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dollargeneral.com under News & Events.
Such as statements about our strategy, plans, including but not limited to our 2021 real estate outlook, our initiatives, goals, priorities, opportunities, investment, guidance, expectations or beliefs about future matters, including but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer and other statements that are not limited to historical fact.
We also may reference certain financial measures that have not been derived in accordance with GAAP.
dollargeneral.com under News & Events.
Despite continued significant uncertainty in the operating environment, our team members have been unwavering in their commitment to fulfilling our mission of serving others, by providing affordable, convenient and close to home access to everyday essentials, at a time when our customers need them most.
I could not be more proud of their efforts.
As always, the health and safety of our employees and customer continues to be our top priority.
We continue to closely monitor CDC and other governmental guidelines regarding COVID-19 and are evaluating and adapting our safety protocols as that guidance evolves.
As one of America's essential retailers, we remain committed to being part of the solution during these difficult times.
And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17,000 stores located within 5 miles of approximately 75% of the US population.
At the same time, we remain focused on advancing our operating priorities and strategic initiatives, as we continue to meet the evolving needs of our customers and further position Dollar General for a long-term sustainable growth.
To that end, and from a position of strength, I'm excited to share an update on some of our more recent plans.
First, as you saw in our release, we plan to further accelerate our pace of new store openings and remodels in 2021.
In total, we expect to execute 2,900 real estate projects next year, as we continue to lay and strengthen the foundation for future growth.
As previously announced, we recently introduced our newest store concept pOpshelf, further building on our proven track record of store format innovation.
We opened our first two locations during the quarter and while still early, we are encouraged by their initial results.
Finally, one of our core values is representing and respecting the dignity and differences of others.
Building on this core value, along with our commitment to diversity and inclusion, we recently updated our fourth operating priority to better capture and express our intent.
We will discuss each of these updates in more detail later in the call.
But first, let's recap some of the results for the third quarter.
The quarter was once again highlighted by exceptional growth on both the top and bottom lines.
We're particularly pleased that for the quarter, our three non-consumable categories once again delivered a combined sales increase, well in excess of our consumable business.
Of note, this represents our 10th consecutive quarter of year-over-year comp sales growth in our non-consumable business, which speaks to the strong and sustained momentum in these product categories.
From a monthly cadence perspective, comp sales for Q3 periods range from the low double digits to mid-teens with the best performance in August followed by modest moderation as we move through the quarter.
Overall, third quarter net sales increased 17.3% to $8.2 billion, driven by comp sales growth of 12.2%.
These results include significant growth in average basket size, partially offset by a decline in customer traffic, as we believe customers continue to consolidate shopping trips in an effort to limit social contact.
Once again this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data, driven by double-digit increases in both units and dollars.
Importantly, our data suggests an increase in new customers this quarter, as compared to Q3 of 2019.
These new customers skew younger, higher income and more ethnically diverse, further underscoring the broadening appeal of our value and convenience proposition.
We are also encouraged by the repurchase rates of new customers and are working hard to retain them, with more targeted marketing and continued execution of our key initiatives.
We're particularly pleased with the -- and how we delivered significant operating margin expansion, which contributed to third quarter diluted earnings per share of $2.31, an increase of 63% over the prior year.
Collectively, our Q3 results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to create meaningful long-term shareholder value.
We operate in one of the most attractive sectors in retail and with our unique combination of value and convenience, further enhanced through our initiatives, we believe we are well positioned to successfully navigate the current environment and emerge even stronger than before.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless I specifically note otherwise, all comparisons are year-over-year and all references to earnings per share refer to diluted earnings per share.
As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by meaningful increase in sales including the impact of COVID-19.
Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year-over-year gross margin rate expansion.
This increase was primarily attributable to a reduction markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
SG&A as a percentage of sales was 21.9%, a decrease of 62 basis points.
Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales this quarter include, occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance and employee benefits.
These items were partially offset by increases in incentive compensation expense and hurricane-related expenses.
Moving down the income statement, operating profit for the third quarter increased 57.3% to $773 million, compared to $491 million in the third quarter of 2019.
As a percentage of sales, operating profit was 9.4%, an increase of 240 basis points.
Operating profit in the third quarter was positively impacted by COVID-19, primarily through higher sales.
The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers, and approximately $25 million in appreciation bonuses for eligible frontline employees.
Year-to-date to the third quarter, we have invested approximately $153 million in COVID-19 related expenses including about $99 million in appreciation bonuses for our frontline employees.
Our effective tax rate for the quarter was 21.6% and compares to 21.7% in the third quarter last year.
Finally, as Todd noted earlier, earnings per share for the third quarter increased 62.7% to $2.31.
Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times, while continuing to invest for the long term.
We finished the quarter with $2.2 billion of cash and cash equivalents, a decrease of $760 million compared to Q2 and an increase of $1.9 billion over the prior year.
Merchandise inventories were $5 billion at the end of the third quarter, an increase of 11.8% overall and 5.9% on a per store basis.
While out of stocks remain higher than normal for certain high demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels.
Year-to-date to Q3, we generated significant cash flow from operations totaling $3.4 billion, an increase of 103.7%.
Total capital expenditures through the first three quarters were $698 million and included our planned investments in remodels and relocations, new stores and spending related to our strategic initiatives.
During the quarter, we repurchased 4.4 million shares of our common stock for $902 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $88 million.
At the end of Q3, the remaining share repurchase authorization was $1.6 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDAR.
Moving to an update on our financial outlook for fiscal 2020.
We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business.
As a result, we are not providing guidance for fiscal 2020 sales or earnings per share at this time and are unlikely to resume issuing guidance to the extent such uncertainties persist.
Let me now provide some context as to what we expect in the fourth quarter.
Given the unusual situation, I will elaborate on our comp sales trends thus far in Q4.
From the end of Q3 through December 1, comp sales accelerated increasing approximately 14% during this timeframe, reflecting increased demand in our consumables business.
And while we remain cautious in our sales outlook, we are encouraged with our sales trends, particularly as we move further past government stimulus payments and the expiration of enhanced unemployment benefits under the CARES Act.
That said, significant uncertainty still exists concerning the duration of the positive sales environment, including external factors related to the ongoing health crisis and their potential impact on our business.
Beyond these macro factors, there are number of more specific considerations as it relates to the fourth quarter.
First, we anticipate higher transportation and distribution costs in Q4.
Like other retailers, our business is seeing the effect of higher transportation costs due to a tight carrier market, as a result of driver shortages and a greater demand for services at third-party carriers.
In addition, we are in the process of building, expanding or opening a number of distribution centers across our dry and DG Fresh networks.
And while we expect, these investments will enable us to drive even greater efficiencies going forward and further support future growth, these investments will pressure gross margin rates in Q4.
Also please keep in mind that the fourth quarter represents our most challenging lap of the year from a gross margin perspective filing 60 basis points of rate improvement in Q4 2019.
With regards to our strategic initiatives, we continue to anticipate they will positively contribute to operating margin over time as the benefit to gross margin continues to scale and outpace the associated expense with both NCI and DG Fresh on pace to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure SG&A rates in the fourth quarter, as we further accelerate their rollouts.
Finally, we expect to make additional investments in the fourth quarter as a result of COVID-19, including up to $75 million in employee appreciation bonuses, which includes our recent announcement to award approximately $50 million in additional bonuses, bringing our full year investment in appreciation bonuses to approximately $173 million, as well as continued investments in health and safety measures.
In closing, we are very proud of the team's execution and service resulting in another quarter of exceptional results.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our four operating priorities.
Our first operating priority is driving profitable sales growth.
The team once again did a fantastic job in Q3, executing against a portfolio of growth initiatives.
Let me highlight some of our recent efforts.
Starting with our cooler door expansion program which continues to be our most impactful merchandising initiative.
During the first three quarters, we added approximately 49,000 cooler doors across our store base.
In total, we expect to install more than 60,000 cooler doors this year.
The majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.
Turning now to private brands, which remain a priority, as we look to drive overall category awareness and even greater customer adoption through rebranding, repositioning and expansion of select brands as well as the introduction of new product lines.
We're very pleased with the continued progress across these fronts, including the successful rebranding of six product lines and the introduction of two new brands so far this year.
And we're excited about the continued momentum we're seeing across the portfolio.
Finally, a quick update on our FedEx relationship.
During the quarter, we completed our initial rollout of this convenient customer package pick-up and drop-off service, which is now available in more than 8,500 stores.
We're very pleased with the reception this offering is receiving from our customers and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers in convenient and nearby locations.
Beyond these sales driving initiatives, enhancing gross margin remains a key area of focus for us.
In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us.
The team once again did a great job during the quarter, working with our supply partners to ensure product availability.
Looking ahead, we continue to pursue opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies including the continued expansion of our private fleet, the opening of additional DG Fresh facilities and the recent purchase of our future Walton, Kentucky dry distribution center, which should contribute to a further reduction in stem miles beginning early next year.
In addition, we recently began construction on our first ever ground up combination DG Fresh and dry distribution center in Blair, Nebraska.
We anticipate this facility will be completed in early 2022, enabling us to drive even greater efficiencies as we move ahead.
The team is also executing against additional opportunities to enhance gross margin, including further improvements in shrink, as we continue to build on our success with electronic article surveillance.
Our second priority is capturing growth opportunities.
Our proven high-return low-risk real estate model continues to be a core strength of our business.
As previously announced, we recently celebrated a significant milestone with the opening of our 17,000th store.
This is a testament to the fantastic work of our best-in-class real estate team as we continue to expand our footprint and enhance our ability to serve even more customers.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities.
These metrics include, new store productivity, actual sales performance, average returns, cannibalization and the payback period.
Of note, we continue to see strong performance across these metrics.
For 2020, we remain on track to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores.
Through the first three quarters, we opened 780 new stores, remodeled 1,425 stores, including more than 1,000 in the higher cooler count, DGTP or DGP formats, and we relocated 76 stores.
We also added produce in more than 140 stores, bringing the total number of stores which carry produce to more than 1,000.
As Todd noted for fiscal 2021, we plan to execute 2,900 real estate projects in total including 1,050 new stores, 1,750 remodels and 100 store relocations.
Additionally, we plan to add produce in approximately 600 stores.
Notably, we expect approximately 50% of our new unit openings and about 75% of our remodels to be in the DGTP or DGP formats.
The remainder of our new store openings and remodels will primarily be in the traditional format with higher capacity coolers.
Our plans also include having approximately 30 stores in our new pOpshelf concept, which Todd will discuss in more detail by the end of fiscal 2021 up from two locations today.
Overall, our real estate pipeline remains extremely robust and we are excited about the significant growth opportunities ahead.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
Over the years, we've established a clear and defined process to control spending, which governs our disciplined approach to spending decisions.
This zero based budgeting approach, internally branded as Save to Serve keeps the customer at the center of all we do, while reinforcing our cost control mindset.
We continue to build on our success with Fast Track, which Todd will discuss in more detail later.
As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand, as evidenced by our recent customer survey results where we continue to see overall satisfaction scores at all time highs.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.
We have three business operating priorities.
But at the heart of them is our foundational fourth operating priority.
This priority is anchored in our people and it's truly foundational to everything we do at Dollar General.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As Todd noted, this updated language more fully expresses our values and core beliefs and more closely aligns with the investments we continue to make in the development of our people.
Importantly, we believe these investments continue to yield positive results across our store base, as evidenced by continued, record low store manager turnover, record staffing levels, healthy applicant flows and a robust internal promotion pipeline.
As a growing retailer, we also continue to create new jobs and opportunities for career advancement.
In fact, more than 12,000 of our current store managers are internal promotes and we continue to innovate on the development opportunities we can offer our teams.
We believe, the opportunity to start and develop a career with a growing and purpose-driven Company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also recently completed our annual community giving campaign, where employees across the organization come together to raise funds for a variety of important causes.
I was once again humbled by the generosity and compassion of our people.
This event truly embodies the Serving Others culture that is so deeply embedded at Dollar General.
In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can drive continued growth in the years ahead.
I'm proud of the great progress the team has made in advancing our strategic initiatives.
Let me take you through some of the most recent highlights.
Starting with our non-consumable initiative or NCI.
As a reminder, NCI consist of a new and expanded product offering in key non-consumable categories.
The NCI offering was available in 5,200 stores at the end of Q3, and given our strong execution to date, we now expect to expand the offering to more than 5,600 stores by the end of 2020.
Including approximately 400 stores in our NCI lite [Phonetic] version.
This compares to our prior expectation of more than 5,400 stores at year end.
We're especially pleased with the strong sales and margin performance our NCI stores once again delivered in the quarter.
We also continue to benefit from incorporating select NCI products and planograms throughout the broader store base.
And we are pleased with the performance of our lite stores which incorporates a vast majority of the NCI assortment, but through a more streamlined approach.
As noted earlier, we are also excited about the recent introduction of pOpshelf and the opening of our first two locations, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through, first, continually refresh merchandise, primarily in targeted non-consumable product categories.
Second, a differentiated in-store experience, including impactful displays of our offering designed to create a highly visual, fun and easy shopping experience.
And third, exceptional value with approximately 95% of our items priced at $5 or less.
Importantly, while pOpshelf delivers many of Dollar General's core strengths, including customer insights, merchandise innovation, operational excellence, digital capabilities and real estate expertise, it is specifically tailored to a different shop indication.
We'll primarily be located in suburban communities and initially targets a higher income customer, potentially unlocking additional and incremental growth opportunities going forward.
We're proud of all of the incredible work the team has done in standing up this concept and with the initial work now behind us, we look forward to welcoming additional customers to pOpshelf, as we move forward, our goal of approximately 30 stores by the end of 2021.
Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods.
As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, by removing the markup paid to third-party distributors, thereby enhancing gross margin.
And we continue to be very pleased with the product cost savings we are seeing.
In fact, DG Fresh continues to be the largest contributor to gross margin benefit we are realizing from higher initial mark-ups on inventory purchases.
Importantly, we expect this benefit to grow as we continue to scale this transformational initiative.
Another important goal of DG Fresh is to increase sales in these categories.
We're pleased with the success we are already seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional items, including both national and private brands in select stores being serviced by DG Fresh.
And while produce is not included in our initial rollout plans, we plan -- we plan and continue to believe DG Fresh could provide a potential path forward to expanding our produce offering to even more stores in the future.
In total, we were self-distributing to more than 13,000 stores from eight DG Fresh facilities at the end of Q3.
We expect to capture benefits from this initiative in more than 14,000 stores from 10 facilities by the end of this year and are well on track to complete our initial rollout across the chain in 2021.
Next, our digital initiative, where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
In an environment where customers continue to seek safe, familiar and convenient experiences, we believe our unique footprint combined with our digital assets, provides a distinct competitive advantage.
More specifically, I'm pleased to note that during the quarter, we expanded DG Pickup, our buy online, pickup in the store offering to nearly 17,000 stores compared to more than 2,500 stores at the end of Q2, providing another convenient access point for those seeking a more contactless customer experience.
In addition to DG Pickup, our plans include further expansion of DG GO checkout, as we look to make this feature available in select stores that includes self checkout further enhancing our convenience proposition.
By leading our channel in digital tools and experiences, we believe we are well positioned to drive more in-store traffic, grow basket size and offer even greater convenience to new and existing customers.
Moving now to Fast Track, where our goals, including increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging.
The second component of Fast Track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
During the quarter, we accelerated the rollout of self checkout to more than 900 stores, compared to approximately 400 stores at the end of Q2, with plans for further expansion as we move forward.
And while still early, we are pleased with the initial results, including our customer adoption rates as well as positive feedback from both customers and employees.
Overall, we remain focused on controlling what we can control, while taking actions, including the continued execution of our key initiatives to further differentiate and distance Dollar General from the rest of the discount retail landscape.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives and continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly changing retail landscape.
In closing, we are very proud of the team's performance and our results through the first three quarters of 2020, which further demonstrate that our unique combination of value and convenience continues to resonate with our customers and positions us well going forward.
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compname posts q2 earnings per share of $2.69.
q2 earnings per share $2.69.
sees fy sales up 0.5 to 1.5 percent.
q2 sales $8.7 billion versus refinitiv ibes estimate of $8.61 billion.
qtrly same-store sales decreased 4.7%; increased 14.1% on a two-year stack basis.
sees fy same-store sales decline of 3.5% to 2.5%.
sees fy diluted earnings per share in range of $9.60 to $10.20.
as of july 30, 2021, total merchandise inventories, at cost, were $5.3 billion compared to $4.4 billion as of july 31, 2020.
same-store sales in q2 included a decline in each of consumables, seasonal, apparel, and home products categories.
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I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo.
Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them.
We also will be discussing certain non-GAAP information.
I know these continue to be challenging days with uncertainty all around us regarding our economy, our society, so many families concerned about the health of their loved ones and millions of families worried about their financial well-being.
At Envestnet, we have been incredibly busy as our clients have depended on us more than ever to help them navigate this period of time.
Somehow, after months of working in a new way, it feels like business as usual despite these very unusual circumstances, we've been able to deliver and adapt to the demands of this extraordinary time on behalf of our clients.
We've also been able and been successful in securing new and expanded relationships, delivering solid financial performance and executing on our strategic roadmap.
I'm incredibly proud of our team for their amazing resilience and commitment to our long-term vision.
Envestnet vision is clear: to be the leading provider of financial wellness solutions and services in North America.
Given the accelerated reliance on cloud-based solutions such as what we offer and the number of firms, advisors, partners and consumers that interact with our network today, the stage is set for where we have been headed.
A new standard for personal financial advice is emerging, and we are driving it.
Through our data initiative and platform modernization efforts, we are working to create a fully configurable platform that works effectively both in an end-to-end ecosystem and in smaller app sized pieces.
By leveraging Envestnet's digital environment, deploying what we do will become increasingly friction-free and enable our clients to deliver essential advice in ways that they've traditionally engaged their clients and importantly, also an evolving digital model that meets the expanding expectations of consumers.
And with the use of APIs, we can take advantage of emerging distribution opportunities through which they can deploy our digital solutions.
Demand for these solutions is accelerating.
What we are doing here is important.
It will recreate how the infrastructure for financial wellness will be delivered in the future.
The addressable market opportunity we see ahead of us is substantial, and we are investing to capitalize on it.
We will build, partner and when it makes sense to, we will acquire as we integrate the best capabilities that enable our customers' success.
Our second quarter financial results exceeded our expectations, and our outlook for the remainder of the year has improved.
Pete will provide all the details on that in a little bit.
But first, let me provide some examples of the progress we're making across our business as we execute against our roadmap.
In our wealth solutions business, we continue to demonstrate the many levers we have for growth.
With our land and expand strategy that has worked for the better part of 15 years, our focus has mainly been on the first part of that, adding advisors and accounts to the platform in ways they want to be served by us by investment.
We've been very successful in doing that.
Today, we have more than 103,000 financial use advisors using the Envestnet wealth technology.
Those advisors oversee more than 12 million accounts with $3.8 trillion assets supported by our platform.
But we're beginning to see how our expanded integrated solutions and services create more value for our existing relationships.
Ultimately, data-driven digital engagement is the foundation of everything we do and everything we provide to our clients.
Data informs the financial plan.
A recommendation engine prescribes tangible next steps an advisor and their clients can take.
These steps are all integrated with a variety of financial wellness solutions.
This includes investments, insurance credit and other elements, which advisors and clients can act on immediately, all in one-scale and tested platform.
Highlighting the value of advice is even more important in this virtual world.
Our next to actions, data insights, elevate the advisor's value proposition by handing the advisor's relevant points of contact with their clients.
This is how we expand the value we provide to our clients and deliver on our financial wellness vision.
Our MoneyGuide financial planning business is an excellent example of how this is working.
Financial planning is the cornerstone for financial wellness.
MoneyGuide, which we acquired just last year, had its best quarter in its history.
Revenue and profitability are at its highest levels yet.
We continue to innovate, making financial planning more accessible and easier to leverage for millions of consumers through the tens of thousands of advisors that are using our planning software each and every day.
We now have over 200 integrations, and we continue to see success in renewing, expanding and cross-selling existing enterprise relationships, while we're also establishing new ones.
Recently, a client of ours, Citizens Bank, signed an additional schedule for unlimited retirement block use for approximately 4,000 personal bankers and on their public website for consumers to access directly.
This is an example of how we are deploying these upsized planning components.
We're also seeing a large uptick in the number of RIAs leveraging MoneyGuide solutions.
Sales to independent advisors, those who are not associated with a large broker-dealer or enterprise, were up 23% in the second quarter over last year.
We're implementing our app size MyBlocks to integrate tightly into our solutions.
This changes the ballgame from the app to answers, to the ability to click and execute, these easy deploy blocks illustrate the powerful, disruptive advancement that integration drives for us.
Related to this is how we are paving the way to unlock additional opportunities within our installed base.
Both our insurance and credit exchanges continue to add product providers, shelf space at Envestnet clients and access to thousands of advisors.
Both are integrated within the Envestnet platform and volume is beginning to ramp-up.
In June, we officially launched the Advisor Services Exchange, which enables critical services, including access to capital to RIAs, which is incredibly timely given the backdrop of this current environment.
Another area where data and technology has differentiated us is how we are growing high-value fiduciary solutions that are increasingly being adopted by our clients.
A few data points to highlight.
The number of advisors who are using our tax and impact overlay solutions grew 16% since just this past December, and overlay accounts grew 19%.
And our impact portfolios are also growing as investors seek to align their social and moral priorities with their investments.
Advisers using these solutions are up 12% and impact portfolio accounts are up 18% since the end of just last year.
Quantitative portfolios, our first direct indexing solution, also experienced higher usage, with 23% more advisors using these solutions in 33% more accounts also since the end of 2019.
We're also making progress selling managed account solutions to our Tamarac installed base of RIAs.
Several large firms, including a top 20 RIA, according to Barron's, are transitioning a meaningful amount of their managed account assets to our platform as they seek an operationally efficient way to migrate to model-traded UMAs.
In our Envestnet Yodlee business, revenue also outperformed in the second quarter.
