 million in loans outstanding and that remained in the pandemic-related forbearance.
This compares to 47 borrowers in pandemic-related forbearance representing $75.6 million at the end of the first quarter, and 3,700 borrowers with approximately $700 million of loans outstanding one year earlier.
These factors drove down the expected loan losses resulting in the recording of a net benefit in the provision of credit losses for the quarter.
The company recorded $93.5 million in total operating expenses in the second quarter of 2021 as compared to $87.5 million in the second quarter of 2020, excluding $3.4 million of acquisition-related expenses.
The $6 million or 6.9% increase in operating expenses was attributable to a $3.2 million or 5.8% increase in salaries and employee benefits, a $1.9 million or 17.8% increase in data processing and communications expenses, and a $0.7 million or 7.7% increase in other expenses and a $0.5 million or 5.3% increase in occupancy and equipment expense, offset, in part, by a $0.3 million or 7.9% decrease in the amortization of intangible assets.
The increase in salaries and employee benefits expense was driven by increases in merit-related employee wages, higher payroll taxes, including increases in the state-related unemployment taxes, higher employee benefit-related expenses and the Steuben acquisition.
Other expenses were up due to the general decrease in the level of business activities, including increases in business development and marketing expenses.
The increase in data processing and communications expenses was due to the second quarter 2020 Steuben acquisition and the company's implementation of new customer-facing digital technologies and back office systems between the comparable periods.
The increase in occupancy and equipment expenses was driven by the Steuben acquisition.
In comparison, the company recorded $93.2 million of total operating expenses in the first quarter of 2021, $0.3 million or 0.3% lower than the second quarter 2021 total operating expenses.
The effective tax rate for the second quarter of 2021 was 23.1%, up from 20.3% in the second quarter of 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.
The company closed the second quarter of 2021 with total assets of $14.8 billion.
This was up $181.1 million or 1.2% from the end of the linked first quarter and up $1.36 billion or 10.1% from a year earlier.
Average interest earning assets for the second quarter of 2021 of $13.37 billion were up $680.6 million or 5.4% from the linked first quarter of 2021, and up $2.27 billion, or 20.4% from one year prior.
The very large increases in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben and margin flows of government stimulus-related deposit funding PPP originations.
The company's ending loan balances of $7.24 billion were down $124.2 million or 1.7% from the end of the first quarter.
Excluding the net decrease in PPP loans of $126.1 million and the seasonal decrease in municipal loans totaling $41.2 million, ending loans increased $43.1 million or 0.6%.
As of June 30, 2021, the company's business lending portfolio included 317 first draw PPP loans with a total balance of $72.5 million and 2,254 second draw PPP loans with a total balance $212.3 million.
The company expects to recognize, through interest income, the majority of its remaining first draw net deferred PPP fees totaling $0.9 million during the third quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $9.2 million over the next few quarters.
On a linked quarter basis, the average book value of the investment securities portfolio increased $290.2 million or 7.9% from $3.67 billion during the first quarter to $3.96 billion during the second quarter.
With this said, the company has largely remained on the sidelines with respect to deploying excess liquidity and for market interest rates to become more attractive.
During the second quarter, the company's average cash equivalents of $2.07 billion represented approximately 16% of the company's average earning assets.
This compares to $1.67 billion in average cash equivalents during the first quarter of 2021 and $823 million in the second quarter of 2020.
The $408 million or 24.5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds and the origination of second draw PPP loans and first draw PPP loan forgiveness.
The company's capital reserves remained strong in the second quarter.
The company's net tangible equity to net tangible assets ratio was 9.02% at June 30, 2021.
This was down from 10.08% a year earlier, but up 8.48% at the end of the first quarter.
The company's Tier 1 leverage ratio was 9.36% at June 30, 2021, which is nearly 2 times the well-capitalized regulatory standard of 5%.
The company has an abundance of liquidity with the combination of company's cash and cash equivalents.
Borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available-for-sale investment securities portfolio provides the company with over $6.1 billion of immediately available sources of liquidity.
At June 30, 2021, the company's allowance for credit losses totaled $51.8 million or 0.71% of of loans outstanding.
This compares to $55.1 million or 0.75% of total loans outstanding at the end of the first quarter of 2021 and $64.4 million or 0.86% of total loans outstanding at June 30, 2020.
The decrease in the allowance for credit losses is reflective of an improving economic outlook, the very low levels of net charge-offs and a decrease in delinquent loans and loans on on pandemic-related forbearance.
Non-performing loans decreased in the second quarter to $70.2 million or 0.97% of loans outstanding, down from $75.5 million or 1.02% of loans outstanding at the end of the linked first quarter of 2021, but up from $26.8 million or 0.36% of loans outstanding at the end of the second quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non-accrual status between the periods.
The specifically identified reserves held against the company's non-performing loans totaled only $2.8 million at June 30, 2021.
Loans 30 to 89 days delinquent totaled 0.25% of loans outstanding at June 30, 2021.
This compares to 0.37% one year prior and 0.27% at the end of the linked first quarter.
Management believes the low levels of delinquent loans and charge-offs has been supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
We remain focused on new loan origination and we'll continue to monitor market conditions to seek the right opportunities to deploy excess liquidity.
Our pipeline -- loan pipelines increased considerably during the second quarter and asset quality remains very strong.
We also expect net interest margin pressures to persist and remain well below our pre-pandemic levels but also believe our abundance of cash equivalents represent a significant future earnings opportunity.
We're also fortunate and pleased to have a strong non-banking businesses that supported and diversified our streams of non-interest revenue.
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q1 operating earnings per share $0.97.
q1 revenue rose 2.6 percent to $152.5 million.
qtrly gaap earnings per share $0.97.
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