This period of time highlights why Yodlee is the industry-leading provider of high-quality, secure data aggregation and analytics solutions.
While COVID has been disruptive for many industries, financial institutions, specifically retail banks and wealth management firms, are increasingly embracing digital solutions, which their depositors and investors are accessing more frequently check in on their financial information.
We're also seeing an acceleration of data access agreements being executed between banks and our Yodlee business.
To date, we've secured open banking agreements with half of the top 10 U.S. banks.
We're actively engaged with 25 banks at the moment and expect to have 10 more agreements executed by the end of the year.
Over the past year, we've also significantly enhanced our aggregation platform, modernizing our core architecture so that FinTech developers could easily utilize our comprehensive yet streamlined API platform.
So far this year, Envestnet | Yodlee has more than doubled the FinTech signings compared to last year as some customers have moved from incumbent aggregators.
The momentum here is definitely encouraging.
As we have updated in prior quarters, our investment manager analytics offering continues to face challenges in the market due to the proliferation of alternative data sources and resulting pricing pressure for new and renewal business.
But we're bullish on the value embedded within consumer spending trends that can be gleaned from the data coming into our aggregation platform.
Just this week, we launched something called Insights Solutions.
This is a hyper-personalization capability for financial institutions.
Through APIs, the new solution enables financial service providers to provide experiences that engage customers proactively across their financial wellness and financial planning channels.
They also empower firms to unlock the value of data to support more informed decision-making, accurate customer segmentation and actionable guidance that they're providing to their clients.
Additionally, this quarter, the Federal Reserve Bank of Chicago is now a customer of Envestnet | Yodlee.
They'll be leveraging our spending insights, along with data from other providers to inform their economic research and policymaking.
Last quarter, I shared our thoughts on the future, key themes that are driving the industry as we get through this COVID period.
The perspective guides us as we think about Envestnet's role in shaping the future and supporting our clients.
A few weeks ago, we launched the advisor's playbook for leading clients forward, a guide in supporting website covering these key themes.
We also launched our virtual Advisor Summit in place of our in-person annual client conference.
Through both of these, thousands of advisors and home office participants engage with us in our content, and we've had great feedback.
The feedback has been tremendous, setting our industry thought leadership and how valuable it is, particularly during these times.
These are excellent resources to understand how we're helping lead the industry forward.
Uncertainty presents the opportunity for innovation.
And today, there is a future that is emerging.
Envestnet is helping our clients and millions of households navigate the current environment as they seek answers to these critical emotional questions that they're asking.
Like, what should I do?
And will my family be OK?
A role on answering these questions is to enable a new advice model for the industry that embraces the future, and we are well on our way.
Everything we do is driven by our technology and data capabilities.
They are the conduit to every service and every solution that we offer, our opportunity to expand relationships with our current customers, our installed base, if you will, has never been greater.
We believe that opportunity will grow as we firmly establish this ecosystem for financial wellness.
Today, I'm going to review the second quarter and update our outlook for the rest of the year.
Our second quarter results were quite strong, meaningfully exceeding our expectations.
Adjusted revenue for the quarter was $235 million, well above the guidance we provided.
Asset-based revenue was better despite the impact of the market sell-off in March.
Favorability was primarily driven by product mix, including the increased use of our overlay and direct indexing solutions that Bill mentioned earlier.
We also saw modest favorability in subscription and professional services revenue across our business, again, relative to our expectations.
Cost of revenue was modestly above our guidance, driven by the outperformance in asset-based revenue.
However, most of the revenue favorability flowed through to adjusted net revenue as our overlay and direct indexing solutions, there are no direct cost of revenue.
Our operating expenses overall were in line with expectations, which had assumed lower levels of activity such as reduced near-term hiring and travel expenses, as examples.
As a result, our adjusted EBITDA of $55.8 million was up 29% compared to last year.
This translated to similarly strong performance and adjusted earnings per share of $0.59, 28% above last year.
So what does this mean for margins and our longer-term outlook?
The current environment has created larger swings in our asset-based revenue than normal due to the sizable market fluctuations in the first half of the year.
The effect of the market, while negative a quarter ago, was meaningfully positive during the second quarter, leading to an increased outlook for asset-based revenue in the back half of the year compared to our expectations set out in our last earnings call.
However, the market at June 30 was still not back to beginning of the year levels, and our AUMA was down around $22 billion from the beginning of the year.
Specifically, second quarter market action was a positive $60 billion in AUMA, offsetting a good portion of the negative $82 billion in the first quarter.
Today's guidance assumes a market-neutral outlook based on market levels as of June 30.
Additionally, with stay-at-home orders and travel restrictions in place in all states where we have offices and with all of our employees working remotely and not traveling, our operating expenses have been lower.
We've assumed that pandemic-related circumstances will continue to impact our expenses in the near term, particularly in the third quarter.
We're assuming a modest increase in business activity as we head into the fourth quarter.
However, we recognize that normal will mean something new in the future.
With these assumptions, we would see a sequential increase in some operating expenses between the third and fourth quarter.
And our guidance reflects these increases, and this assumption is the primary reason behind the relatively flat adjusted EBITDA implicit between the third and fourth quarter in today's updated guidance.
At some point in the future, business activity will start to pick up, and our expenses will return to some higher level, likely between where they are now and where they were pre-COVID.
We are already considering how our business should be organized and how we will manage expenses in the future.
Our goal is to further align the organization with our strategy, and we are taking short-term action while evaluating the longer-term organizational framework.
For example, in the second quarter, we closed nine smaller offices across the U.S. with all of those employees permanently working remotely, and we are assessing our optimal geographic footprint for the long term.
Having seen the effectiveness of remote working for certain groups, we are exploring how to operate more in a hub-like fashion.
Over the next several years, we still expect to drive our adjusted EBITDA margin into the mid- or upper 20s, but in the current environment, the path to that will have some variability quarter-to-quarter.
For the full year 2020, we are raising our top and bottom line expectations.
This is driven primarily by the favorable market action during the second quarter, and this quarter's outperformance relative to our guidance.
We now expect adjusted revenue for the year to be between $977 million and $980 million, up 7% to 8% year-over-year.
Adjusted EBITDA to be between $221 million and $223 million, up 14% to 15% year-over-year.
And adjusted earnings per share to be between $2.28 and $2.31.
Turning to the balance sheet.
We ended June with $92 million in cash and debt of $620 million.
Our net leverage ratio at the end of June was 2.3 times EBITDA, down from 2.6 at the end of March.
With $225 million available on our revolver and positive cash flow generation, we are comfortable that we have the liquidity and flexibility as we balance managing the business in the current environment with continuing to invest in growth opportunities, both organically and through strategic activities.
And at this point, I will Bill for his closing remarks.
Recently, I've been thinking a lot about progress.
Last week, we celebrated the 10-year anniversary of our IPO.
During the 10 years after our founding extraordinary people, many who still work in Envestnet today, transformed an idea into a business, into a company that ultimately was traded on the New York Stock Exchange.
That's an incredible journey.
We accomplished a lot in our first 10 years.
But after we rang the bell, we did not stop.
We had more to do.
During these past 10 years, we've experienced tremendous growth, both organically and through acquisition as we established investment as an industry leader.
Last week, as we reached that milestone, Jud Bergman was very much on my mind.
He is every day, but especially last week.
There's a great picture of him, Pete and myself as the first trade cross the wire.
We traded up one step.
And as you can tell by the photograph we've included in the material, it was a big one.
I'm grateful for each step that we have the opportunity to take together.
We covered amazing ground.
But there's so much more for us to do, and that brings us to today.
I mentioned earlier that despite these extraordinary and disruptive days, there is a future that is emerging.
We are driving hard to push this future.
As we outlined in our viewpoint for the industry, data and technology, the idea that all advisors need to become digital is essential and the comprehensive integrated advice that households will receive in the future will come from the experts, and that's the network of financial advisors and firms that we're incredibly fortunate to work with.
But they will be more and more supported by technology that helps them provide insights that powers and engages consumers as they achieve their financial goals.
This is where we live.
We are on our way to establishing the ecosystem that can make financial wellness a reality for everyone.
A cloud-based model where advisors and their clients can tackle the financial questions that are big and small, make the decision and execute it in the platform.
We're fulfilling a vision that positively impacts millions and millions of families.
We have work to do, but I am incredibly excited about what these next 10 years will bring for us.
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q2 adjusted earnings per share $0.59.
sees q3 adjusted net income per diluted share $0.59.
sees fy 2020 adjusted net income per diluted share $2.28 - $2.31.
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I'm Martin Jarosick, Vice President, Investor Relations for CF.
These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.
Now let me introduce Tony Will, our President and CEO.
Before I jump into our financial results, I want to highlight the entire CF team for amazing execution across all areas of our business.
We set all-time company best records for safety, ammonia production and sales volumes, despite the challenges that 2020 hurled at us.
There was no playbook for how to manage through a global pandemic, yet this team developed and implemented plans to keep our people safe along with everyone who came on to our sites.
To date, we have no known transmissions of COVID-19 within any of our facilities.
On the safety front, we ended the year with only four recordable injuries and zero lost time injuries across the entire network for the whole year.
As is typically the case, safe operations are also more productive.
And we proved that again with an all-time ammonia production record of 10.4 million tons.
Our sales and logistics team rose to the challenge and set all-time sales and shipping records of over 20 million product tons.
Truly a remarkable performance by all.
Looking ahead, we are very optimistic about 2021.
As Bert will describe in a moment, the global nitrogen pricing outlook is much more positive than a year ago.
With strong commodity crop prices and significantly higher energy prices in Asia and Europe, we are seeing a robust demand environment, coupled with a steeper global cost curve.
The current conditions in the Southern Plains in Midwest have thrown another crisis at us, but as usual, the team has done a fantastic job responding to and navigating through these new challenges.
We have been able to quickly adjust our plant operations based on close communications with our gas suppliers.
Disruptions have been widespread across the US nitrogen industry and this should result in further tightening of nitrogen supply for the spring planting season in North America, additional support for an already strong 2021.
Longer term, we are pleased with the progress we are making on our commitment to the clean energy economy.
We continue to advance discussions with technology providers and partners, and we have seen new opportunities develop since our announcement.
These underscore how broad the demand for green and low carbon ammonia will be, and also the value of our unique capabilities.
Then Chris will follow to talk about our financial position and capital allocation outlook before I return for some closing comments.
Global nitrogen dynamics today with low-cost producers like CF are the most positive they have been since 2014.
Strong demand driven by high commodity crop prices and a steeper global cost curve are creating a tighter nitrogen supply and demand balance.
As a result, prices have risen significantly in recent months and are well above 2020 values.
Global demand is robust and broad-based.
Farmers in North America has seen nitrogen consuming coarse grains reach multi-year highs for both near term and futures contracts.
For corn, we have seen lower-than-expected supply and high global demand led by China.
As a result, the USDA is projecting that the corn stocks-to-use ratio for the marketing year-over-year will be at its lowest level since 2013.
This supports our projection of 90 million to 92 million planted corn acres in the US this year with upside potential.
Through the balance of the year, we continue to expect positive demand in most growing regions, particularly India and Brazil.
We expect the urea tender volumes in India this year will be well above the five year average and close to the 10 million metric tons of last year.
For Brazil, we project 2021 imports of urea to be approximately 6.57 million metric tons, similar to last year.
As demand was increasing, the cost curve steepened significantly.
From July 2020 to July -- to December 2020, the Dutch TTF natural gas price and the Asian JKM LNG price both increased about five times greater than the US Henry Hub natural gas price.
This had a number of impacts.
First, margin opportunities increased for low cost producers.
Second, the significant increase in energy prices for producers in Europe and Asia pressured their margins, not only leading to lower operating rates but creating demand for import ammonia into those regions.
This contributed to even tighter global market.
Over time, we expect the global nitrogen market to tighten further and faster driven by several factors.
In the near term, the need to rebuild the stock of commodity crops will underpin demand growth.
Longer term, a key driver will be emerging demand for ammonia for clean energy applications.
We believe this level of global demand will require more production from the highest cost plants until prices rise enough to incent greenfield construction in other parts of the world.
We are well positioned as we approach the spring application season and have the flexibility necessary to address any challenges that arise.
We believe that the recent weather conditions in the US, or [Phonetic] disruption that we've built our system to overcome.
We are looking forward to working with our customers and leveraging our optionality to ensure that these requirements are met as they make -- as our customers make their final preparations for spring.
For 2020, the company reported net earnings attributable to common stockholders of $317 million or $1.47 per diluted share.
EBITDA was $1.32 billion and adjusted EBITDA was $1.35 billion.
Net cash provided by operating activities was $1.2 billion and free cash flow was approximately $750 million.
These results reflect year over year, global nitrogen -- lower year-over-year global nitrogen prices, partially offset by higher sales volume and lower natural gas and SG&A costs compared to the year before.
The results also demonstrate our continued efficient conversion of EBITDA into free cash.
As you can see on slide 9, we converted more than 55% of our adjusted EBITDA into free cash in 2020, which is the highest rate among our peers.
Our free cash conversion continues to support our capital structure and allocation priorities.
This will lower our gross debt to $3.75 billion.
As we remain focused on investment grade and positioning the company to execute our clean energy growth strategy, we will continue to evaluate opportunities to further reduce gross debt over time.
We remain excited to invest in the clean energy growth opportunity given the expected return profile.
We will also continue to return cash to our shareholders through our quarterly dividend and opportunistic repurchases at attractive levels.
As we look ahead to 2021, I want to share some of our expectations for the year ahead.
We anticipate that our capital expenditures for 2021 will be in the range of $450 million.
This reflects a return to a normal level of planned maintenance and turnaround activities in the year ahead, and the first expenses associated with the Green ammonia project at Donaldsonville.
We also expect SG&A levels to return to a level closer to 2019 than 2020.
Our annual cash interest expense will fall to $175 million with the repayment of the 2021 notes.
With our planned maintenance schedule and recent gas driven curtailments, we expect gross ammonia production to be around 9.5 million to 10 million tons.
This, along with lower inventories to the start of the year will likely result in lower product tons sold than in 2020.
Additionally, based on forward curves, we project our natural gas costs will be somewhat higher in 2021 than in 2020.
However, we expect margins to improve this year given the positive nitrogen pricing outlook that Bert described.
As you can see on slide 12, increases in our realized urea price have a much greater impact on EBITDA than higher realized natural gas costs.
With that, Tony will provide some closing remarks before we open the call for Q&A.
Their commitment to our values and unwavering focus on safety and execution are truly the foundation of our success.
We feel very positive about the year ahead.
As Bert described, nitrogen industry dynamics for producers in North America are the most favorable we have seen in nearly a decade.
And longer term, the developing demand for ammonia in clean energy applications provides exciting growth prospects for us, where we are uniquely positioned to be a global leader providing clean energy for a better world.
Economies will continue to focus on decarbonization, and hydrogen will be a key solution, with ammonia a critical enabler of hydrogen as a clean fuel.
We have seen tremendous interest in our strategic direction since our announcement last fall, and see substantial opportunities ahead for clean and low carbon ammonia.
This will provide a growth platform for longer-term shareholder value.
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compname reports nine month 2021 net earnings of $212 million, ebitda of $984 million, adjusted ebitda of $1,485 million.
cf industries holdings - management believes global nitrogen supply will remain constrained with production in key regions affected by high energy prices.
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A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we will be using combined historical results for the third quarter, defined as three months of legacy IFF results and three months of N&B results and for nine months year-to-date defined as nine months of legacy IFF January to September and eight months of N&B February to September, in both the 2020 and 2021 period to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our recently appointed Executive Vice President and CFO, Glenn Richter.
As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer.
I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team.
Rustom played an important role in our combination with DuPont N&B.
And for that, we are immensely grateful.
He has been important in putting IFF in the strong position it is today.
Before we conclude today's call with a question-and-answer session, Glenn will also speak to our outlook for the remainder of the year.
Now as I mentioned, I'd like to kick us off on Slide six by discussing our financial highlights for the first nine months of 2021.
Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021.
In the first nine months of 2021, IFF achieved $8.6 billion in sales, representing 10% growth or 7% on a currency-neutral basis, a strong reflection of the strength of our market-leading platform and the compelling position we have established with our customers as a combined company.
We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%.
As we will discuss in more detail, we continue to confront meaningful inflationary pressure due to higher raw material, logistics and energy costs.
We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million free cash flow or approximately 10% of our trailing nine months sales, driven by strong cash generation.
This cash generation has enabled us to stay on track to meeting our deleveraging target.
Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.
I'm pleased to share that we have completed the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022.
Together, these two important divestitures will create a more focused IFF, allowing us to hone in on the constraints of our core business segments and it creates a stronger, more focused business.
We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divesting other noncore businesses.
We started this year with a simple commitment to focus on execution and deliver on the potential of the new IFF.
I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives, while delivering strong results with continued sales momentum and profit growth.
Now turning to Slide 7.
I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months.
First, I'm excited to share that we continue to experience strong growth in all four of our key operating regions despite ongoing and unique market uncertainties that have persisted across each geography.
In North America, we achieved 7% growth across all four of IFF's business divisions, led by high single-digit growth in Nourish and Scent.
These two divisions have continued to perform exceptionally well, quarter after quarter.
In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India as well as a low single-digit growth in China, even amid particularly strong recent market complexities in the region.
From a business unit perspective, Nourish, Scent and Pharma Solutions continued to carry the region's growth throughout the year-to-date.
Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth, largely fueled by double-digit growth in our Nourish and Scent divisions and continued local currency strength.
Perhaps, most impressive is a 7% sales growth that our EMEA region achieved to date, which includes a robust double-digit increase in the third quarter, impressive performance on our Scent and Nourish divisions growth, this encouraging rebound with Scent delivering double-digit growth led by our Fine Fragrance business and Nourish delivering high single-digit growth led by our Food Service business.
We expect this momentum to continue through the remainder of the year, and we will stay diligent to ensure our business remains nimble, positioned to perform against any new supply chain challenges that may arise.
Moving now to Slide 8, I'd like to take a closer look at our nine months year-to-date sales performance across IFF's key business segments.
Our largest division, Nourish, has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strength from our Flavors, Ingredients and Food Design businesses.
Scent has had a similar strong year delivering 8% in currency-neutral growth to date, led by impressive double-digit growth in Fine Fragrance as well as strong growth in Consumer Fragrance and Ingredients.
Health & Bioscience has seen strong demand in key focus areas including Home & Personal Care, Animal Nutrition and Cultures & Food Enzymes.
As you know, we are in the process of selling our Microbial Control unit, which has continued to experience headwinds through this year but has rebounded from COVID-impacted lows with growth in both Q2 and Q3.
This divestiture should further enhance the performance of this important division.
Pharma Solutions, despite significant challenges, is flat so far for the year.
Supply chain challenges have had an outsized impact on this division throughout the year.
While we have seen encouraging growth in our Industrial business, the division still struggles to meet customer demand due to raw material availability challenges and logistics issues.
Now on Slide 9, you will see that we have outlined some of the factors influencing the growth and profitability of each of our four divisions so far this year.
As I previously mentioned, Nourish has had a strong year with Flavors and Ingredients experiencing double-digit growth.
We have been working hard in our execution to manage volume and cost to limit margin impact from higher raw material costs, which continued to be a headwind on our profitability.
While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds, while delivering meaningful growth.
Our team has did an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward.
In Health & Bioscience, we mentioned broad-based growth across the markets, but here, we are seeing significant margin impacts from higher logistic costs.
As shared on our second quarter call, part of this that freight rates have increased significantly, but also we are having higher logistic costs to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth, investing in R&D and plant technology to increase output later this year and into 2022.
The Scent division has certainly realized the strongest, all-around bounce back as consumer demand rises across end markets.
Notably, Fine Fragrances alone has realized 36% growth year-to-date with double-digit growth in Cosmetic Active and continued solid performance in Consumer Fragrances.
At the time, sales profitability expansion of 110 basis points has been led by higher volume, favorable mix and higher productivity.
As I mentioned, Pharma Solutions was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demand.
These challenges, including supply and logistic constraints and ongoing inflation have, in turn, significantly pressured our margin compared to the first nine months of 2020.
Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics, and we'll continue to prioritize returning our Pharma Solutions business to the profitability we know is achievable.
And in the fourth quarter, we're expecting year-over-year top and bottom line performance to improve.
As we have been talking about today, IFF is realizing very strong sales momentum across our business.
This is a reflection of the powerful new position we have created through our combination with the N&B business and a compelling value proposition we can offer to our customers.
While we are pleased to put many of the gross headwinds related to the pandemic behind us, it is important to understand that our growth this year is, in fact, meaningful above pre-pandemic results.
If you look at the total business, you will see that on a comparable 9-month pro forma basis, the new IFF has realized 9% sales growth over 2019 results.
This strength is broad-based too.
Each segment is realizing strong growth above pre-pandemic levels.
Nourish is a business that was particularly hard hit through the pandemic, is now strongly growing with sales growth of 9% compared to pro forma 2019 9-month period.
And important, especially given that much of the integration work is coming from within this division, these results showcase how our position in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers.
Moving to Slide 11, I would like to discuss the strong progress we have made in terms of synergy realization.
For just nine months, since completing our merger with N&B, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company.
Having received significant and highly encouraging positive feedback from our customers, along with persistent robust customer demand, we are confident in our ability to meet our revenue target.
To date, revenue synergies have started to contribute to our top line performance, and we are pleased that our project pipeline is strong and growing.
In the first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target with one quarter to go.
This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing our organization.
I'm confident that we will more than exceed our $45 million year one synergy target.
And I'm encouraged by the continued progress we are making toward achieving our 3-year run rate of cost synergy target of $300 million.
His background is perfect, but there are two areas I think really stand out.
First, he brings tremendous depth with private and public companies and leading finance teams to enhance discipline and build processes that drive toward a goal of shareholder value creation.
He has time and time again shown an ability to help businesses accelerate top line growth while driving margin expansion.
In this way, he consistently implements productivity initiatives with lasting impact.
Second, he has been through several large-scale M&A integrations with a track record of strong success.
As we continue to execute on our multiyear transformational integration, this experience is invaluable.
Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community.
And the most common questions I've been asked is why did I join IFF and what are my near-term priorities.
Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction.
There were three very compelling reasons for me to join IFF.
First, and perhaps most importantly, IFF is a company that is truly making a difference in helping solve some of the world's biggest challenges.
We are delivering reliable, innovative and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment.
Second, the industry has very attractive organic growth characteristics, benefiting from continued strong consumer tailwinds from increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets and new consumer needs presented by aging demographics in developed markets.
I also believe that scale will become an important basis of competitive advantage as customers demand leading ESG platforms, increased innovation and speed to market, global supply chain resiliency and help in navigating increasingly complex regulations.
Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry-leading platform.
And since joining IFF, I've tried to immerse myself in the business completely, visiting sites, meeting with our business and operations teams and spending time at our R&D and creative centers.
I've also prioritized hearing from you, our investors and analysts.
And frankly, today, I'm even more bullish on the strength of IFF's global capabilities and the tremendous long-term potential we have to drive strong top and bottom line growth.
Relative to my near-term priorities, I have four primary areas of focus.
By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses.
Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital.
A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity.
And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining.
In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you.
With that, I'd now like to provide an overview of our consolidated third quarter results.
In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division and strong increases in both Scent and Health & Biosciences.
In terms of contribution, volume performance was the primary driver of our growth as pricing represented approximately two percentage points in the quarter.
Though our gross margin continued to be challenged by inflationary pressures, it was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%.
And while we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases or approximately 50% in the third quarter when we include raw material, logistics and energy increases.
As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis but expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization.
Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of $1.47.
On the next few slides, I will dive deeper into the third quarter financial results for each of our four divisions.
Turning to Slide 13, I'll start with our Nourish division, which had an exceptional quarter.
In Q3, Nourish achieved 17% year-over-year sales growth or 15% on a currency-neutral basis, driven by robust double-digit growth in Flavors for the second consecutive quarter.
Ingredients also grew double digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosics, LPG and food protection, increasing double digits.
Food Design also grew double digits, led by Food Service, where pandemic-related restrictions continue to be lifted with away-from-home consumer behaviors returning to more typical levels.
As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.
On Slide 14, you'll see that our Health & Biosciences division saw year-over-year sales growth of 7% or 5% on a currency-neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures & Food Enzymes.
Our Health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a 2-year basis.
As Andreas mentioned earlier, inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand has challenged our margins across our business, with H&B particularly impacted, which drove an operating EBITDA decrease of 12%.
Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher air freight volumes, where we have increased intercompany shipments to manage available capacity.
As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output.
Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin.
Turning now to Slide 15.
Our Scent division continues to perform extremely well and experienced strong growth, achieving 10% year-over-year growth or 9% growth on a currency-neutral basis.
This performance was driven by Fine Fragrances' continued rebound, which grew approximately 36%, led by new customer wins and improved volumes.
Our Ingredients category also continues to perform well and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter led by strong performance in both Cosmetic Actives and Fragrance Ingredients.
While our Consumer Fragrances business saw modest low single-digit growth against a strong double-digit year ago comparison, this is a marked improvement from Q2, and we expect further growth as we move forward.
On a 2-year average basis, Consumer Fragrance remained strong at 9% in the third quarter.
Scent also experienced adjusted operating EBITDA growth of 10%, driven by strong volume growth and favorable mix.
Margin was down modestly due to higher raw materials and logistics costs, a trend we see continuing.
I will provide more context shortly.
Lastly, in our Pharma Solutions business, we saw a currency-neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistics disruptions, which have made it challenging to meet persistent and growing customer demand.
While Industrials has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison.
The division's adjusted operating EBITDA and margin also continue to be impacted by higher sourcing, logistics and manufacturing costs.
We also continue to see the impact of force majeures and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines.
While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic and as Andreas mentioned earlier, we remain focused on returning the division to profitability as these industry conditions stabilize.
Now on Slide 17, I would like to review our cash flow position and leverage dynamics for the first nine months of 2021, both of which remain a top priority for us.
So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion.
As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.
Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back half weighted.
From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target, with our cash and cash equivalents finishing at $794 million, including $122 million restricted cash, with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan.
Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt to credit-adjusted EBITDA.
With our continued strong cash flow generation, including proceeds from divested noncore businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than three times net debt to EBITDA within 20 to 36 months, post-transaction close.
Turning to Slide 18.
I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year.
As I mentioned earlier, IFF and the industry at large have seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.
The inflationary pressures we are seeing today are significant.
Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October.
The price of wheat is up almost 40% in the last 12 months through October.
Brent crude prices have more than doubled over the past 12 months to the highest level since October 2018.
In the U.S., natural gas prices are up 100% from a year ago and in the U.K. grew up about 500%.
And transportation rates have increased significantly given the high demand and limited capacity to ship.
Across the raw materials, logistics and energy markets, like many industries around the world, we have seen costs accelerate each quarter, which has led to our margins being adversely impacted.
For example, in the first half of 2021, gross margin was down about 150 basis points, while in the third quarter, we were down about 210 basis points.
As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.
Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as well as improve our sourcing efficiencies, accelerate operational improvements and capture targeted integration synergies to drive profit growth.
Now moving to Slide 19.
I would like to share what this means for our consolidated financial outlook.
For the full year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand.
For the full year 2021, we are targeting $11.55 billion in total revenue or approximately 8.5% growth, up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter.
We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid.
As mentioned, unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry, and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures.
And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%, down from approximately 21.5% that was forecasted in September.
About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends we see in the fourth quarter.
For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges.
We also adjusted our capex spend outlook down as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses.
Overall, we are pleased of the progress we've made to date, strong top line growth and a commitment to meet near-term macro cost pressures, and we're confident that IFF is on the right path and poised for continued success across our core business.
Before I wrap it up, I'd like to reiterate how proud I am of IFF and our thousands of employees around the world who have showcased a remarkable resilience toward an evolving and continuously uncertain industry environment.
We have continued to deliver strong year-over-year sales and profit growth, and I'm confident that with our top-notch financial and operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile, while continuing to deliver for both our shareholders and our customers.
Q4 is off to a solid start, and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets.
In sum, it is clear to me that IFF is in an incredible strong position.
We knew entering this year that the new IFF was poised to change our industry.
But to do so, we had to execute.
As we look at industry-leading sales growth for the full year, I'm just so proud of how everyone here stepped up and executed on our vision and delivered against our potential.
IFF is once again the clear leader of this field, creating another iconic chapter in this company's 132-year legacy.
This core strength of the business is why I felt now was the perfect time to start the transition to find IFF's next CEO.
I have every confidence that now is the right time to let the next chapter of IFF legacy begin.
As we announced, the search has begun for my successor, and we expect that person to be in place by early 2022.
I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future.
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iff q2 adjusted earnings per share $1.50.
q2 adjusted earnings per share $1.50.
sees fy sales up about 7 percent.
raises full year 2021 sales outlook.
board of directors authorized a 3%, or $0.02 increase, in quarterly dividend to $0.79 per share.
sees fy sales about $11.4 billion.
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In these communications, we may make certain statements that are forward looking, such as statements regarding MasTec's future results, plans and anticipated trends in the industries where we operate.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in today's call.
These discussions will be followed by a Q&A session.
And we expect the call to last about 60 minutes.
We had another good quarter and a lot of important things to talk about today, so I'll going ahead hand it over to Jose.
Today, I will be reviewing our third quarter results as well as providing my outlook for the markets we serve.
Before getting into the quarterly details, I'd like to offer my perspective on where I think MasTec stands today.
At this time last year, during our 2020 third quarter call, we laid out a long-term goal of our pathway to achieving annual revenues of $10 billion plus.
It's important to remember, at that time, MasTec was on a path to generate just over $6 billion of revenue in 2020.
Still somewhat unsure of where the COVID pandemic would take us, we have seen a significant impact to our Oil and Gas business and the demand and pricing issues it had created.
Our ability to provide that outlook was a testament to the strength we were seeing across our non-Oil and Gas business and the growing opportunities we were expecting.
Fast forward 12 months, this year, we expect to generate $8 billion in revenue.
And our long-term goal of reaching annual revenues exceeding $10 billion is now within reach in what we hope will be a much shorter time frame.
Opportunities in our communication, transmission and clean energy segments continue to expand and give us great confidence we will be able to meaningfully grow revenue over the coming years.
We believe we are in the midst of a very unique opportunity.
Since becoming CEO in 2007, we've been able to grow MasTec from $900 million in revenue to $8 billion today.
And while I've seen and experienced great cycles of growth during that time, I've never seen the number and scope of opportunities we are seeing across our business.
Demand for our services is incredibly high, and again, our prospects to deliver long-term revenue growth are better than I've ever seen.
While our business continues to expand and our mix continues to diversify away from Oil and Gas, our focus is on margin improvement and execution.
Our margin execution across our non-Oil and Gas segments has been below our expectations in 2021.
We've been challenged and impacted for multiple reasons, including COVID, labor availability, supply chain delays and poor performance on projects.
With that said, we are confident we can achieve the margin targets we previously disclosed as we continue to grow the business in the coming years.
We understand and believe that our ability to create shareholder value is driven not only by our revenue growth opportunities but more importantly by our ability to achieve our targeted margins.
While we'd like to see our results materialize sooner, we believe the longer-term outlook is not only fully intact but actually improving.
Now some third quarter highlights.
Revenue for the quarter was $2.404 billion.
Adjusted EBITDA was $278 million.
Adjusted earnings per share was $1.81.
And backlog at quarter end was $8.5 billion, a year-over-year increase of $821 million.
In summary, we had another excellent quarter and are on track for another great year.
There are a number of catalysts that could have a significant impact on our growth.
These include within our Communications segment a ramp-up of 5G-related activity and the spend, including in-building solutions; continued focus on expanding fiber networks both in rural communities and in major cities to support broadband services as well as wireless backhaul; an increased focus on smart city initiatives, with increased availability of capital from both the public and private sector.
Within our electrical transmission and distribution segment, catalysts include grid modernization, including significant investments for improved grid reliability and system hardening to better prepare for storms and fires; the growing need for new transmission lines to tap into renewable-rich geographies; and the focus on grid architecture related to growing electrical vehicle charging demand.
In our Clean Energy and Infrastructure segment, catalysts include the growing focus on sustainability and climate initiatives, including zero-carbon emission goals; significant investments in renewable power generation, including wind and solar; a focus on other clean energy-generating fuels, including biomass, geothermal and hydrogen; opportunities around carbon capture and its potential benefits; and finally, the role of battery storage and its improving economics.
We believe we are very well positioned to benefit from these growing and accelerating trends in our business segments.
Now I'd like to cover some industry specifics.
Our Communications revenue for the quarter was $670 million.
We expected revenues to be slightly higher.
And we continued to experience delays and COVID impacts that affected the acceleration of AT&T's and Verizon's build plans related to last year's spectrum auctions.
Highlights for the quarter included our growth with T-Mobile, whose revenue more than doubled over last year's third quarter.
In addition, we had another quarter of strong backlog growth.
The second quarter of this year represented the largest quarterly sequential segment backlog increase in the company's history, and in the third quarter, we were again able to sequentially grow segment backlog by over $200 million.
We expect another similar increase during the fourth quarter.
Margins for the segment were 10.7% in the third quarter; and were impacted by both lower wireless revenues than expected, along with project closeouts related to a large fiber build that is nearing completion.
We expect sequential margin improvement in the Communications segment in the fourth quarter and excellent momentum heading into 2022 based on our backlog build.
Over the last few quarters, we've talked about the opportunities related to the Rural Digital Opportunity Fund or RDOF, which will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas; and the 5G Fund for Rural America, which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America.
In addition to these programs, the current pending infrastructure bill has another $65 billion allocated for broadband infrastructure.
While not built into any of our models, this amount of investment would likely have a significant impact on the potential opportunities for us in this segment.
Moving to our Electrical Transmission segment.
Revenue was $365 million versus $129 million in last year's second (sic) third quarter.
The increase was driven by organic growth of nearly 50% in the quarter on a year-over-year basis; and the first full-quarter contribution of INTREN, which we acquired during the second quarter.
Margins for the segment were 9.5%, which exceeded our expectations.
The integration of our INTREN acquisition has gone very well, and we are seeing a number of cross-selling opportunities which are positively impacting both MasTec and INTREN.
While backlog was flat sequentially, we have an increasing number of opportunities that should allow us to continue to grow this business at solid double-digit rates for years to come.
We believe the changes in electrical distribution and transmission needs led by grid modernizations and hardening, reliability and renewable integration, coupled with the transition toward increased electrical vehicle usage, will have an enormous impact on a last-mile distribution of electricity.
Moving to our Oil and Gas pipeline segment.
Revenue was $858 million and margins remained strong.
During the third quarter, we were able to accelerate project timing and complete some projects early.
Our fourth quarter revenue guidance level is impacted by this acceleration.
As a reminder: Last year, we forecasted a longer-term recurring revenue target of $1.5 billion to $2 billion a year, assuming a continued depressed oil and gas market.
As commodity prices have increased and maintained strong levels, we have seen an increase in customer requests, as we are working with a number of customers repricing previous projects and are optimistic we will see an uptick in opportunities.
A challenge our customers are facing has been the increased costs of steel pipe related to the supply chain issues.
Pipe materials often account for nearly 50% of project costs.
While we believe there will be an increasing number of large pipeline projects, we expect the opportunities to materialize in 2023 and beyond as the supply chain issues improve.
That, coupled with the continued growth of carbon capture and sequestration and the potential of hydrogen, have improved our longer-term outlook of our pipeline business.
While we still expect 2022 to be within our previously disclosed revenue targets, we are becoming a lot more bullish about our opportunities for 2023 and beyond in this segment.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $518 million for the third quarter.
As a reminder: Segment revenue has grown nearly sevenfold since 2017.
We expected a slight sequential improvement in margins that did not materialize.
While I believe we have done an amazing job in growing and diversifying the segment, margins haven't materialized as quickly.
With that said, we believe we are at the cusp of seeing significant improvements in margins.
At MasTec, we take great pride in having been able to perform at high levels over a long period of time.
Our conviction in improving margins in this segment are no different.
We understand and are addressing the issues that have led to the underperformance, and we have tremendous confidence in the potential of this market and the associated margins we can generate.
We believe our diversification is our strength in this segment, as we are capable of meeting any of our customers' demands.
We are actively working on renewable projects, including wind, solar and biomass; baseload generation projects, including dual-source hydrogen-capable projects; as well as our growing presence in the infrastructure market.
With a clear national focus on sustainability and clean energy, we have seen a significant increase in planned clean energy investments from our customers as they improve their carbon footprint.
As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments.
Backlog at quarter end in Clean Energy was $1.570 billion versus $891 million at the end of last year's third quarter, a year-over-year increase of nearly $700 million and a slight sequential reduction of over $100 million from the second quarter.
Since quarter end, we've either signed or been verbally awarded another roughly $800 million in projects.
In addition, the level of project proposal activity and negotiations has never been higher.
To recap: We're having a solid 2021 and are very excited about the opportunities in the markets we serve.
Finally, I'd like to highlight the potential opportunities of the pending infrastructure bill.
With a significant presence in the telecommunications market, which include 5G build-out capabilities, our involvement in maintaining and building the electric grid, coupled with our exposure to the clean energy market, including wind, solar, biofuels, hydrogen and storage; and our recent expansion into the heavy infrastructure, including road and heavy civil, we believe we are uniquely positioned to benefit from the potential infrastructure spend.
We are confident we can hit our growth targets with solely private investments in infrastructure but do recognize the potential acceleration in our markets with significant government spend.
I'm honored and privileged to lead such a great group.
The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty; and in providing our customers a great-quality project at the best value.
These traits have been recognized by our customers.
And it's because of our people's great work that we've been able to deliver these financial outstanding results in a challenging environment and position ourselves for continued growth and success.
Today, I'll cover our third quarter financial results and our updated annual 2021 guidance expectations.
As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, we had strong third quarter results with revenue of approximately $2.4 billion, a 42% increase over last year; adjusted EBITDA of approximately $278 million; and adjusted EBITDA margin rate at 11.6% of revenue.
This represented record-level third quarter revenue and adjusted EBITDA.
Yesterday, we announced a new and increased credit facility of $2 billion, which adds to our ample liquidity, improves pricing and eliminates security requirements.
Our strong cash earnings profile, coupled with our focus on working capital management during 2021, has allowed us to easily fund organic working capital needs associated with approximately $1.5 billion in year-to-date revenue growth while investing approximately $600 million in strategic acquisitions.
At the end of our third quarter, we maintained a strong balance sheet and capital structure with liquidity approximating $1.3 billion, comfortable leverage metrics and with net debt at only 1.3 times adjusted EBITDA at quarter end.
Given our strong balance sheet and cash flow performance, coupled with the unsecured nature of our new credit facility, we have approached credit rating agencies for review and are hopeful of a positive rating agency action in the near term.
Now I will cover some detail regarding our third quarter segment results and guidance expectations for the balance of 2021.
Third quarter Communications revenue was $670 million, approximately 4% growth compared to last year.
This growth level was a few percentage points lower than our expectation, as project start-up issues slowed revenue during the quarter.
Our third quarter Communications segment adjusted EBITDA margin rate was 10.7% of revenue, an 80 basis point sequential decline primarily related to the overhead impacts of lower-than-expected third quarter revenue levels.
Our annual 2021 Communications segment expectation is that revenue will range somewhere between $2.5 billion to $2.6 billion, with annual 2021 adjusted EBITDA margin rate approximating 11%.
This implies fourth quarter year-over-year revenue growth in the high-teens range despite some continued slower revenue impact on new project start-up activity.
This also implies strong improvement in fourth quarter adjusted EBITDA margins, both sequentially and compared to the fourth quarter of last year, as we begin to ramp toward significant expansion in 2022.
Third quarter Clean Energy and Infrastructure segment or clean energy revenue was $518 million.
And adjusted EBITDA was approximately $14 million or 2.7% of revenue, below our expectation.
As we indicated on our last quarter's call, we anticipated some continued negative impact on third quarter clean energy adjusted EBITDA margin rate as two underperforming projects, highlighted during the prior quarter, would generate third quarter revenue with no margin.
We substantially completed those projects during the third quarter, with performance largely as expected.
However, during the third quarter, clean energy segment results were also negatively impacted by a COVID-19 outbreak on a project that caused delays and additional cost.
At one point during this project, approximately 1/3 of the project field crew and 50% of critical path electricians were either infected with COVID or in quarantine, effectively stopping project production.
Absent this unique impact, third quarter clean energy segment adjusted EBITDA margins would have been generally in line with our expectation of a slight sequential adjusted EBITDA margin rate improvement.
We believe the issues that have negatively impacted our clean energy segment year-to-date adjusted EBITDA margin performance are largely behind us and, based on project timing, expect that fourth quarter segment revenue will be the largest revenue quarter of the year with over 60% year-over-year revenue growth and strong fourth quarter adjusted EBITDA margin rate improvement to a high single-digit level.
As we have previously indicated, our clean energy segment has grown from $300 million of revenue in 2017 and will approach $2 billion in revenue during 2021.
In order to achieve this growth, we have significantly expanded our field crew operations and head count very quickly.
This rapid expansion has caused some growing pain inefficiencies, which has impacted our annual 2021 adjusted EBITDA margin performance.
As I just indicated, we expect improved performance during the fourth quarter and, importantly, continued strong revenue and adjusted EBITDA margin rate improvement in 2022.
Third quarter Oil and Gas segment revenue was $858 million, and adjusted EBITDA was $171 million.
During the quarter, we accelerated work on a large project and achieved substantial completion ahead of schedule.
This increased our third quarter revenue by approximately $100 million, accelerating revenue previously expected to occur in the fourth quarter.
We would like to recognize the men and women of our MasTec teams for their commitment to safety and quality during this difficult project.
We currently expect annual 2021 Oil and Gas segment revenue will range between $2.5 billion to $2.6 billion, with annual 2021 adjusted EBITDA margin rate for this segment expected in the high-teens to low-20% range.
Third quarter Electrical Transmission segment revenue was $365 million, and adjusted EBITDA margin rate of 9.5% of revenue.
Third quarter results reflected a full quarter of electrical distribution and storm services from INTREN, which contributed revenue of approximately $175 million to the quarter.
Excluding INTREN, organic segment revenue during the third quarter grew $64 million and adjusted EBITDA margin performance was strong.
We expect annual 2021 revenue for the Electrical Transmission segment to approximate $1 billion and annual 2021 adjusted EBITDA margin rate to range somewhere between 6.5% to 7% of revenue.
This expectation includes the assumption that second half of 2021 segment adjusted EBITDA margin rate will approximate a low-8% range, a significant improvement when compared to first half 2021 performance.
We continue to believe that multiple macro end market trends, including renewable power generation, increased distribution needs to support electric vehicle expansion and grid investments for storm and fire hardening, are continuing to develop and should provide our segment substantial future growth opportunities.
Now I will discuss a summary of our top 10 largest customers for the third quarter period as a percentage of revenue.
Enbridge was 21% of revenue, reflecting the previously mentioned pipeline project acceleration.
Newly defined AT&T services totaled 7% of revenue.
As indicated on our 10-Q filed yesterday, reported AT&T revenue amounts have been reclassified to exclude DIRECTV services for all periods, as this entity has been spun off into a separate third-party entity.
Revenue performed for AT&T includes wireless, wireline and other services, including smart city deployment projects.
NextEra Energy was 6% of revenue, comprising services across multiple segments including clean energy, Communications and Electrical Transmission.
Equitrans Midstream was 5%.
Entergy and Comcast were each 4% of revenue.
Duke Energy, DIRECTV and Exelon reached 3%; and Enel Green Power was 2%.
Individual construction projects comprised 63% of our third quarter revenue, with master service agreements comprising 37%.
With the combination of an expected resurgence in wireless MSA work, coupled with the INTREN acquisition whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis.
Lastly, as we've indicated for years, backlog can be lumpy, as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time as a result of actual contract signs.
As of September 30, 2021, we had total backlog of approximately $8.5 billion, up approximately $821 million when compared to last year.
Importantly, each of our non-Oil and Gas segments' backlog represented a record third quarter level, reflecting continued and expanding strength in these end markets.
And we continue with the expectation that 2022 segment revenue will range somewhere between $1.5 billion to $2 billion, with potential sizable growth opportunities in 2023 and beyond.
Now I'll discuss our cash flow, liquidity, working capital usage and capital investments.
As I mentioned earlier in these remarks, yesterday, we announced closing of a new unsecured $2 billion credit facility, which reflects a $250 million increase from our prior facility with improved pricing and extended term.
We are hopeful the combination of our consistent and strong cash flow performance coupled with our new unsecured credit facility will provide us a path toward an investment-grade credit rating in the near term.
And we are engaging with rating agencies for an updated outlook.
During the third quarter, we managed to reduce our net debt levels by approximately $80 million despite the working capital associated with approximately $450 million in sequential revenue growth.
We ended the quarter with $1.3 billion in liquidity; and net debt, define as total debt less cash and cash equivalents, at $1.26 billion, which equates to a very comfortable 1.3 times leverage metric.
2021 year-to-date cash provided by operating activities was approximately $500 million.
We ended the third quarter with DSOs at 72 days compared to 85 days in Q3 last year.
And this level is well below our target DSO range of mid- to high 80s.
We are proud of the strength, resilience and consistency of MasTec's cash flow profile.
As we look forward to close outing -- to the closeout of 2021, we expect continued strong cash flow generation despite the working capital associated with our 2021 revenue growth and expect that annual 2021 free cash flow will once again exceed adjusted net income.
Assuming no Q4 acquisition activity, net debt at year-end is expected to approximate $1.2 billion, leaving us with ample liquidity and an expected book leverage ratio slightly over one times adjusted EBITDA.
In summary, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity, giving us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value.
Moving to our 2021 guidance view.
We predict an annual 2021 revenue of $8 billion, with adjusted EBITDA of $930 million or 11.6% of revenue; and adjusted diluted earnings of $5.55 per adjusted diluted share, which is a $0.10 per share increase over our prior expectation of $5.45 per adjusted diluted share.
And the earnings per share increase is primarily due to the benefit of lower expected annual 2021 income tax expense.
This translates into a fourth quarter revenue expectation of $1.85 billion, with adjusted EBITDA of $218 million or 11.7% of revenue; and earnings guidance of $1.33 per adjusted diluted share.
As previously mentioned, our fourth quarter revenue view includes approximately $100 million in lower revenue expectations for the Oil and Gas segment due to the acceleration of project revenue during the third quarter.
As we have previously provided some color regarding 2021 segment expectations, I will briefly cover other guidance expectations.
We anticipate net cash capex spending in 2021 at approximately $120 million, with an additional $160 million to $180 million to be incurred under finance leases.
As we have previously indicated, as our end market operations shift with non-Oil and Gas segments becoming a larger portion of our overall revenue, our capital spending profile should reduce, as the Oil and Gas segment has historically required the largest level of capital investment.
We expect annual 2021 interest expense levels to approximate $54 million, with this level including approximately $600 million in year-to-date acquisition funding activity.
For modeling purposes: Our estimate for 2021 share count continues at 74 million shares.
We expect annual 2021 depreciation expense to approximate 4.3% of revenue, inclusive of year-to-date 2021 acquisition activity.
As we have previously indicated, this expectation incorporates an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we are utilizing conservative depreciation life and salvage value estimates on previous capital additions to protect against future market uncertainties.
Given these trends, we anticipate that annual 2022 depreciation expense dollar amount and percentage of revenue will decrease when compared to annual 2021 levels.
We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of slightly under 1% of overall revenue.
And lastly, we expect that annual 2021 adjusted income tax rate will range approximately 22%, with our third and fourth quarter adjusted income tax rates ranging in the 19% to 20% range primarily due to the benefits of income mix and tax true-up adjustments.
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sees q4 adjusted earnings per share $1.33.
q3 revenue rose 42 percent to $2.4 billion.
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Last night, we released results for our second quarter of fiscal year 2021, copies of which are posted in the Investor Relations section of our website.
In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to the GAAP results.
Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.
Erica will review the business segment and corporate financial results.
I'm very pleased with the exceptional operating results we generated this quarter as we saw continued strength across our businesses.
For the quarter, we generated a second consecutive record adjusted earnings per share of $1.38 and segment EBIT of $149 million.
Adjusted earnings per share was up 79% over the second fiscal quarter of 2020 largely due to strong volumes across all regions, robust unit margins, disciplined operational execution and strong performance in our targeted growth initiatives.
The Cabot team demonstrated great operational flexibility in the face of continued COVID restrictions, weather related interruptions and tightness in the global shipping markets.
This operational adaptability was made possible by the extraordinary efforts of our commercial and supply chain teams and the strength of the Cabot manufacturing network.
During the quarter, we saw strong volumes in the tire and automotive markets and continued strength in our infrastructure, packaging and consumer-driven applications.
We are pleased to see that automotive builds and passenger car miles driven have improved, though still generally lag pre-COVID levels.
On the other hand, truck miles driven are very robust, driving a large replacement tire market.
With both automotive and tire markets still expected to be below prior peaks on a 2021 forecast basis, we are optimistic about our growth runway in the coming years.
In the near term, COVID cases remain persistently high in certain regions, particularly across Europe, South America and India.
While vaccines are offering promise, the economic recovery will likely remain uneven and challenge to reach its full potential until the public health crisis is fully under control.
Raw material prices continue to rise across most value chains and our businesses were no different.
We effectively implemented price increases to recover these rising costs, which combined with favorable product mix to drive robust unit margins.
Looking at our major segments, Reinforcement Materials generated record EBIT performance in the quarter of $89 million, driven by robust customer demand and strong Asia pricing.
Results in Performance Chemicals were up sharply over the prior year with segment EBIT of $58 million compared to $31 million last year, as the business drove double-digit volume growth in both Performance Additives and Formulated Solutions businesses, and benefited from favorable product mix.
Overall I am very pleased with the way we have navigated the pandemic, and I believe that Cabot is emerging from the COVID crisis a stronger company.
Our global manufacturing footprint and service capabilities and leading product portfolio are increasingly valued by our customers.
While the recession of 2020 required an intense focus on cost and cash preservation, we continue to sustain our assets and make important investments in sustainability and growth for the long term.
One of the most exciting growth investments is in the space of batteries and I would like to take a few minutes to update you on our progress here.
We are seeing a real inflection point in terms of demand for electric vehicles and energy storage as pressures to reduce greenhouse gases increase.
Cabot is well positioned and is supporting this transition with our leading portfolio of highly engineered, conductive carbon additives and formulation capabilities.
Our business is demonstrating strong growth this year and we expect this will continue into the future.
I will start with some comments about the overall market.
Lithium ion batteries are growing rapidly and expected to grow at a 25% to 30% compound annual growth rate through 2030 with the primary growth driver being electric vehicles as countries establish CO2 reduction goals and accelerate the shift away from internal combustion engines.
Further technology improvements in batteries are a necessary enabler of this transition, and the materials industry will play a key role in this pursuit to drive down costs and increase range.
Cabot currently serves this market by offering a range of materials and formulations for use in energy storage applications.
These materials can be classified into two groups, conductive carbon additives, which include conductive carbon black, carbon nanostructures and carbon nanotubes and non-carbon additives which include products in our fumed metal oxides business.
Conductive carbon additives are a small part of the battery formulation, but play a very important role.
These additives enable electrons to move in and out of the active phase where they're stored during charging and discharging of the battery.
There are two types of conductivity required to make this effective, short range conductivity and long range conductivity.
Based on the different shapes and properties of conductive carbon additives they impart different conductivity performance.
For example, carbon nanotubes are more advantaged in providing the long range conductivity, while conductive carbon blacks are more advantaged in providing the short range conductivity.
Therefore, there is no one single best additive for this application.
Having the capability to offer different types of conductive carbon additives and blends of such materials is important in delivering a formulated solution to the customer that addresses their specific needs.
There are a few drivers that distinguish Cabot in the conductive carbon additive space.
First, we have an established an unmatched global footprint and application capability to support our customers, as they build manufacturing plants around the world.
Over the past few years, through the establishment of our Asia Technology Center and the R&D capabilities acquired from the Sanshun acquisition, we have built a leading technical support team.
This capability coupled with a global manufacturing footprint positions us favorably in the eyes of our customers.
Second, through organic and inorganic investments over the past few years including the recent acquisition of Sanshun, Cabot is the only carbon additive supplier with commercially proven conductive carbon black, carbon nanotube, carbon nano structure and dispersion capabilities.
This variety of conductive carbon additives enables us to tailor different formulated solutions for our customers and work with them on next generation technologies.
And third, Cabot has a rich legacy of innovating in demanding technical applications.
Our experience in the CMP market for semiconductors and inkjet has offered invaluable practices and protocols that will be critical for the battery market.
In terms of financial performance, we believe that the battery application will become a material contributor to the Performance Chemicals segment over the next few years.
The current conductive carbon additives market for lithium ion batteries which includes both CNTs and conductive carbon black is approximately $400 million in material value.
We expect this market will grow to approximately $1 billion in value by 2025.
Our energy materials business is off to a strong start in fiscal 2021 with forecasted revenue of approximately $80 million for the fiscal year.
Over the past five years, revenue has grown at a CAGR of roughly 50% which includes the acquisition of our CNT business in China.
While we are making significant investments to drive qualification and further extend our technical capabilities EBITDA is forecasted to be between $15 million and $20 million in fiscal year 2021.
We are excited about the promise of this emerging application and will continue to focus our efforts to support customers and realize the potential of energy storage.
I will start with discussing results in the Reinforcement Materials segment.
The Reinforcement Materials segment delivered record operating results with EBIT of $89 million which is up 46% compared to the same quarter of fiscal 2020, primarily due to significantly higher volumes across all regions and improved unit margins driven by favorable spot pricing in the Asia region.
Globally, volumes were up 18% in the second quarter as compared to the same period of the prior year primarily due to 30% growth in Asia and 10% higher volumes in the Americas and Europe.
Higher volumes are driven by key end market demand that continued to recover from COVID related impacts in fiscal 2020.
Results also benefited from higher margins from continued strong pricing in Asia, which included a second consecutive quarter of price increases ahead of rising feedstock costs.
Looking ahead to the second half of 2021, we expect volumes to remain strong.
In addition, we anticipate higher feedstock cost flow-through in Asia, while fixed costs are expected to be higher due to the timing of planned plant maintenance spending, after delayed spending in 2020 and the first half of this fiscal year.
Now, turning to Performance Chemicals, EBIT increased by $27 million as compared to the second fiscal quarter of 2020, primarily due to strong volumes across the segment and improved product mix, driven by an increase in sales and into automotive applications.
Year-over-year volumes increased by 10% in Performance Additives and 14% in Formulated Solutions, driven by increases across all our key product lines from higher demand levels and some level of customer inventory replenishment during the quarter.
Looking ahead to the second half of fiscal 2021, we expect overall volumes to remain strong.
However we anticipate demand into auto applications will decrease somewhat due to the semiconductor chip shortage, which will unfavorably impact product mix as compared to the first half of the year.
In addition, we anticipate higher fixed costs in the second half of the fiscal year due to the timing of spending.
Moving to Purification Solutions, EBIT in the second quarter of 2021 declined by $1 million compared to the second quarter of 2020.
The reduced demand in mercury removal applications was partially offset by a reduction in fixed costs, resulting from the sale of our mine in Marshall, Texas and the related long term supply agreements.
Looking ahead to the second half of fiscal 2021, we expect EBIT to improve driven by seasonally higher volumes.
I'll now turn to corporate items.
We ended the quarter with a cash balance of $146 million and our liquidity position remains strong at approximately $1.3 billion.
During the second quarter of fiscal 2021, cash flows from operating activities were $65 million which included a working capital increase of $80 million.
The working capital increase was largely driven by growth related networking capital as accounts receivables increased with higher sales and inventory increase from purchases of higher cost raw materials.
Capital expenditures for the second quarter were $40 million, for the full year we expect capital expenditures to be approximately $200 million.
This estimate includes continued EPA related compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products.
Additional uses of cash during the quarter included $20 million for dividend.
Our year-to-date operating tax rate was 28% and we forecast our operating tax rate will be between 27% and 29% for the fiscal year.
We are very pleased with the record results in the second quarter of 2021 with volumes continuing to recover from the COVID related lows we experienced in fiscal 2020 and great execution across the organization.
We achieved another record setting quarter in reinforcement materials and very strong results in the performance chemicals segment.
Throughout the first half of the year, I am pleased with how well the team has been executing.
Our manufacturing plants continue to operate effectively in the COVID environment to meet the needs of our customers.
Furthermore, we achieved an important milestone on our sustainability journey with the completion of the air pollution control project at our Franklin Louisiana plant.
We continue the integration of our CNT acquisition in China and our investments in inkjet are on track, to deliver on the promise of growth in the packaging segment.
And finally, we continue to renew our ways at working to drive more efficient and effective processes through the implementation of digital solutions.
I'm proud of the Cabot team for their work to strengthen our foundation and establish our platform for sustainable growth.
Moving to our current outlook, we continue to see robust and broad-based demand globally including in our key tire, automotive and industrial end use markets.
Our current view is that the underlying demand will remain strong during the second half of the year.
Against this demand outlook, we expect some impact from the flow-through of higher raw material costs in Asia, moderating volumes into automotive applications due to the semiconductor chip shortage and higher fixed costs as we perform some maintenance and turnarounds that are necessary to ensure we can meet customer demand in 2022.
Based on these factors, we expect adjusted earnings per share for the full year to be in the range of $4.70 to $4.95.
On the cash side, we anticipate our cash and liquidity will remain robust.
Networking capital increases, driven by a sharp recovery in demand and a steady increase in oil prices should moderate in the second half of the year.
We expect to see better conversion of our strong EBITDA and to operating cash flow as this happens.
We anticipate operating cash flow for the year will cover our cash needs for capital expenditures and dividends.
Our debt to EBITDA ratio was 2.3 times at the end of March and we expect this will be reduced further by year end.
The strength of our culture and the resilience of our employees has never been more apparent than it has during these challenging times.
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sees q2 adjusted earnings per share $0.90 to $1.00.
q1 adjusted earnings per share $1.18.
about $1.5 billion of liquidity, total debt to ebitda ratio of 2.5x as of december 31, 2020.
anticipate demand to remain strong in q2 with january levels starting quarter above prior year.
anticipate increasing raw material & fixed costs sequentially, less customer inventory replenishment than experienced in q1.
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We appreciate your continued interest in our company.
I'm Jim Gustafson, Vice President of Investor Relations.
Over the last several months, we have made incredible progress in our efforts to combat the COVID-19 pandemic.
And it's with continued optimism that I provide several updates today, starting with vaccination followed by a summary of the first quarter performance then an update on our improved outlook for the year and finally, an overview of our ongoing commitment to ESG.
Q1 brought a lot of smiles as the Kidney Care community administered hundreds of thousands of vaccines to its patients.
Providers worked closely with the Biden Administration, the CDC and state government so that dialysis patients could be vaccinated in a trusted and convenient side of care.
We knew that this would help our patients overcome transportation and other access challenges getting to third-party sites.
And we had confidence that the hesitancy rate would decline when they received education from a trusted caretaker.
We also saw an opportunity to positively impact health equity by administering COVID vaccine in our clinics.
Similar to the early results in the broader U.S. population, in the first few weeks of the vaccine rollout, we saw the vaccination rate for Black and Hispanic were approximately 40% below that of White and Asian American.
This did not sit well with us.
We've got to work and mobilized our care teams, including social workers, dietitians and medical directors to have one-on-one conversations with patients to address common causes of hesitancy.
Our Hispanic patients have now been vaccinated at nearly the same rate as white patients and the gap for our black patients has been reduced to 10%.
We are not done.
Our pursuit for health equity continues.
On to our first quarter financial results.
We delivered solid performance in Q1 as our operating margins returned to 15.7% in the quarter, while we continue to lead through the continued challenges presented by the pandemic.
As we covered on our last call, treatment volumes declined in Q1.
Our treatments per day hit a low point in mid-February, including the impact of approximately 25,000 missed treatments from the winter storm.
Since then, our daily treatment trends have steadily improved.
As these trends continue, absent any further infection surges, we believe that our sequential patient census growth through the end of the year could return to pre-COVID levels, which is what we incorporated in our guidance ranges we provided last quarter.
Let me provide a bit more detail on volume that supports our outlook.
First, since our update in Q1, COVID case counts and new infections within our dialysis population have continued to decline.
As of last Friday, the number of active cases among our patients across the country decreased approximately 85% from peak prevalence on January 6, 2021, and the last seven-day incidence rate for new cases decreased approximately 91% from the week ending January 9, 2021.
Second, we're grateful that we're seeing a dramatic decline in the mortality rates associated with COVID.
We've previously shared that the unfortunate incremental mortality associated with COVID was approximately 7,000 in 2020.
In 2021, both our patient mortality count and mortality count in the general population peaked in January.
In the first quarter, incremental mortality associated with COVID was approximately 3,300 lives, with more than half of that number occurring in January, decreasing to approximately 600 in March.
It is too early to provide an estimate for April, but we expect the results will improve versus March.
Shifting to full year outlook, our view of core operation performance for the year remains largely unchanged from our original guidance.
However, now that the likelihood of some downside scenarios have decreased due to the trends I've previously mentioned, we are increasing our adjusted earnings per share guidance range to $8.20 to $9 per share and our adjusted operating income guidance range to $1.75 billion to $1.875 billion.
At the midpoint of our revised adjusted operating income guidance, this would represent approximately a 4% growth year-over-year.
These revised ranges assume no further major disruption from the virus strain.
My final topic is our ongoing commitment to environmental, social and governance matters or ESG.
ESG has become a more significant topic of conversation in the investment community over the last couple of years, but these are not new areas of focus for us at DaVita.
Our beliefs are incorporated into our stated vision of social responsibility that has three components: caring for our patients, caring for each other and caring for the world around us, including both our communities and our environment.
DaVita continues to execute against this vision, providing top quality clinical care for our patients is at the core of what we do and because I've already spoken at length about our patients care and our efforts to vaccinate our patients, I would like to highlight a few of our achievements in caring for our teammates and caring for the world around us.
I believe that fostering an environment rich in diversity and where we all feel that we belong is imperative to our culture and how we connect with each other and how we connect with our patients every day.
And our commitment to cultivating diversity is evident throughout the organization.
It starts with the Board of Directors, currently made up of nine leaders, of whom 67% are diverse, including four women and three people of color.
The diversity of our team extends to the leaders who run the core operations in our clinics of whom 52% are female and 27% are people of color.
These results have been achieved through thoughtful and deliberate practices to create a diverse pipeline of talent.
In 2021, we published our first report on diversity and belonging, disclosing many of our company's diverse metrics and our ongoing efforts to cultivate a diverse organization in which everyone feels that he or she belongs.
We also recently published our 14th Annual Corporate Social Responsibility Report and our first ESG Report.
These reports disclose the progress we made in 2020 and lay out our ambitious ESG goals for 2025, including goals to reduce carbon emissions by 50% and to have vendors representing 70% of emissions set by climate change goals and to achieve engagement scores of 84% or higher among our teammate population.
We are pleased with our progress to date on diversity and ESG.
And as you can see by our goal, we have a lot more we hope to accomplish.
Q1 was a strong start to the year with solid financial performance.
For the quarter, we recorded revenue of approximately $2.8 billion, operating income of $443 million and earnings per share of $2.09.
As Javier referenced, treatment volume was a large headwind and our nonacquired growth was negative 2.2% compared to negative 0.3% in Q4.
While COVID presented the main challenge to NAG in Q1, winter storms, particularly Uri, were responsible for about 30 basis points of the NAG decline.
Treatments per day bottomed out during the first quarter, so we expect to start seeing quarter-over-quarter growth in Q2.
We continue to expect that NAG will be negative for the year, although we expect to see an acceleration of NAG in 2022 and 2023 as mortality rates may be lower than the pre-COVID levels for a few years.
U.S. dialysis revenue per treatment grew sequentially by almost $3 this quarter as a result of the Medicare rate increase, higher enrollment in MA plans, a slight improvement in commercial mix and higher volume from our hospital services business, partially offset by the seasonal impact of coinsurance and deductible.
U.S. dialysis patient care costs declined sequentially by approximately $6 per treatment.
Although we continue to experience elevated costs due to the pandemic, such as higher PPE and certain clinical level expenses from continued infection control protocols, our Q1 patient care costs included a nearly $2 per treatment benefit from our power purchase agreement, a benefit that we do not expect to persist through the rest of the year.
For the quarter, the net headwind related to COVID was approximately $35 million, consisting primarily of higher PPE costs and the compounding effect of patient mortality associated with COVID, partially offset by the benefit from the sequestration suspension with a number of other items that largely offset each other.
For fiscal year 2021, we now estimate the net negative impact from COVID to be approximately $50 million lower than our guidance last quarter.
This is the result of lower COVID impact in Q1, the recently passed extension of the Medicare sequestration relief through the end of the year and lower other offsets, including T&E in the back half of the year.
At the middle of our guidance range, this would equate to $150 million negative impact from COVID in 2021.
Our DSO increased by approximately seven days in Q1 versus Q4, primarily due to temporary billing holds related to the winter storm and the changes in calcimimetics reimbursement.
In certain circumstances, we hold claims to make sure we have complete and accurate charge information for payments.
This quarter, we had more of these holes and the single largest driver was related to winter storm Uri, which impacted more than 600 of our centers until right in the middle of the quarter.
This has the effect of pushing a significant amount of cash flow from this quarter to the next and caused the corresponding DSO increase in the interim.
While claim holds shift cash flow between quarters, they have no negative impact on what we ultimately expect to collect.
We've already seen a significant increase in cash collections in April and expect a corresponding positive impact on both cash flow and DSOs over the next two quarters.
A couple of final points.
In the first quarter, we repurchased 2.9 million shares of our common stock.
And to date, in April, we repurchased approximately one million additional shares.
Debt expense was $67 million for the quarter.
We expect quarterly debt expenses to increase to approximately $75 million beginning next quarter as a result of the $1 billion of notes issued in late February.
Before we open up the line for Q&A, let me share some reflections.
Over the past year, our teams and our business experienced unusual volatility and challenges due to the pandemic.
We have weathered this very difficult period because of our dedication of our people, our scale, our innovation and our holistic platform and approach to patient care.
As I look forward, our organization is stronger, our relationships with patients have deepened and I have even more resolve that our comprehensive Kidney Care platform is well positioned to deliver a best-in-class value proposition to our patients, physicians in hospitals and payer partners.
Now let's open it up for Q&A.
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1st quarter 2021 results.
q1 earnings per share $2.09 from continuing operations.
now sees fy 2021 adjusted net income from continuing operations per share $8.20 - $9.00.
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We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Damon Audia Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Franklin Cardenas, President, Infrastructure business segment; Pete Dragich, Chief Operating Officer, Metal cutting business segment; and Ron Port, Chief Commercial Officer, Metal Cutting Business Segment.
These risk factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
For today's call, I will start with some general comments on the year, followed by a quick overview of the fourth quarter.
After that, I will discuss fiscal year '21 and our strategic agenda that will well position the company as markets recover.
From there, Damon will review the quarterly financial results in more detail.
Beginning on Slide 2, I would describe our fiscal year '20 as a year of significant challenge, but also a year of significant progress on our strategic growth and profitability improvement initiatives.
As you recall, we began the year in what was already considered an industrial downturn.
737 MAX production halt and a significant decline in the price of oil followed soon after.
Last, but certainly not least, COVID-19 significantly affected end markets in all regions in the second half of our fiscal year, especially in Q4.
As a result, organic sales declines occurred throughout the year and got worse as the year progressed.
However, we focused on the things we could control by implementing aggressive cost control actions, staying the course to advance our strategic agenda including positioning the Company for profitable growth and to gain share as markets recover.
These actions resulted in strong decremental margin performance in the second half as well as substantially completing our planned simplification/modernization capital spend.
I'm pleased with how our team came together to tackle the challenges.
COVID-19 protocols we successfully implemented continue to allow us to operate safely and serve customers globally.
So, all our facilities operated throughout the fourth quarter with a notable exception of our Bangalore, India plant, which was closed for approximately six weeks due to a government mandated lockdown.
Some examples of our cost control actions are; the acceleration of planned structural cost reductions associated with our simplification/modernization program, and further temporary cost control actions to mitigate COVID-19 headwinds such as increased furloughs, salary and variable compensation reductions, and reduced production schedules.
These measures helped to align our cost more closely with demand and finish the year on a strong liquidity position, despite the challenging environment.
In addition, we continue to make significant progress on our strategic initiatives.
Yesterday, we announced our intention to close a plant in Johnson City, Tennessee as part of our simplification/modernization program.
This brings the total number of plant closures to six, since inception of the program and is in line with our original target of five to seven plant closures.
That does not include the significant downsizing of the Essen, Germany facility.
We expect the Johnson City closure to be substantially complete by fiscal year-end, with production consolidated into other newly modernized Kennametal facilities.
We are also substantially complete with the spending on simplification/modernization capital, which marks a significant milestone in our journey to fundamentally reduce our cost structure, improve financial performance throughout the economic cycle, and improve customer service to enable share gain.
As we navigate through another challenging fiscal year, we will see the benefits from simplification/modernization increase.
This is driven in part as we recognized full-year run rate savings from fiscal year '20 actions, bring additional modernized processes online, and recognize the benefits from accelerating the simplification/modernization structural cost actions.
Also, of course, as volumes return, the savings will grow from increased utilization of our modernized processes and rationalized footprint.
In addition to simplification/modernization, we continue to advance our strategic growth initiatives, including launching new high value-added products and preparing to extend our reach into a large segment of metal cutting that we previously had not focused on, and I will talk more about these growth initiatives in a minute.
But first, let me quickly review, on Slide 3, the fourth quarter results, which as you know, like other industrial manufacturing companies, we experienced significant headwinds due to COVID-19.
In Q4, the Company reported an organic sales decline of 33% on top of the 2% decline in the prior year quarter, which is the worst quarterly organic decline since the Great Recession in 2008.
All segments reported negative organic growth for the quarter with Industrial declining by 36%, WIDIA 32%, and Infrastructure at 29% compared to negative 4% and 3% for Industrial and WIDIA and infrastructure at 1% growth in the prior year quarter.
Also, all regions were negative with the Americas posting a 39% decline, EMEA 34%, and Asia Pacific 24%.
Remember that Asia Pacific saw COVID-19 related declines earlier than EMEA followed by the Americas.
Adjusted operating expenses declined 18% reflecting our cost control measures.
These actions in the quarter combined with benefits from our simplification/modernization program, significantly mitigated the effect of lower volumes on operating leverage.
Adjusted EBITDA margin for the quarter was 17.7%, a decrease of 330 basis points from 21% in the prior year.
Turning to Slide 4, due to COVID-19, it remains difficult to forecast how our customers as well as our end-markets will be affected.
As a result, we will not be providing an annual outlook for fiscal year '21.
However, I would like to provide some color on what we might expect, especially in the first quarter.
Based on our July sales and the month to month sequential sales pattern throughout Q4, market demand in Q1 would seem so far to be stable or modestly improving from Q4 levels for many end markets and regions.
But as you know, the Company typically sees, on average, an approximately 10% seasonal decline in revenues from Q4 to Q1.
So as customers' continue their reopening process in Q1, the resulting improvement in demand may not be sufficient to fully offset the normal seasonal pattern.
Also note that there can be a lag of a few months from when customers increase production to when we see a corresponding increase in demand.
Beyond Q1, it's helpful to consider customer sentiment, which seems to be that while there are signs of improvement from Q4 to Q1 there is still a lot of uncertainty because of COVID-19 on how these signs would translate to Q2 and beyond.
So while many customers are hopeful for continued improvement, they seem to feel it prudent, due to the uncertainty of COVID-19, the plan for demand to be stable or only modestly improving through the end of calendar year 2020.
But regardless of how end market demand unfolds in fiscal year '21, we will continue our cost control actions to protect margins and liquidity.
Regarding capital expenditures for fiscal year '21.
Capital spending will be significantly reduced by over $100 million to be in the range of $110 million to $130 million for the full year.
The reduction of course is as expected, given we are substantially through the capital spend for the simplification/modernization program.
The benefits of these investments will continue to increase in fiscal year '21 bringing savings since inception to approximately $180 million at fiscal year-end, including total Company headcount reduced by approximately 20% and a rationalized footprint with six fewer plants and more production moving to lower-cost countries.
So we are successfully managing through the current environment, while still advancing simplification/modernization and our other strategic initiatives to drive growth and share gain as markets recover.
For example, on Slide 5, in fiscal year '20 we continue to launch new products with great value propositions for customers in key end market.
As you can see from the customers' feedback they speak of the incredible versatility and performance of Kennametal products.
We are creating tremendous value for our customers and differentiating ourselves from the competition.
These types of innovations fuel growth.
For example, in fiscal year '20, we won a five-year strategic supplier agreement with a leading aircraft OEM and a complete tooling program from a leading wind power bearings manufacturer.
And these are just a few examples of how creating value for customers is driving new business growth.
We've also continued to advance our Commercial Excellence initiatives to gain share when markets recover.
As you can see on Slide 6, we announced yesterday that as of July 1st, we combined Industrial and WIDIA into a single metal cutting organization.
This move will enable us to more effectively direct our commercial resources, products, and technical expertise toward capturing a larger share of wallet, in addition to executing a new brand strategy.
Previously, WIDIA operated to serve a customer need segment within metal cutting that significantly overlap the Kennametal brand positioning.
Our new approach is to reposition the WIDIA brand and portfolio to serve a multi-billion dollar segment within metal cutting that we previously have not focused on.
We expect that this approach will open up a 40% increase in served market opportunity while offering better service and tooling options to our customers.
More specifically, in speaking with our customers, we know they need technical support and high performance tooling, optimized around specific applications; but they also have a need for high quality, fit for purpose tools that are readily available and have the versatility to offer performance across a broad range of applications.
It is this part of the customers' metal cutting share of wallet that we are targeting by repositioning the WIDIA brand and product portfolio, which will leverage our newly modernized manufacturing capabilities for improved delivery and cost performance.
So, from a customer perspective and this is true across all end markets, we are providing customers' access to the Company's full metal cutting suite through both direct and indirect channels, in effect a one-stop shop model to cover a broader range of their metal cutting needs.
I will begin on Slide 7 with the review of our Q4 operating results on both the reported and adjusted basis.
As Chris mentioned, demand trends already at depressed levels from the industrial downturn deteriorated significantly in Q4, driven by the effects of COVID-19.
For the quarter, sales declined 37% year-over-year, in line with the decline seen in April or negative 33% on organic basis to $379 million.
Foreign currency had a negative effect of 2% and our divestiture contributed another negative 2%.
Adjusted gross profit margin of 27.7% was down 790 basis points year-over-year.
The year-over-year performance was primarily due to the effect of lower volumes and associated absorption, partially offset by cost control actions including furloughs, increasing benefits from simplification/modernization and the positive effect of raw materials, which amounted to approximately 140 basis points.
Adjusted operating expenses of $68 million were down 41% year-over-year and decreased to 18% as a percentage of sales.
Although much of this decrease is temporary, it is reflective of our aggressive approach to managing costs in this environment.
EBITDA margin was 17.7%, down 330 basis points from the previous-year quarter.
Taken together, adjusted operating margin of 8.8% was down 700 basis points year-over-year.
The adjusted effective tax rate in the quarter was significantly higher at 51.2% due to the combined effects of geographical mix changes in our taxable income as well as the magnified effect of GILTI on the effective tax rate as we finalized actual full-year taxable income versus estimates.
It's worth noting that our adjusted effective tax rate for the full year was approximately 33%.
We reported a GAAP earnings per share loss of $0.11 versus earnings per share of $0.74 in the prior-year period, which reflects the reduced volume and higher tax rate, partially offset by our cost control actions coupled with restructuring items.
On an adjusted basis, earnings per share was $0.15 per share in the quarter versus $0.84 in the prior year.
The main driver for our adjusted earnings per share performance are highlighted on the bridge on Slide 8.
Effective operations this quarter amounted to negative $0.68.
This compares to negative $0.08 in the prior year period and negative $0.39 in the third quarter.
The largest factor contributing to the $0.68 was the effect of significantly lower volume and associated under-absorption.
This was partially offset by cost control actions, including lower variable compensation as well as positive raw materials of $0.08.
Simplification/modernization contributed $0.14 in the quarter on top of the $0.10 in the prior year.
This brings the total FY '20 simplification/modernization savings to $0.46.
As Chris mentioned, our expectations for FY '21 is that the simplification/modernization benefits will be in the range of $0.80, driven by actions already taken or announced.
Remember, restructuring is a subset of our simplification/modernization program.
In terms of benefits from our restructuring program, the savings from our FY '20 restructuring actions delivered approximately $33 million in run rate annualized savings at the end of FY '20.
FY '21 restructuring actions are expected to contribute an additional $65 million to $75 million of annualized run rate savings by the end of FY '21.
The total year results in detail and the earnings per share bridge can be found in the appendix.
Slide 9 through 11 details the performance of our segments this quarter.
Industrial sales in Q4 declined 36% organically on top of a 4% decline in the prior year period.
All regions posted year-over-year sales declines with the largest decline in the Americas at negative 40% followed by EMEA at 38% and Asia-Pacific at 27%.
The slightly better performance in Asia Pacific reflects more mixed results in the region, with growth in wind energy and improvement in China, slightly offsetting significant contraction in other countries such as India.
From an end market perspective, the weakness in demand remains broad based, with significant declines in transportation and general engineering down 45% and 32% respectively.
This was primarily driven by the demand effects of COVID-19 as well as related customer shutdowns that continued throughout Q4.
Sales in aerospace also experienced a significant decline both year-over-year and sequentially, driven by the associated effects on demand in the supply chain from COVID-19.
Adjusted operating margin came in at 7.7% compared to 18.3% in the prior year quarter.
The decrease was primarily driven by the decline in volume and associated under-absorption, partially offset by reduced variable compensation and other cost control actions, increased simplification/modernization benefits and a 90 basis point benefit from raw materials.
On a sequential basis, adjusted operating margin decreased 540 basis points as lower volumes were partially offset by aggressive cost control actions and lower variable compensation.
Turning to Slide 10 for WIDIA.
Sales declined 32% on top of a negative 3% in the prior year period.
Regionally, the largest decline this quarter was in Asia Pacific down 41%, the Americas 31% and EMEA 28%.
The decline in Asia Pacific was mainly driven by India with its countrywide COVID-19 shut down for approximately half of the quarter.
Adjusted operating margin for the quarter was negative 2.9% due to volume declines, partially offset by lower variable compensation and other cost control actions, a raw material benefit of 220 basis points, and increased simplification/modernization benefits.
Turning to Infrastructure, on Slide 11.
Organic sales declined 29% versus positive 1% in the prior year period.
Other items that negatively affected Infrastructure sales included a divestiture of 4%, FX of 2% and fewer business days of 1%.
Regionally, the largest decline was in the Americas at 39%, then EMEA at 22%, and Asia-Pacific at 14%.
By end market, these results were primarily driven by energy, which was down 47% year-over-year, given the extreme drop in oil prices and the corresponding decline in the U.S. land-only rig count.
General Engineering and Earthworks were down 31% and 17% respectively.
Adjusted operating margin of 12.7% remained relatively stable sequentially, but decreased 280 basis points from the prior year margin of 15.5%.
This decrease was mainly driven by lower volumes and associated under-absorption, partially offset by reduced variable compensation and other cost control actions, favorable raw materials that contributed 200 basis points and benefits from simplification/modernization.
Now turning to Slide 12 to review our balance sheet and free operating cash flow.
Before I review the numbers, like I did last quarter, I would like to emphasize that we view liquidity as extremely important, particularly in these uncertain times.
We will remain conservative to ensure the Company has ample liquidity to weather the current environment as well as continue to execute our strategy.
Our current debt maturity profile is made up of two $300 million notes maturing in February of 2022 and June of 2028 as well as a U.S. $700 million revolver that matures in June of 2023.
At fiscal year-end, we had combined cash and revolver availability of approximately $800 million.
At quarter end, we were also well within our covenants.
Primary working capital decreased both sequentially and year-over-year to $596 million.
On a percentage of sales basis, it increased to 35.4%, a reflection of the significant decline in sales in the quarter.
Net capital expenditures were $38 million, a decrease of approximately $20 million from the prior year, bringing the total capital spend for the year to $242 million as expected.
Our fourth quarter free operating cash flow was $39 million and represents a year-over-year decline, reflecting lower income due to volume and increased cash restructuring cost.
Total free operating cash flow for the full year was negative $18 million.
As mentioned on our last call, while we expected positive cash flow in the fourth quarter, free operating cash flow for the full year was projected to be slightly negative, given the level of capital expenditures and cash restructuring charges.
In addition, we paid the dividend of $17 million in the quarter.
Full balance sheet can be found on Slide 20 in the appendix.
Turning to Slide 13.
This slide shows how certain factors are expected to affect earnings per share and free operating cash flow during each half of FY '21 on a year-over-year basis.
As I mentioned earlier, we expect increased simplification/modernization benefits of approximately $80 million in FY '21.
The accumulated benefits will increase as we move through the year.
As we think about the temporary cost control actions that we've announced in June, they will generate a savings of $10 million to $15 million per quarter in the first half of FY '21 relative to the first half of FY '20.
However, as we look at the second half of FY21, the temporary cost control actions implemented in FY '20 and the reversal of variable compensation which we currently do not expect to repeat, will create a year-over-year headwind.
As you'd expect from us, we will remain diligent in managing our cost and we will take the appropriate actions if markets continue to be challenging.
Based on current tungsten spot prices, raw materials will be a positive in the first half due to the headwinds we faced in the beginning of FY '20 and will be roughly neutral for the rest of the year.
Depreciation and amortization will step up to a range of approximately $130 million to $140 million compared to approximately $120 million in FY '20.
We currently expect our full year tax rate in FY '21 to be similar to the 33% adjusted effective tax rate we saw in FY '20, but it could fluctuate significantly in any given quarter depending on the effects of geographical mix and the sensitivity to lower pre-tax income.
However, should trends in earnings begin to improve in the second half, particularly in the U.S., our tax rate should improve.
As we get back to a more normalized environment, we still expect our long-term effective tax rate to be in the low '20s.
Regardless of the effective tax rate, we expect cash taxes in FY '21 to be approximately $10 million less than the $37 million paid in FY '20.
In regard to free operating cash flow, capital expenditures will be significantly lower versus last year, as Chris mentioned, by approximately $120 million.
However, I want to note that the total spend for the year will be weighted to the first half, mainly due to the timing of cash payments associated with machine deliveries.
Primary working capital will depend in part on how market conditions evolve over the next several quarters.
For the first half of FY '21, although we will reduce inventory levels based on current market conditions, the net accounts receivable and accounts payable will likely still be a working capital use.
In the second half, assuming market conditions improve, we would expect working capital to be use as well given the significantly depressed accounts receivable balance in Q4 of FY '20 and reduced accounts payable from decreased capital spending in FY '21.
We will continue to be diligent on inventory, while ensuring that we do not compromise on customer service, which is essential for our high-volume, high-margin products.
Lastly, cash restructuring charges are expected to be a negative factor year-over-year in both the first half and second half due to our accelerated restructuring activities announced in June.
We currently expect cash restructuring charges to be $25 million to $35 million higher in FY '21 with the majority of this increase in the first half.
Looking ahead to fiscal year '21, we will continue to focus on the things that we can control so that we manage through the current market headwinds and prepare the company to outperform during the recovery.
We'll continue our approach to aggressively manage costs and aligning production to demand while operationalizing our modernization investments for incremental benefits.
Second, we are committed to maintaining solid liquidity with a focus on optimizing cash flow through lower capital spend, working capital management, and cost control actions.
Finally, we'll continue to pursue our strategic growth initiatives so that we can position the Company for profitable growth and share gain as end markets recover and to achieve our adjusted EBITDA profitability target when sales reach a top line range of $2.5 billion to $2.6 billion.
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q3 sales $483 million versus refinitiv ibes estimate of $515.9 million.
q3 earnings per share $0.03.
excluding china, effect of covid-19 on q3 was minimal from a revenue standpoint.
all but one production facility is operating, and this facility is expected to reopen mid-may.
company is taking other aggressive cost-control measures to offset market headwinds.
cost cutting measures include, reductions in all discretionary spending, furloughs, extensive travel restrictions.
company is withdrawing its previously announced outlook for fiscal year 2020.
kennametal - has adequate liquidity & access to credit to meet cash flow requirements & expects to remain in compliance with relevant debt covenants.
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This is Sonic Automotive.
That was very choppy from our perspective.
I want to be sure that the listeners can hear.
That must a bad connection.
I'm David Smith, the Company's CEO.
Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Danny Wieland.
During the first quarter of 2021, we continue to build on our strong momentum coming off record adjusted earnings in 2020.
We generated record first quarter total revenues of $2.8 billion, up 21% on a year-over-year basis and record first quarter earnings per share of $1.23 per share, tripling our adjusted earnings per share of $0.40 per share in the first quarter of last year.
These results were driven by strong performance in our franchise dealerships, and another all-time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team.
I'm pleased to report positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business.
We remain extremely confident in our long-term growth targets based on our current results and near-term outlook and the increasing number of Americans that are receiving vaccinations and beginning a return toward normalcy.
Given these trends in our progress to date, we are confident we can attain our goal of more than doubling total revenues to $25 billion by 2025.
And significantly increasing profitability going forward.
In our core franchise dealership segment, first quarter revenues were $2.3 billion, a 15% increase from last year.
Total franchise pre-tax income was $70.5 million, an increase of $47.9 million or 211% compared to last year.
On a two-year comparison compared to the first quarter of 2019, same-store franchise dealership revenues increased 14% and pre-tax income increased by $49.8 million, which is a 240% increase, reflecting the impact of our lower expense structure as a result of strategic actions that was taken last year.
Turning now to EchoPark.
We continue to experience rapid growth during the first quarter, achieving all time record quarterly revenues of $507 million, which is up 53% compared to the same period last year.
We also achieved record quarterly retail sales volume of nearly 19,700 units, which is up 41% year-over-year and ahead of 18,000 to 19,000 units we guided to on our February call.
In addition to top line growth, we have to -- build of our EchoPark model that currently use vehicle pricing environment during the total gross profit per unit of $2,339 and above our target of $2,150.
Our first active part delivery center in Greenville, South Carolina continues to outperform our model selling 160 vehicles in March at nearly $1,750 in total gross profit per unit.
Generally $100,000 and store level profit for the month.
Our outlook in the EchoPark stores and delivery centers also continue to ramp aggressively.
With our Phoenix hub selling 228 vehicles in its full month in March, driving $125,000 of store level profit.
The unit ratio of December's used car acquisition is already ramping up nicely selling 300 plus in total gross profit per unit.
And we continue to apply our learnings to each new EchoPark store we opened or acquired.
And results are proving the scalability and momentum of the EchoPark model.
We believe these results showcase the flexibility, value proposition and consumer demand or EchoPark's unique pre-owned vehicle shopping concept as more guests choose to visit our stores and or shop echopark.com for the incredible inventory selection on diesel pricing and a unique guest experience that we offer.
As an update on our expansion of EchoPark's nationwide distribution network and omnichannel retailing platform, we opened five new locations in the first quarter.
In April, we opened our latest retail hub in Birmingham, Alabama and our third delivery center in Charleston, South Carolina.
We remain committed to opening 25 new EchoPark locations in 2021 and we're on track for our 140 plus point nationwide distribution network by 2025, which we expect to retail over 0.5 million pre-owned vehicles annually by that time.
With our progress to-date and the continuing development of our omnichannel retailing platform, we are confident that we can reach $14 billion in EchoPark revenue by 2025.
It's important to recall that Sonic actually grew earnings per share in the first quarter of last year compared to 2019 due to the strength of our January and February results despite the initial impact of the pandemic in March of 2020.
Since that time, we have substantially improved our expense structure, which was reflected in the current quarter's profitability and operating margins and our expectations for the remainder of 2021 and beyond.
In the first quarter of 2021, total SG&A expenses as a percentage of gross profit were 72.2% representing a 830 basis point improvement compared to the first quarter of last year and 790 basis points better than the first quarter of 2019 which in dollar terms, while same store franchise gross profit increased 34.5 [Phonetic] last year, same-store franchise SG&A expenses decreased $7.5 million, demonstrating the permanent expense reductions we had previously [Technical Issues].
Turning now to our balance sheet, we ended the first quarter with $435 million in available liquidity and set an all time high liquidity mark in April at $570 million which included over $300 million in cash on hand.
More recently, the Company closed a new four-year $1.8 billion credit facility.
The credit facility was substantially oversubscribed with strong support from both new and incumbent financial partners.
We are very pleased with this transaction which has extended our debt maturities, improved our borrowing costs and raised our total available liquidity and fore-playing capacity to facilitate our growth plans.
Reflecting our current business momentum, expansion of liquidity resources, I'm very pleased to report that our Board of Directors recently approved 20% increase to the Company's quarterly cash dividend to $0.12 per share payable on July 15, 2021 to all shareholders of record on June 15, 2021.
Additionally, the Board increased our share repurchase authorization by $250 million, bringing our total remaining authorization to $277 million.
In summary, our record first quarter performance reflects steadily increasing automotive retail demand as well as constantly improving operating conditions.
EchoPark has rapidly become one of the leading success stories in the pre-owned automotive retail industry, and we look forward to continuing its rapid expansion in 2021.
We expect to see continued strong demand for both new and pre-owned vehicles in the near term, which should drive further growth for our franchise dealerships and the EchoPark brand.
At the same time, our efficiency improvements have enabled us and had enabled us to operate in a much leaner more profitable manner.
Despite the challenges we all faced in the last year during this global pandemic, Sonic and EchoPark has emerged as much stronger, more efficient organization.
We are encouraged by our successes to-date and remain confident in our long-term strategic plans.
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sonic automotive q1 adjusted earnings per share $0.40 from continuing operations.
q1 revenue $2.8 billion.
q1 adjusted earnings per share $0.40 from continuing operations.
board of directors approved a 20% increase to company's quarterly cash dividend, to $0.12 per share.
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I am Dorian Hare.
Today's call is being recorded.
An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab on our website at www.
Certain risk factors that may impact our business are set forth in our filings with the SEC under 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.
We continue to make the health and safety of our employees a top priority, and I hope that you and those close to you remain safe.
Turning to Slide 4, and as I will cover in a moment, Equifax delivered an outstanding first quarter with record revenue and strong sequential growth versus fourth quarter.
The tremendous progress we have made, executing against our strategic priorities and building out our Equifax Cloud capabilities is allowing us to outperform our underlying markets and deliver outstanding revenue growth and margin expansion.
In U.S., where the economy is still recovering from the COVID pandemic more rapidly than we anticipated, we continue to outperform the overall mortgage market, which remains strong in the first quarter.
We're also seeing a real recovery and strong growth across our core banking, auto, insurance, government and talent business segments.
First quarter was a great start to 2021.
We are energized by our strong momentum in pivoting to our next chapter of growth with the launch of EFX2023, our new strategic growth framework that will serve as our companywide compass over the next three years.
With our new Equifax Cloud foundation increasingly in place, we're focused on leveraging our new Equifax Cloud data in technology infrastructure to accelerate innovation, new products and growth.
Innovation in new products will fuel our growth in 2021 and beyond as we leverage our new EFX cloud capabilities to bring new products and solutions and multidata insights to customers faster, more securely and more reliably.
As you know, we ramped our investments in product and innovation resources over the past 12 months to accelerate our new product roll outs, leveraging the new Equifax Cloud.
Our highly unique and diverse data assets are at the heart of what creates Equifax's differentiation in the marketplace.
We have data assets at scale that our competitors do not have, including TWN, NCTUE, DataX, IXI and more, and we are committed to expanding and deepening these differentiated data assets through organic actions, partnerships and M&A.
We are also relentlessly focused on a customer first mentality, which moves us closer to our customers, with a focus on delivering solutions to help their -- help solve their problems and drive their growth.
Another critical lever of our strategy is to reinvest our accelerating free cash flow in smart, strategic and accretive bolt-on acquisitions, that both, expand and strengthen our capabilities with a goal of increasing our revenue growth by 1% to 2% annually from M&A.
And data security is deeply embedded in our culture.
We have clearly established Equifax as an industry leader in data security.
Working together as one aligned global Equifax team, where we leverage our commercial strengths, our new products, and our capabilities across our EFX cloud global platform, will allow us to deliver solutions that only Equifax can bring to the marketplace.
We're energized around our new EFX2023 strategic priorities that will serve as our guide post over the next three years and support our new long-term growth framework that we plan to put in place later this year.
Turning now to Slide 5, Equifax performance in the first quarter was very strong.
Revenue at $1.2 billion was the strongest quarterly revenue in our history.
In first quarter, constant currency revenue growth was a very strong 25% with our organic growth at 23%, which was also an Equifax record.
As a reminder, we're coming off a solid 13% growth in first quarter last year.
All business units performed -- outperformed our expectations and we are seeing positive signs of a COVID recovery beginning to accelerate, particularly in the U.S.
Our growth was again powered by our two U.S. B2B businesses, Workforce Solutions and USIS, with combined revenue up a very strong 38%.
Mortgage-related revenue remained robust, and importantly, our non-mortgage-related verticals grew organically by a very strong 16%.
The adjusted EBITDA margins of our U.S. B2B businesses were 52%, up 400 basis points with EWS delivering close to 60% margins.
As a reminder, Workforce Solutions and USIS are over 70% of Equifax revenue and 80% of Equifax business unit EBITDA.
First quarter Equifax adjusted EBITDA totaled $431 million, up 36% with over 250 basis points of expansion in our margins to 35.6%.
This margin expansion was delivered while including all cloud technology transformation costs in our adjusted results, which negatively impacted first quarter adjusted EBITDA margins by over 300 basis points.
Excluding cloud transformation costs, our margins would have been up over 500 basis points.
We are clearly getting strong leverage out of our revenue growth.
Adjusted EBITDA -- adjusted earnings per share at a $1.97 per share was up a very strong 37% from last year, which was also impacted by the inclusion of cloud transformation costs.
Adjusted earnings per share would have been $2.20 and up 54%, excluding these costs.
We continue to accelerate our EFX Cloud data and technology transformation in the quarter, including migrating an additional 2,000 customers to the cloud in the U.S. and approximately 1,000 customers Internationally.
Leveraging our new EFX cloud infrastructure, we also continue to accelerate new product innovation.
In the first quarter, we released 39 new products, which is up from 35 launched a year ago in the first quarter, continuing the momentum from 2020 where we launched a record 134 new products.
And we're seeing increased revenue generation from these new products, leveraging our new EFX Cloud.
For 2021, we expect our vitality index defined as revenue from new products introduced in the last three years to exceed 8%.
This is a 100 basis point improvement from the 7% guidance we provided on our vitality index back in February.
And in that first quarter, we completed five strategic bolt-on acquisitions with a focus on identity and product capability through our acquisition of Kount and accelerating growth in Workforce Solutions with the acquisitions of HIREtech and i2Verify.
Acquisitions that will broaden strength in Equifax are a strong lever for continuing to accelerate our growth and a big focus.
We're energized by our fast start to '21 and are clearly seeing the momentum of our only Equifax model leveraging our new EFX Cloud capabilities.
Our first quarter results were substantially stronger than the guidance we provided in February with over 90% of the revenue outperformance delivered in our two U.S. B2B businesses, Workforce Solutions and USIS.
Importantly, as we'll discuss in more detail shortly, over 60% of this outperformance in the U.S. B2B revenue was in our non-mortgage segments in both USIS and Workforce Solutions.
Non-mortgage revenue strengthened consistently during the first quarter with March revenue up significantly versus February in both USIS and EWS.
This broad-based strength was above our expectations and gives us confidence about further strengthening in the second quarter and second half as the COVID recovery unfolds.
Mortgage revenue was also stronger than we expected despite the growth in U.S. mortgage market at 21% being slightly below our expectations from a slowing -- from slowing mortgage inquiries in late March, which have continued into April.
Our continued strong mortgage results and outperformance was driven by Workforce Solutions with stronger market penetration, record growth and positive impact from new products.
USIS mortgage revenue also exceeded expectations slightly.
This stronger revenue delivered strong operating leverage with substantial improvement in our EBITDA margins and adjusted EPS.
The strength of our first quarter results in Workforce Solutions and in U.S. non-mortgage revenue across USIS and Workforce Solutions broadly gave us the confidence to substantially raise our 2021 guidance for both revenue and adjusted EPS.
We're increasing our revenue guidance by $225 million to a midpoint of $4.625 billion and increasing our adjusted earnings per share guidance by $0.55 a share to a midpoint of $6.90 per share.
This includes our expectation that the U.S. mortgage market for 2021 as measured by credit inquiries will decline more in our February guidance of down 5% to a decline of approximately 8%.
Our framework assumes that the mortgage market slows primarily in the third and fourth quarter, which is consistent with our prior guidance.
And John will discuss our mortgage assumptions in more detail in a few minutes.
Turning to Slide 6, our outstanding first quarter results were broad-based and reflect better than expected performance from all four business units.
Workforce Solutions had another exceptional quarter, delivering 59% revenue growth and almost 60% adjusted EBITDA margins.
Workforce Solutions is now our largest business, representing almost 40% of total Equifax revenue in the fourth quarter and is clearly powering our results.
Verification Services revenue of $385 million was up a strong 75%.
Verification Service mortgage revenue again more than doubled for the fourth consecutive quarter, growing almost a 100 percentage points faster than the 20% underlying growth we saw in the mortgage market credit inquiries in the first quarter.
Importantly, Verification Services non-mortgage revenue was up over 25% in the quarter.
This segment of Verification Services continues to expand its market coverage and benefit from NPIs, new records, new use cases and is a long-term growth lever for Workforce Solutions.
Talent Solutions, which represents over 30% of verifier non-mortgage revenue almost doubled, driven by both new products and a recovery in U.S. hiring.
Government solutions, which represents almost 40% of verifier non-mortgage revenue also returned to growth driven by greater usage in multiple states of our differentiated data.
As a reminder, we continue to work closely with a social security administration on our new contract that we expect to go live in the second half and ramp to $40 million to $50 million of incremental revenue at run rate in 2022.
Our non-mortgage consumer business, principally in banking and auto, also showed strong growth in the quarter as well, both from deepening penetration with new lenders and from some recovery in those markets that I'll cover more fully in the discussion of USIS.
Debt management, which now represents under 10% of verifier non-mortgage revenue was, as we expected, down versus last year, but is stabilized and we expect to see growth in that vertical as we move through 2021.
Employer Services revenue of $96 million increased 17% in the quarter, driven again by our unemployment claims business which add revenue of $47 million, up around 47% compared to last year.
In the first quarter, Workforce Solution processed about $2.8 million UC claims, which is up from $2.6 million in the fourth quarter.
EWS processed roughly one in three U.S. initial unemployment claims in the quarter, which was up from one in five that they had been processing in recent periods, reflecting the growth in Workforce Solutions UC market position.
As a reminder, we continue to expect UC claims revenue to decline sequentially in the second quarter and throughout the balance of 2021 as the U.S. economy recovers and job losses dissipate.
We currently expect a decline in the second quarter UC revenue of about 45% versus last year and a full year 2021 decline in UC claims revenue of just under 30%.
Employer Services non-UC businesses had revenue down slightly in the quarter.
Our I-9 business driven by our new I-9 Anywhere solution continued to show very strong growth with revenue up 15%.
Our I-9 business is expected to continue to grow substantially to become our largest Employer Services business in 2021 and represent about 40% of non-UC revenue.
Reflecting the growth in I-9 and the return to growth of workforce analytics, we expect Employer Services non-UC businesses to deliver organic growth of over 20% in 2021.
The HIREtech and i2Verify acquisitions that we closed in March had a de minimis impact on revenue in the quarter, but will add -- will further add to Workforce Solutions growth during the rest of '21.
I'll discuss both HIREtech and i2Verify a little bit later.
Reflecting the power and uniqueness of TWN data, strong verifier revenue growth and operating leverage resulted in adjusted EBITDA margins of 59.3% and almost 800 basis point expansion from last year in Workforce Solutions.
Rudy Ploder and the Workforce Solutions team delivered another outstanding quarter and are position to deliver a strong 2021.
Workforce Solutions is clearly Equifax' largest and fastest growing business.
USIS revenue was up a very strong 19% in the quarter with organic growth also a strong 17%.
Total USIS mortgage revenue growth of $177 million was up 25% in the quarter, while mortgage credit inquiry growth up 21%, was slightly below the 24% expectation we shared in February.
As I mentioned, John will cover our updated view of the mortgage market for 2021 in a few minutes.
USIS mortgage revenue outgrew the market by 500 basis points in the quarter, driven by growth in marketing and new debt monitoring products.
Non-mortgage revenue performance was very strong with growth of 15% and organic growth of 11%, which is a record for USIS, and off a fairly strong first quarter last year.
We view this outperformance by U.S. as meaningful and a reflection of the competitiveness and commercial focus of the USIS team.
Importantly, non-mortgage online revenue grew a very strong 16% in the quarter with organic growth of almost 11%.
We saw non-mortgage revenue growth accelerate in February and March as vaccine rollouts increased and financial institutions gain confidence in the consumer and the economy.
Banking, auto, ID and fraud, insurance and direct to consumer all showed growth in the quarter which is encouraging as move into second quarter and the rest of 2021.
Commercial was about flat, while only telco was down in the quarter as we expected.
Financial Marketing Services revenue, which is broadly speaking our offline or batch business was $53 million in the quarter, up almost 12%, which is also very positive.
The performance was driven by marketing related revenue, which was up over 20% and ID and fraud revenue growth of just under 10% as consumer marketing and originations ramped up.
In 2021, marketing-related revenue is expected to represent about 45% of FMS revenue with identity and fraud about 20% and risk decisioning about 30%.
This strong growth across our non-mortgage businesses, including strong growth in marketing-specific offline revenue is very encouraging for both the recovery of our underlying markets and our non-mortgage performance as we move into second quarter and the rest of 2021.
The USIS team continues to drive growth in their new deal pipeline with first quarter pipeline up 30% over last year, driven by growth in both the volume and the size of new opportunities and NPI roll outs.
First quarter win rates were also higher than levels seen in 2020.
Sid Singh and as USIS team continue to be on offense and are competitive in winning in their marketplace.
In addition to driving core business growth in the first quarter, USIS achieved an important strategic milestone in closing the acquisition of Kount, an industry leader in providing AI-driven fraud prevention and digital identity solutions.
Integration efforts are now under way with a key focus on technology and product, leveraging the joint Equifax and Kount data and capabilities.
Kount's technology platform will migrate to the Equifax Cloud in the next 12 to 18 months, which will allow for the full integration of Kount and Equifax capabilities for new solutions, new products and market expansion in the fast growing identity and fraud marketplace.
USIS adjusted EBITDA margins of 42.9% in the first quarter were down about 180 basis points from last year.
About two-thirds of the decline was due to the inclusion of tech transformation costs in our adjusted EBITDA in 2021.
The remainder of the decline was principally driven by the higher mix of mortgage products and redundant system costs from our cloud transformation.
Moving now to International, their revenue was up 3% on a constant currency basis in the quarter, which is the second consecutive quarter of growth in our global markets, but are still very challenged by COVID lockdowns and slow vaccine roll outs.
Revenue growth improved significantly in Canada, Asia Pacific, which is our Australian business and Latin America.
This was partially offset by revenue declines in the U.K., principally due to continued U.K. lockdowns in response to the COVID pandemic.
Asia-Pacific, which is principally our Australia business had a very good performance in the first quarter with revenue of $87 million, up 7% in local currency.
Australia consumer revenue continues to improve relative to prior quarters and was down only about 2% versus last year compared to down 5% in the fourth quarter.
Our Commercial business combined online and offline revenue was up a strong 9% in the quarter, a solid improvement from fourth quarter.
And fraud and identity was up 15% in the quarter following strong performance in the fourth quarter.
European revenues of $69 billion were down 5% in local currency in the first quarter.
Our European credit business was down about 5% in local currency.
Spain revenue was down about 1%, while the U.K. was down about 6% in local currency similar to the fourth quarter from continued challenging COVID environments.
Our European debt management business revenue declined by about 4% in local currency in the quarter.
Both, the CRA and debt management businesses were impacted in the quarter by actions taken by the U.K. government to curtail debt placements in response to the pandemic resurgence in the United Kingdom.
As the lockdown and other actions lift in April and May, we anticipate improvements in U.K. CRA revenue in the second quarter and improvements in debt management revenue in the second half of 2021 as collection activity restarts in the latter part of the second quarter.
Latin American revenues of $42 million grew about 1% in the quarter in local currency, which was an improvement from the down 1% we saw in the fourth quarter.
These markets also continue to be heavily impacted negatively by continued COVID lockdowns and slow vaccine rollouts.
We continue to see the benefit in LatAm of strong new product introductions over the past three years, which is benefiting their top line.
Canada delivered record revenue of $44 million in the quarter, up about 13% in local currency.
Consumer online was up about 3% in the quarter, an improvement from the fourth quarter.
Improving growth in commercial, analytical and decision solutions and ID and fraud also drove growth in Canadian revenue in the first quarter.
International adjusted EBITDA margins at 28.2% were down 30 basis points from last year.
Excluding the impact of the tech transformation cost that we've included in adjusted EBITDA, margins were up about 200 basis points.
This improvement was principally due to revenue growth and operating leverage, partially offset by redundant system costs from our cloud transformation.
Global Consumer Solutions revenue was down 16% on a reported basis and 17% on a local currency basis in the quarter and slightly better than our expectations.
We saw better than expected performance in our global consumer direct business, which sells directly to consumers through equifax.com and myEquifax and which represents about half of total GCS revenue.
Direct-to-consumer revenue was up a strong 11% in the quarter, the third consecutive quarter of growth.
Decline in overall GC revenue in the quarter was again driven by our U.S. lead generation partner business, which has been significantly impacted from COVID beginning in mid-2020.
As we discussed, we expect a decline in total GCS revenue from our partner vertical to moderate substantially as we move into the second quarter and return to growth in the fourth quarter of 2021.
GCS adjusted EBITDA margins of 24.6% were up about 150 basis points.
We expect margins to be pressured to around 20% in the second quarter, reflecting planned cost to complete the migration of our consumer direct business, cloud transformations in the U.S., U.K. and Canada through our new Equifax cloud platform.
Moving to Slide 7, this chart provides updated view of Equifax core revenue growth.
As a reminder, core revenue growth is defined as Equifax revenue growth excluding number one, the extra revenue growth in our UC claims business in '20 and '21, and number two, the impact on revenue from U.S. mortgage market activity as measured by changes in total U.S. mortgage market credit inquiries.
Core revenue growth is our attempt to provide a more normalized view of Equifax revenue growth excluding these unusual UC and U.S. mortgage market factors.
In the first quarter, Equifax core revenue growth, the green section of the bars on Slide 7, was up a very strong 20%, reflecting the broad-based growth across Equifax and this is up significantly from the 11% core revenue growth we delivered in the fourth quarter and well above our historic core growth rates.
Workforce Solutions and USIS have continue to strongly outperform the mortgage market.
The 16% organic growth in U.S. B2B non-mortgage revenue also drove our core revenue growth.
Importantly, our core revenue growth has accelerated over the past five quarters from 5% in first quarter of 2020 to 11% in the fourth quarter of last year and to 20% this quarter, reflecting the strength and resiliency of our broad-based business model, power of Workforce Solutions, the market competitiveness of USIS and benefits from our cloud Equifax -- our cloud data and technology investments and our increasing focus on leveraging the cloud for innovation in new products.
As you know, the strong growth is in the midst of a global market that is still recovering from the COVID pandemic.
Turning to Slide 8, Workforce Solutions continues to power Equifax and clearly is our strongest and more valuable and largest business.
Workforce Solutions revenue grew a very strong 59% in the first quarter with core revenue growth accelerating to 46%.
As a reminder, the 59% growth is of 32% growth in first quarter of 2020.
The strong outperformance and sequential improvement reflects the power of the unique TWN database and Workforce Solutions business model.
At the end of the first quarter, the TWN database reached 115 million active users and 90 million unique records, an increase of 9% or 10 million active records from a year ago.
And as a reminder, over 60% of our records are contributed directly by employers that Workforce Solution provides employer services like, UC claims, W-2 management, I-9, WOTC, and other solutions too.
And we've built these relationships over -- with these -- with our customers and contributors over the past decade.
The Remaining 35% are contributed through partnerships, most of which were exclusive.
The major payroll processor agreement that we announced on our February call is still on track to go live later this year, which will add to our TWN database.
And we have a dedicated team, as you know, focused on growing our TWN database, with an active pipeline of record additions to continue to expand our TWN database.
The Workforce Solution team continues to focus on expanding the number of mortgage companies and financial institutions with which we have real time, system- to-system integrations, which, as you know, drives increased usage of our TWN data.
The team is also focused on extending our offerings into card and auto verticals, as well as across our growing government vertical.
And as I mentioned earlier, we continue to work closely with the SSA, and expect to go live with our new solution in the second half of this year, which will deliver $40 million to $50 million of incremental revenue and run rate in 2022.
The Workforce Solutions new product pipeline is also rapidly expanding as our teams leverage the power of our new Equifax Cloud infrastructure.
We are anticipating new products in mortgage, talent solutions, government, and I-9 in 2021.
New product revenue will increase in '21 and '22, as we begin to reap the benefits of our new products introduced to the market during last year and in 2021.
Rudy Ploder and the Workforce Solutions team have multiple levers for growth in '21, '22 and beyond.
Workforce Solutions are most -- Workforce Solutions is our most valuable business and will continue to power our results in the future.
Slide 9 highlights the ongoing exceptional core growth performance in mortgage for our U.S. B2B business -- mortgage businesses Workforce Solutions and USIS.
Workforce and USIS outgrew the underlying U.S. mortgage market again in first quarter, with combined core growth of 48%, up from 37% in 2020, and in line with the 49% growth they delivered in the fourth quarter -- 49% core growth.
This outperformance was driven strongly by Workforce Solutions with core mortgage growth of 99%.
Consistent with past quarters, Workforce Solutions 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 when making credit decisions.
USIS delivered 5% core mortgage revenue growth in the quarter, driven primarily by new debt monitoring solutions with further support from marketing.
Our ability to substantially outgrow all of our underlying markets is core to our business model and core to our future growth.
As Mark referenced earlier, U.S. mortgage market inquiries remained very strong in 1Q '21 and up 21%, but that growth was slightly lower than the 24% we had expected when we provided guidance in early February.
As shown in the left side of Slide 10, as mortgage rates increased over the past few months and refinancing activity continues, the number of U.S. mortgages that could benefit from a refinancing has declined to about $30 million.
Although, still very strong by historic standards, this is down from the levels we saw in 4Q '20 and early 1Q '21.
Based upon our most recent data from 4Q 2020, mortgage refinancings were continuing at about $1 million per month.
As shown on the right side of Slide 10, the pace of existing home purchases continues at historically very high levels.
This strong purchase market is expected to continue throughout '21 and into '22.
Based on these trends and specifically the reduction in the pool of mortgages that would benefit from refinancing, we are reducing our expectation for the mortgage market financing activity in 2021.
As shown on Slide 11, we now expect mortgage credit inquiries to be about flat in 2Q '21 versus 2Q '20, and to be down about 25% in the second half of '21 as compared to the second half of '20.
Overall, for 2021, we expect mortgage market credit inquiries to be down approximately 8%.
This compares to the down approximately 5% we discussed with you in February.
Slide 12 provides our guidance for 2Q '21.
We expect revenue in the range of -- revenue in the range of $1.14 billion to $1.16 billion, reflecting revenue growth of about 16% to 18%, including a 2.1% benefit from FX.
Acquisitions are positively impacting revenue by 2%.
We are expecting adjusted earnings per share in 2Q '21 to be $1.60 to $1.70 per share compared to 2Q '20 adjusted earnings per share of $1.63 per share.
In 2Q '21, technology transformation costs are expected to be around $44 million or $0.27 per share.
Excluding these costs that were excluded from 2Q '20 adjusted EPS, 2Q '21 adjusted earnings per share would be $1.87 to $1.97 per share, up 15% to 21% from 2Q '20.
This performance was being delivered in the context of the U.S. mortgage market, which is expected to be flat versus 2Q '20.
Slide 13 provides the specifics on our 2021 full year guidance.
We are increasing guidance substantially, despite the expectation of a weaker U.S. mortgage market.
2021 revenue of between $4.575 billion and $4.675 billion reflects revenue growth of about 11% to 13% versus 2020, including a 1.4% benefit from FX.
Acquisitions are positively impacting revenue by 1.7%.
EWS is expected to deliver over 20% 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 in the upper single-digits and GCS revenue is expected to be down mid-single-digits in 2021.
2Q '21 revenue was also expected to be down mid-single-digits for GCS.
As a reminder, in 2021, Equifax is including all cloud technology transformation costs and 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 through 2020.
In 2021, Equifax expects to incur one-time cloud technology transformation costs of approximately $145 million, a reduction of about 60% from the $358 million incurred in 2020.
The inclusion in 2021 of this about $145 million in one-time costs would reduce adjusted earnings per share by $0.91 per share.
This is consistent with our guidance for 2021 that we gave in February.
2021 adjusted earnings per share of $6.75 to $7.05 per share which includes these tech transformation costs is down approximately 3% to up 1% from 2020.
Excluding the impact of tech transformation costs of $0.91 per share, adjusted earnings per share in 2021 which show growth of about 10% to 14% versus 2020.
2021 is also negatively impacted by redundant system costs of about -- of over $65 million relative to 2020.
These redundant system costs are expected to negatively impact adjusted earnings per share by approximately $0.40 a share.
Slide 14 provides a view of Equifax total and core revenue growth from 2019 through 2021.
Core revenue growth excludes the impact of movements in the mortgage market on Equifax revenue as well as the impact of changes in our UC claims business within our EWS Employer Services business, and also the employee retention credit revenue from our recently acquired HIREtech 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 2Q '21 and full year 2021 reflects the midpoint of guidance ranges we provided.
In 1Q '21, we delivered very strong core revenue growth of 20% and expect to continue to deliver strong core revenue growth in 2Q '21 of about 20%,and 16% for all of 2021.
This very strong performance, we believe, positions us well entering 2022 and beyond.
And now I'd like to hand it back over to Mark.
Turning to Slide 15, this highlights our continued focus on new product innovation, which is a critical component of our next chapter of growth as we leverage the Equifax Cloud for innovation in new products and growth.
We continue to 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.
In the first quarter, we delivered 39 new products, which is up from the 35 we delivered last year.
We are encouraged by this continued strong performance, especially following the record 135 new products we delivered last year.
We wanted to highlight some of these new products, which we expect to drive revenue in '21 and beyond.
First, Insight Score for credit card launched by USIS provides the credit card industry with a specific credit risk score created using credit and alternative data that predicts a likelihood of a consumer becoming 90 days past due or more within 24 months of origination.
USIS also launched a new commercial real estate tenant risk assessment product suite, which provides real time and unmatched data analytics and risk assessment or tenants buildings in portfolio strength delivered through an interactive Ignite Marketplace app or as a stand-alone report.
And Workforce Solutions continues to expand its suite of products focused on the government vertical.
Their government enhanced solutions social, Social Services Verification product gives the ability for the customer to choose the desired period of employment history with options ranging from three months, six months, one year or three years or the full employment history.
These products help government agencies quickly and efficiently administer federally -- federal supplement -- supplementary nutrition, child health insurance, medicaid, Medicare benefits, many child support and ensure program integrity.
In the first quarter, over two-thirds of our new products launched or in development leveraged our new Equifax cloud-based global product platforms.
This enables significant synergies and efficiencies in how we build the new products, our speed to bring the products to market and our ability to move the new products easily to our global markets.
Our new cloud-based Luminate platform for fraud management is a great example which is launching in Canada and the U.S. simultaneously and will soon launch in the United Kingdom, Australia and India.
This would have taken much longer and been much more expensive in a legacy environment.
We're also rolling out our Equifax cloud-based Interconnect and Ignite platforms for marketing and risk and decisioning and management products throughout Latin America, Europe, Canada as well as the United States.
As we discussed on our call in February, we're focused on leveraging our new cloud capabilities to increase NPI rollouts and new product revenue growth in '21 and beyond.
As a reminder, our NPI revenue is defined as the revenue delivered by new products launched over the past three years and our vitality index is defined as the percentage of current year revenue delivered by NPI revenue.
As I mentioned earlier, we've increased our 2021 vitality index guidance from 7% by a 100 basis points to 8% as you can see from the left side of the slide is significant is a significant increase from about 500 basis points in 2020.
NPIs are a big priority for me and the team as we leverage the Equifax Cloud for innovation, new products and growth.
Turning to Slide 16, M&A plays an important role in our growth strategy and will be central to our long-term growth framework.
Our team is focused on building an active pipeline of bolt-on targets that will both broaden and strengthen Equifax.
Our M&A strategy centers on acquiring accretive and strategic companies that add unique data assets, new capabilities, deliver expansion into identity and fraud or expand our geographic footprint.
In the first quarter, we closed five acquisitions totaling $866 million across strategic focus areas of identity and fraud, Workforce Solutions, open data and SME.
We discussed three of these transactions with you in February which were the acquisitions of Kount, AccountScore and Creditworks.
As I just discussed earlier, we're excited excited about expanding opportunities we see from the combined Kount and Equifax in the fast growing identity and fraud marketplace.
In March, we closed two Workforce Solutions bolt-on transactions HIREtech and i2verify, which will further broaden and strengthen our Workforce Solutions business.
HIREtech is a Houston-based company that provides employee-related tax credit services as well as verification services.
HIREtech also has unique channel relationships to provide these services through payroll providers, consulting firms and CPA firms.
I2verify is a Newburyport Massachusetts-based company that provides secure digital verifications of income and employment services.
The company has a unique nationwide set of record contributing employers with concentrations in the healthcare and education sectors.
i2verify also brings unique records to the TWN database, which are contributed by direct relationships.
You should expect Equifax to continue to make acquisitions in these strategic growth areas that offer unique data and analytics to our customers with the goal of increasing our top line by 100 to 200 basis points annually from M&A.
Before wrapping up, I want to speak to you about an area of significant focus at Equifax and importance to me personally.
Slide 17 provides an overview of Equifax's ESG strategy and how it helps position us for long-term sustainability.
I hope you saw and had a chance to read our annual report letter that highlighted our increased focus on ESG.
First, Equifax plays an important role in helping consumers live their financial best.
A primary example of this is that our alternative data assets such as utility and phone payment data provide lenders with a better picture of the approximately 30 million U.S. individuals who do not have traditional credit files or access to the formal financial system.
I've also made advancing, inclusion and diversity, a personal priority since I joined Equifax.
Believing that diversity of thought leads to better decisions, we're taking clear steps to broaden diversity at Equifax, including the last three directors added to our Board are diverse and all seven individuals who have added to my senior leadership team since I joined three years ago have also been diverse.
We're carrying out this focus on inclusion and diversity across Equifax.
We're also focused on environment -- on our environmental impact in our greenhouse gas print.
Our cloud transformation will move our existing legacy technology infrastructure to the cloud which will dramatically reduce our environmental impact as we leverage the efficiencies and carbon-neutral infrastructure at our cloud service providers.
Over the course of this year we -- over the course of last year we decommissioned six data centers, over 6,800 legacy data assets and over 1,000 legacy applications.
We have a detailed program under way to baseline our energy usage and benefits from our cloud transformation as we work toward a commitment regarding carbon emissions and a net-zero footprint.
We're also committed to be an industry leaders regarding security.
With the leadership of our CSO, Jamil Farshchi, our culture puts security first.
All employees are required to take a mandatory security focused training sessions every year.
And all of our 4,000 bonus eligible employees have a security goal in their annual MBOs.
We believe -- we also believe in sharing our security protocols and strategies with our partners, customers and competitors to collaborate to keep us all safe.
In 2020, we hosted our inaugural Customer Security Summit where we detailed our progress on security transformation and discussed advancements in supply chain and security.
As threats continue to involve, we remain highly focused on continuing to advance our security efforts.
Wrapping up on Slide 18, Equifax delivered a record setting first quarter and we have a strong momentum as we move into second quarter in 2021.
Our 27% overall and 20% core growth in first quarter reflects the strength and resiliency of our business model, while still operating in a challenging COVID environment.
We've now delivered five consecutive quarters of sequentially improving double-digit growth.
We're confident in our outlook for 2021.
And as John described, are raising our full year midpoint revenue by 500 basis points to $4.625 billion and our earnings per share midpoint by 9% to $6.90 a share.
Our revised revenue estimate of 12% growth in 2021 at the midpoint of the range off a very strong 17% in 2020, reflects the resiliency, strength and momentum of the EFX business model.
Our increased 2021 growth framework incorporated our expectation as John discussed that the U.S. mortgage market will decline about 8% in 2021 and while operating in a still recovering COVID economy.
Our expectation for core revenue growth of 16% in 2021 reflects how our EFX 2023 strategic priorities are delivering.
Workforce Solutions had another outstanding quarter of 59% growth and will continue to power Equifax operating performance throughout 2021 and beyond.
The Work Number is our most differentiated data assets and Workforce Solutions is our most valuable business.
Rudy Ploder and his team are driving outsized growth by focusing on their key levers, new records, new products, penetration and expansion in the new verticals with our differentiated TWN database.
USIS also delivered an outstanding quarter of 19% growth, highlighted by non-mortgage revenue growth of 15% and 11% organic non-mortgage growth.
We expect our non-mortgage growth to accelerate as the U.S. economy recovers.
The acquisition of Kount is providing new opportunities and products in the rapidly expanding identity and fraud marketplace and USIS continues to outperform the mortgage market from new products, pricing and increased penetration.
USIS is clearly competitive and winning in the marketplace and will continue to deliver in '21 and beyond.
International grew in the first quarter for the second consecutive quarter, overcoming economic headwinds from significant COVID lockdowns and slower vaccine rollouts in our global markets.
Our expectations are high for ongoing sequential improvement in International during 2021 and for accelerating growth as their underlying markets recover from the COVID pandemic.
We're also making strong progress rolling out our new EFX Cloud technology and data infrastructure and remain confident as John described in the significant top line cost and cash benefits of our new EFX Cloud capabilities.
These financial benefits will ramp as we move through 2021 and continue to grow in 2022 and are enabled by our always on stability, speed to market and ability to rapidly build new products around the globe.
Our strong performance -- operating performance is allowing us to continue to accelerate investments in new products, leveraging our new Equifax Cloud capabilities.
And we're off to a strong start in 2021 with 39 NPIs in the first quarter, on top of the record 134 we launched in 2020.
And our strong outperformance is fueling our cash generation, which is allowing us to reinvest in accretive and strategic bolt-on acquisitions.
As discussed earlier, we closed five acquisitions in strategic growth areas in the first quarter and we have an active M&A pipeline.
We look for bolt-on acquisitions that will strengthen our technology and data assets and that are financially accretive with the goal of adding 100 to 200 basis points to our top line growth rate in the future.
I'm energized about what the future holds for Equifax.
We have strong momentum across all of our businesses as we move in the second quarter.
We're on offense and positioned to bring new and unique solutions to our customers that only Equifax can deliver, leveraging our new EFX Cloud capabilities and our strong results and the increased guidance that we provided reflect that.
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endeavor releases third quarter 2021 results.
q3 revenue $1.4 billion.
increased 2021 revenue guidance to between $4.89 billion and $4.95 billion.
increased 2021 adjusted ebitda guidance to between $835 million and $845 million.
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On our call today are David Gibbs, our CEO; Chris Turner, our Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller.
Following remarks from David and Chris, we'll open the call to questions.
All system sales results exclude the impact of foreign currency.
Core operating profit growth figures exclude the impact of foreign currency and special items.
All two-year same-store sales growth figures are calculated using the geometric method.
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-Q filing.
Third quarter earnings will be released on October 28, 2021, with the conference call on the same day.
I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same-store sales growth.
Importantly, each division reported positive same-store sales growth on a two-year basis, a step up from first quarter trends.
This sustained momentum was underpinned by our investments in digital and off-premise and the adaptability of our brands to meet the needs of consumers in an ever-changing environment.
Though COVID obviously creates a more challenged operating environment, our confidence is stronger than ever in our ability to navigate the resulting uncertainties and in the long-term growth potential of Yum!
As a result, we are reinstating our long-term growth algorithm with one important change.
We are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth.
As a reminder, our long-term growth algorithm includes 2% to 3% same-store sales growth and mid to high single-digit system sales growth leading to high single-digit core operating profit growth.
The diversification of our global portfolio, the resilience of our business model, and the agility of our teams are allowing us to compete and win in a full range of market conditions, including both those markets with accelerated recovery and markets still heavily impacted by COVID.
Looking forward, our iconic brands and unmatched scale, in combination with the world-class talent in our restaurant teams, franchisees, and above-store leaders, have uniquely positioned us for sustained growth.
Now we'll discuss our Recipe for Growth and our Q2 performance and the growth drivers that underpin it.
To start, I'll cover two growth drivers, namely Relevant, Easy and Distinctive brands or RED for short, and unrivaled culture and talent.
Then Chris will share more details of our Q2 results, our unmatched operating capability, and Bold Restaurant Development growth drivers and our strong liquidity and balance sheet position.
First, a few highlights from the quarter.
system sales grew 26%, driven by 23% same-store sales growth.
Importantly, same-store sales grew 4% on a two-year basis, which includes the impact of approximately 700 or about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021.
This was driven by continued strong sales momentum in North America, the U.K., and Australia, with improved performance in Europe as it began to reopen and show signs of recovery.
As I mentioned earlier, each of our brands delivered positive two-year same-store sales growth on a global basis, including the impact of temporary closures, and each brand also reported an improvement in the two-year trend from Q1.
This is a great indicator for the sustained strength and breadth of our recovery.
Even more exciting is the extremely strong net new unit growth of 603 units that we delivered during the quarter, which was both broad-based and record-setting.
Looking across the more than 150 countries in which we operate, we've seen that while the overall global trend is positive, the recovery will neither be consistent from country to country nor linear within a country.
This insight reinforces the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off-premise channels.
We've seen that increased customer mobility driven by reopening trends and vaccinations contributed to strong performance in many of our markets.
A key growth driver for our business and priority for our teams is the continued acceleration of our digital and technology initiatives across the globe, geared toward providing customers with new and seamless ways to access our brands.
Even as economies continue to reopen, the importance of the off-premise occasion remains a top priority.
We delivered a second quarter record with over $5 billion in digital sales, a 35% increase over the prior year.
Even more exciting, for the first time, on a trailing 12-month basis, we delivered more than $20 billion in digital sales.
We believe these sales are highly incremental and result from our investments in our digital and technology ecosystem, which enable our teams to deliver an even more RED customer experience.
To bring the impact of our digital efforts to life, I want to share a few proof points.
The Taco Bell U.S. launch of our Taco Bell rewards program in 2020 has continued to grow digital sales for the brand with features such as loyalty member exclusives and early access to crave-worthy promotions.
We're incredibly excited by the early results from the program and the future growth opportunity that remains.
We're seeing significant uptick in frequency and higher spend per visit, leading to an increase in overall spend of 35% for active customers in the Taco Bell rewards program compared to their pre-loyalty behavior.
As another example, at KFC U.S., we launched our internally built KFC e-commerce website and app in early 2021, replacing our previous third-party solution.
As a result, our 2021 digital sales are on pace to soon surpass last year's full-year digital sales amount.
Now let's talk about our RED Brands.
Starting with the KFC division, which accounts for approximately 51% of our divisional operating profit, Q2 system sales grew 35%, driven by 30% same-store sales growth and 5% unit growth.
For the division, Q2 same-store sales grew 2% on a two-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021.
At KFC International, same-store sales grew 36% during the quarter.
Same-store sales declined 1% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
We had truly outstanding results in March, leading the recovery with double-digit two-year same-store sales growth in the U.K., Australia, Canada, and the Middle East.
Our strong off-premise capabilities, digital strength, and value offerings have continued to meet shifting consumer demand around the globe and there is opportunity for continued recovery as reopening and mobility increases globally.
Next, at KFC U.S., we continued to see strong momentum, with 11% same-store sales growth in Q2.
Importantly, same-store sales grew 19% on a two-year basis, owing to the continued strength of our group occasion business, the digital capabilities mentioned earlier, and our new chicken sandwich.
Our chicken sandwich performed exceptionally well and provides us with a solid platform to drive additional sales layers in the future.
Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit.
The division reported Q2 system sales growth of 10%, driven by 10% same-store sales growth.
While the division had a 3% unit decline versus last year, driven by the elevated COVID-related dislocations and closures of 2020, it has sustained its positive 2021 development momentum, delivering 1% unit growth relative to Q1.
Global Q2 same-store sales grew 1% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
Overall, Pizza Hut International same-store sales grew 16%.
Same-store sales declined 6% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
Importantly, the off-premise channel achieved 21% same-store sales growth on a two-year basis for the quarter and delivery continued to be the primary driver of growth as the shift toward an off-premise model continues in most of our Pizza Hut markets.
The top line results from our Australia, Canada, Malaysia, and our U.K. delivery business are shining examples of what it means to nail the RED Brand strategy.
These markets continue to unlock off-premise growth opportunities through a focus on value and innovation, a digital-first customer experience, and distinctive communications with the help of our magnetic ambassadors, spokespeople who bring our brand to life across the world.
At Pizza Hut U.S., we continue to see positive same-store sales with 4% overall same-store sales growth.
On a two-year basis, the off-premise channel grew 18% and overall same-store sales grew 9%, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021.
Pizza Hut also delivered strong product news with the continued success of our iconic stuffed crust pizza and the successful return of a consumer favorite, the Edge Pizza during the quarter.
As for Taco Bell, which accounts for approximately 31% of our divisional operating profit, Q2 system sales grew 24%, driven by a 21% same-store sales growth and 2% unit growth.
For the division, Q2 same-store sales grew 12% on a two-year basis.
The quarter kicked off with the return of the Quesalupa as part of the fan-favorite $5 Chalupa Cravings Box, followed by the relaunch of the iconic Naked Chicken Chalupa.
In May, we launched our first-ever global brand campaign, #ISeeATaco, in which fans could score a free taco when the moon looked like a taco.
We generated over 2 billion impressions and step-change brand awareness, especially in our international markets where we have a tremendous run rate for growth.
And finally, the Habit Burger Grill delivered 31% same-store sales growth and 6% unit growth.
Q2 same-store sales grew 7% on a two-year basis.
Importantly, digital sales continued to mix over 35%, only a modest pullback from Q1, even as dining rooms continued reopening and dine-in sales saw a steady improvement throughout the quarter.
On the innovation front, we introduced the Brunch Charburger during the quarter, a unique all-day breakfast offering that included crisp golden tots, house-made secret sauce and a freshly cracked egg.
In addition to providing customers with a seamless experience to access our brands, we continue to invest in restaurant technology initiatives that make it easier for our team members to operate and run a restaurant.
As previously announced in the quarter, we've agreed to acquire Dragontail Technologies, a cutting-edge restaurant technology company, whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch, and customer order tracking.
The acquisition is subject to various approvals and we expect to close by the end of the third quarter.
An important factor of RED Brands is having a positive impact and the desire to make good easy for customers.
Our Recipe for Good framework focuses on our commitment to investing in the right recipe today.
We were proud to publish our 2020 Recipe for Good report this week, which highlights our strategic investments in socially responsible growth and sustainable stewardship of our people, food and impact on the planet.
The report includes updates on our key commitments on critical issues like climate change and equity and inclusion.
I'm confident that our plans in these areas have the right ingredients for us to succeed and make a positive impact for our people, franchisees, customers, and communities.
Now to unrivaled culture and talent.
Two of our key assets are our iconic brands and the people that bring our brands to life around the world every day.
As I've mentioned in previous quarters, COVID has further strengthened the collaboration partnership across our entire system.
A great example of this is our relationship with our independent supply chain purchasing co-op in the U.S., RSCS.
Many of you probably saw the recent announcement that the CEO of RSCS, Steve McCormick has made the decision to retire in early 2022 and that RSCS Chief Operating Officer, Todd Imhoff, was unanimously selected to succeed Steve in the role of CEO.
Steve has had a tremendous and positive impact on our business for nearly a decade and our entire system is grateful for his leadership.
At the same time, Todd is the right leader to step into this role and lead the RSCS moving forward as it continues to provide a true competitive advantage for our entire U.S. business.
Our unrivaled culture and talent has always been a towering strength of Yum!
and I'm incredibly proud of our ability to bring our brands and people together in ways we haven't in the past.
During the quarter, we hosted several virtual meetings where we fostered collaborations on a global scale for our franchisees and teams, including marketing, planning meetings, ops, development programs, a global finance summit, leaning with leaders sessions, and companywide chats just to name a few.
It's during these meetings that we realize we are all more alike than we are different and the power that our brands and our culture have to bring people together.
To wrap up, I'm pleased with the sustained momentum in our business and the agility we've shown in the last year and I'm optimistic that we are set up to win.
Our results demonstrate the resilience of our diversified global business and confidence in our strategies, which are fueled by the underlying health of our franchise system.
We are poised to accelerate growth and maximize value creation for all our stakeholders for years to come.
With that, Chris, over to you.
Today, I'll discuss our second quarter results, our unmatched operating capability, and Bold Restaurant Development growth drivers, and our solid liquidity and balance sheet position.
To begin, let's discuss Q2.
system sales grew 26%, driven by 23% same-store sales growth.
On a two-year basis, same-store sales grew 4%, which includes the negative impact of about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021.
We delivered 2% unit growth year-over-year, which included a Q2 record of 603 net new units.
EPS, excluding special items, was $1.16, representing a 41% increase compared to ex-special earnings per share of $0.82 in Q2 2020.
Core operating profit grew 53% in the second quarter, driven by accelerated same-store sales growth in several developed markets at KFC, the combination of strong sales and restaurant margin growth at Taco Bell and a year-over-year benefit associated with reserves for franchisee accounts receivable.
At Taco Bell, company restaurant margins were 25.9%, 1.4 points higher than prior year.
Favorable sales flow-through was partially offset by labor and commodity inflation, as well as increasing semi-variable costs as we return to normal operations.
As mentioned on our previous call, we expect these margins to return closer to historical pre-COVID levels later this year given inflationary pressures, along with increased staffing at our restaurants as a result of increases in dining room patronage and a return toward our historical daypart mix.
During Q2, we continued to see recoveries of amounts past due, primarily led by KFC International.
These recoveries resulted in a $4 million net benefit to operating profit related to bad debt during the quarter, representing a $17 million year-over-year tailwind to operating profit growth as we lapped $13 million of expense in Q2 2020.
As a reminder, we ended 2020 with $12 million of full-year bad debt expense with large quarterly swings due to COVID.
As such, we expect year-over-year operating profit growth to be negatively impacted in the second half as we lap bad debt recoveries of $21 million and $8 million in Q3 and Q4, respectively.
While difficult to forecast, at this point, we still don't expect bad debt to significantly impact our year-over-year operating profit growth on a full-year basis.
General and administrative expenses were $230 million.
Full-year 2021 G&A is expected to be back-end weighted, as it has been historically.
We now estimate that our consolidated G&A expenses will be approximately $1 billion for the full year 2021, a slight increase from our Q1 estimate attributable to increased incentive-based compensation.
Our commitment to be an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged and we expect our G&A to system sales ratio to move back toward our historic ratio as sustained growth continues.
Reported interest expense was $159 million, an increase of 21% compared to Q2 2020, driven by a special item charge of $34 million related to early redemption of restricted group bonds during the quarter.
Interest expense, ex-special, was approximately $125 million, a decrease of 5%, driven by recent refinancing actions and the elimination of revolver balances held in the prior year.
We still expect our 2021 interest expense to be approximately $500 million, excluding the previously mentioned $34 million special item charge similar to 2020.
We plan to continue to take advantage of favorable market conditions to refinance debt at attractive rates.
As a reminder, this will result in higher one-time expenses that will be favorable to interest expense going forward.
Capital expenditures, net of refranchising proceeds, were $16 million for the quarter.
As we've discussed on prior earnings calls, we believe roughly $250 million in annual gross capex appropriately balances the inherent needs of the business, with opportunities to invest in technology initiatives and strategic development of equity stores.
We still anticipate at least $50 million in annual proceeds from refranchising, which will fund the strategic equity store investments.
Now on to our unmatched operating capability growth driver.
Our restaurants are operated by world-class franchisees who are experienced and competing and winning in any environment.
It's well known that the U.S. is facing a competitive labor market, which is more pronounced relative to other markets across our diverse global footprint.
We and our franchisees are leaning into our unrivaled culture, which differentiates our brands to compete in a tight labor market with a focus on retention and recruiting.
I'll add some color by sharing examples from our Taco Bell company restaurants.
I'll start first with recruitment.
We posted hiring parties, which have led to a significant uptick in employee hires.
We also launched a fast apply option to make the application process easier and more efficient by reducing the application time from eight minutes to two minutes.
On the retention front, we've supported and rewarded our team members by offering a variety of incentives, including paid time off, free family meals, and increased employee development activities to name a few.
We've always prioritized investing in our people and we recognize the importance now more than ever to ensure we maintain focus on our unmatched operating capability to deliver a RED customer experience.
At the same time, our system is well positioned to sustain strong unit economics while managing the inflationary environment related to labor market dynamics and commodity cost trends.
On the commodity front, there is no one better equipped to navigate this environment, given our massive cross-brand purchasing scale through our domestic supply chain co-op RSCS, that gives our franchisees many benefits, including advantaged end to end sourcing and supply chain costs.
We are also confident in the pricing power of our brands and partner closely with our franchisees as they make strategic pricing decisions in their respective markets to deal with cost pressures while still providing customers with relevant value and distinctive products.
As David mentioned earlier, we are also prioritizing investments in restaurant technology initiatives that make it easier for our team members to operate a restaurant while also providing an enhanced customer experience.
As an example, Pizza Hut International continues to demonstrate significant momentum on this front, as evidenced by increased customer satisfaction metrics.
Their improvements are fueled by continued adoption of frictionless restaurant technology, including our in-house intelligent coaching app called HutBot that launched at the end of 2020 and is now live in 40 markets, covering 4,000 restaurants.
HutBot eases the daily management of our stores with the RTM, leading to a better customer experience.
At Taco Bell, we've continued excelling at serving more customers through our drive-thrus.
We had our sixth consecutive quarter of under four-minute drive-thru order to delivery time.
Speed for Q2 was six seconds faster than Q2 2020 and our teams served 4 million more cars compared to the same quarter last year.
A huge shout out to our operators and team members for continuing to break records in speed with the increased demand in off-premise.
The drive-thru experience is an increasingly critical competitive advantage for our brands.
So these improvements position us well to win going forward.
That's a perfect segue to our Bold Restaurant Development growth driver, which I'm particularly thrilled to speak about today.
Our net new unit growth of 603 during the quarter was broad based across brands and geographies, making this not only a record quarter, but also capping a record first half.
These results speak to the strength of our iconic brands in growing food categories supported by a healthy, well capitalized franchise system primed for sustained growth.
Most notably, KFC opened 428 net new units during the quarter with significant builds in China, Russia, India, Latin America, and Thailand, contributing to 5% unit growth year-over-year.
As many of you know, KFC has the first-mover advantage in several emerging markets with a strong domestic footprint upon which to grow.
This impressive development quarter from KFC speaks to the power of this global brand and the unit economics that underpin it.
Pizza Hut has sustained its positive 2021 development momentum, delivering 1% unit growth relative to Q1, underpinned by the strength in gross openings and moderating store closures.
Pizza Hut opened 99 net new units during the quarter, led by strong development in China, India, and Asia.
Taco Bell opened 74 net new units and we're excited to share that Taco Bell International had its best development quarter ever, opening 30 net new units led by Spain and the U.K. In the U.S., we opened our flagship Taco Bell Cantina in Times Square, with a digital forward footprint and personalized experience.
Overall, we are pleased with the momentum in the first half of the year and we're extremely proud to announce 4% to 5% unit growth guidance, led by development from all four brands across our footprint.
Next I'll provide an update on our balance sheet and liquidity position and priorities for capital allocation.
We ended Q2 with cash and cash equivalents of approximately $552 million, excluding restricted cash.
The strong recovery in EBITDA during Q2 drove our consolidated net leverage down to approximately 4.5 times, temporarily below our target of approximately 5 times.
During the quarter, we repurchased 2.1 million shares, totaling $255 million at an average price per share of $119.
Year-to-date, we've repurchased $530 million of shares at an average price of $112.
Finally, our capital priorities remain unchanged: invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash flows to shareholders via repurchases.
Overall, I'm extremely proud of our Q2 results, the resilience of our business model, and the agility of our teams.
With that, operator, we are ready to take any questions.
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compname reports second-quarter results; record 603 net-new units.
digital system sales of over $5 billion.
same-store sales growth of 23%.
reinstates long-term growth algorithm with raised unit guidance.
q2 earnings per share $1.16 excluding items.
q2 worldwide system sales excluding foreign currency translation grew 26%, with kfc at 35%, taco bell at 24% and pizza hut at 10%.
q2 worldwide system sales excluding foreign currency translation grew 26%, with 23% same-store sales and 2% unit growth.
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We sincerely hope everyone is continuing to stay healthy and safe.
Finally, we'll be referring to adjusted results and outlook.
That release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Let me start with the headlines for the full year results.
We delivered strong top and bottom line growth and exceeded our previous outlook.
We significantly increased our brand and capability investments and improved our market shares.
We generated excellent cost savings and cash flow, and we returned significant cash to shareholders.
Now let's cover the details of our results, starting with sales.
Full year net sales were $19.1 billion.
That's up 4% year-on-year and included a 2 point drag from currency rates.
Organic sales grew 6%, with healthy underlying performance and increased demand related to COVID-19.
Volumes were up 4%, and net selling prices and product mix each increased 1%.
Mike is going to provide some more color on our top line and market share performance in just a few minutes.
Moving on to profitability.
Full year adjusted gross margin was 37.1%, up 210 basis points year-on-year.
Adjusted gross profit increased 10%.
We generated $575 million of cost savings from our FORCE and restructuring programs.
That was well above our initial target and slightly better than we expected in October.
For 2021, we're targeting $400 million to $460 million in total cost savings.
Commodities were favorable by $175 million in 2020 although they turned inflationary in the fourth quarter.
We're planning for commodity inflation of $450 million to $600 million in 2021.
Costs are projected to increase broadly in most areas, including pulp and recycled fiber, resins, superabsorbent and distribution expenses.
Other manufacturing costs were higher in 2020, including costs related to COVID-19.
Foreign currencies were also a headwind, reducing operating profit at a high-single digit rate.
Moving further down the P&L, between the line spending was up 110 basis points as a percent of sales.
That was driven by advertising, which was up 90 basis points.
SG&A spending also increased and included higher incentive compensation, along with capability building investments.
Adjusted operating margin was 18.7%, up 90 basis points, and adjusted operating profit grew 9%.
In terms of Company profitability for 2021, the midpoint of our planning assumptions implies a 70 basis point decline in adjusted operating margin.
And while there are a number of moving pieces, it's likely that adjusted gross margin will be down somewhat more than that.
Turning back to 2020 results.
Full year adjusted earnings per share were $7.74, up 12%.
Our October guidance was for earnings of $7.50 to $7.65.
In addition to the strong growth in adjusted operating profit, the bottom line benefited from higher equity income, a lower share count and a slight decline in adjusted effective tax rate.
Now let's turn to cash flow [Technical Issues] Cash provided by operations was an all-time record $3.7 billion, up $1 billion year-on-year, reflecting outstanding working capital performance and strong earnings.
Cash flow is expected to be down year-on-year in 2021, driven by higher cash taxes and working capital.
Nonetheless, cash flow should remain strong and well above 2019's level.
Capital spending was $1.2 billion in 2020, in line with plan and the prior year.
We plan to spend between $1.2 billion and $1.3 billion in 2021, including activity for our restructuring program and a pickup in growth projects.
Based on an initial outlook at longer-term opportunities, we believe spending will be elevated again in 2022.
On capital allocation, dividends and share repurchases totaled $2.15 billion.
That's the 10th consecutive year we've returned at least $2 billion to shareholders.
Let me finish with a short update on our restructuring program.
We continue to make significant progress as we head into the last year of this program.
We're about 85% to 90% through the total pre-tax charges, which we've increased somewhat to reflect delays as a result of COVID-19 and costs for additional savings opportunities.
So far, we've generated $420 million of savings and expect to achieve between $540 million and $560 million of savings by the end of 2021.
Our original savings estimate was $500 million to $550 million.
Finally, at this point cash payments are about 75% to 80% complete.
Overall, it was an excellent year financially, while we invested more in the business for the long term and navigated the COVID-19 environment.
Hey, let me begin by saying that I'm very proud of our KC team and our accomplishments in 2020.
We worked tirelessly to protect the health and safety of each other by setting and maintaining strict safety protocols, all of which are in place today.
We kept our global supply chain running and safely served the needs of our consumers and customers, and in many cases, delivering record output.
At the same time, we delivered healthy top line growth across our portfolio, gained market share, invested to strengthen long-term brand fundamentals and delivered strong financial results.
Looking more closely at our business segments, we saw excellent performance in Personal Care, with 5% organic sales growth and strong share performance.
In North America, organic sales rose 6%, driven by broad-based growth in baby and child care.
Our market shares were up nicely on both Huggies diapers and GoodNites youth pants.
In D&E markets, personal care organic sales were also up 6% despite volatile market conditions.
More specifically, Personal Care organic sales were up double digits in China, India and South Africa; up high single digits in Eastern Europe; and up low-single digits in Latin America.
We also improved our share positions in many D&E markets.
Looking at our other segments.
Organic sales were up 13% in Consumer Tissue and down 7% in K-C Professional.
As expected, both businesses experienced the effect of COVID-19 and the shift to more consumers working from home.
We're pleased with how our K-C team managed through that volatility.
To meet elevated demand in Consumer Tissue, we significantly reduced our SKU count and leveraged our global supply network to increase production, including support from KCP.
We continue to focus on category expanding and brand building programs while improving our market execution.
Those actions helped us gain market share for Kleenex facial tissue in North America and Europe.
In KCP, where the washroom category continues to be a significant part of our business, we made good progress pivoting to growth opportunities in other parts of the business, including in wipers and safety products.
Sales of those products were up double digits in North America.
Importantly, we grew or maintained market share in approximately 60% of the 80 key cohorts that we track.
I'm pleased to see our brands winning in the marketplace.
Overall, our results were strong, and I'm encouraged by the way we executed in 2020.
Next, I'll turn to our outlook for 2021.
We expect a more challenging environment, especially compared to last year.
More specifically, we expect some of the net benefit from COVID dynamics, including higher consumer demand, to reverse.
In addition, commodity costs are rising globally, and we're also reflecting our latest view on economic conditions and birth rate trends.
Despite these factors, we're confident in our ability to deliver top line growth and expect to strengthen our market positions and improve our Company for long-term value creation.
Our plans call for total sales growth of 4% to 6% in 2021, and that includes 2 points from the Softex acquisition and a 1 to 2 point benefit from currencies.
We expect to grow organic sales 1% to 2%.
We plan to leverage and scale our brand-building capabilities and investments that we've made over the past two years.
We have a healthy innovation pipeline, including near-term launches for Huggies in North America, China, Eastern Europe and Latin America, and we've also upgraded products for our global Kotex brand in several markets.
We expect to benefit from selective pricing actions and other revenue management programs, but we're not currently planning for broad-based list price increases.
And we'll continue to make capability and technology investments to drive long-term success.
On advertising, spending should be similar to 2020 levels, and this reflects the increases we made over the last two years and confidence in the strong ROIs from digital.
We believe this level of investment is sufficient to support our growth plans in the current environment.
On the bottom line, we're targeting adjusted earnings per share of $7.75 to $8.
That's even to up 3% year-on-year.
We're focused on delivering our annual plan, while managing the quarter-to-quarter volatility that could be higher than normal in this environment.
Finally, because of the different COVID dynamics in 2020 and 2021, we think it is relevant to consider our performance over both years.
So on that basis, using the midpoint of our 2021 outlook, we're projecting to grow organic sales approximately 4% and to increase adjusted earnings per share 7% on average over that two-year period.
Those growth rates are slightly above our medium-term objectives.
In conclusion, we're on track with KC Strategy 2022, and we're managing effectively through a very challenging environment.
We're improving our top line and strengthening our brands, our market positions and our Company for the long term.
We continue to be optimistic about our opportunities to deliver balanced and sustainable growth and create shareholder value.
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q3 sales rose 7 percent to $5.0 billion.
updated earnings outlook reflects significantly higher input cost inflation.
kimberly-clark - qtrly earnings negatively impacted by significant inflation & supply chain disruptions that increased costs beyond what we anticipated.
taking further action, including additional pricing and enhanced cost management, to mitigate headwinds.
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On the call are Jeff Mezger, chairman, president, and chief executive officer; Matt Mandino and Rob McGibney, executive vice presidents and co-chief operating officers; Jeff Kaminski, executive vice president and chief financial officer; Bill Hollinger, senior vice president and chief accounting officer; and Thad Johnson, senior vice president and treasurer.
And with that, here is Jeff Mezger.
We had a remarkable year in 2021, producing revenue growth in excess of 35% and an increase in our earnings per share of more than 90%.
We achieved our objectives of expanding our scale and profitability, driving our return on equity up by over 800 basis points to 20%.
Our results are even more notable considering they were accomplished despite the supply chain challenges and municipal delays that were pervasive throughout the year as our teams have been successfully navigating these issues.
As we begin 2022, we are poised to continue delivering returns-focused growth.
Our backlog value of $5 billion, which grew 67% year over year provides a strong base to support our roughly $7.4 billion in expected revenues in 2022.
This represents substantial top-line expansion, which combined with our expectation of a dramatic increase in our gross margin to nearly 26% will drive our return on equity meaningfully higher.
With respect to the fourth quarter, we generated total revenues of $1.7 billion and diluted earnings per share of $1.91, representing a year-over-year increase of more than 70% on the bottom line.
We achieved an operating income margin approaching 12%, resulting in a 28% expansion in our operating profit per unit to over $56,000.
In addition to this significant profit growth, our business is generating a healthy level of cash flow, and we remain consistent in our balanced approach toward allocating this capital.
Disciplined investment in community count growth is our top priority.
And in 2021, we put over $2.5 billion to work in land acquisition and development.
We expanded our lot position to nearly 87,000 lots under control, which is almost 30% higher from year-end 2020.
Our lot position is diversified both across and within our regions, and we own all of the lots that we need for our anticipated 2022 delivery goals.
We also now own or control the lots that we need for sustained growth in 2023.
In addition to reinvesting in our business, we returned over $240 million in cash to stockholders through the share repurchases that we completed in our third quarter, along with our quarterly dividend, and we reduced our debt during the year by over $60 million.
Throughout 2021, we implemented price increases across nearly all of our communities, along with managing lot releases to balance pace, price, and production in order to optimize each asset.
Although costs rose as we move through the year, our pricing strength outpaced the rate of cost inflation, driving our backlog margins higher.
This dynamic continued in our fourth quarter contributing to a rise in our net order value of 12% year over year despite net orders decreasing 10%, a level similar to the decline in our community count.
This increase in net order value contributed to a backlog value that is more than 65% higher.
With the extension of our cycle times, most of the pricing power we experienced in 2021 will be reflected in our gross margin beginning in our 2022 second quarter.
In addition, our results will continue to benefit from structural tailwinds, including the performance of our more recently opened communities, where margins are running in excess of the company average.
The ongoing rotation into a higher quality mix of assets as the impact from reactivated communities continues to diminish, a reduction in amortized interest, and the impact that higher monthly deliveries per community has on field overhead.
All of these factors combined are driving our expectation of a gross margin of nearly 26% for this year.
We successfully opened 130 new communities in 2021, our largest number in many years, including 33 in the fourth quarter.
The higher lot count that I mentioned will enable us to accelerate our new community openings in 2022.
As a result, we now expect to end 2022 with about 265 communities, up over 20% year over year and ahead of our initial projection that we shared in September.
In addition of supporting our roughly 30% increase in revenue planned for 2022, our community count expansion will also contribute to our growth in 2023.
Our monthly absorption per community of 5.5 net orders during the fourth quarter, reflected a typical seasonal pattern sequentially.
For the year, our absorption pace averaged 6.3 net orders per community per month, the best annual rate we have seen in more than a decade.
Homebuyers value the choice and personalization inherent in our built-to-order model, which we believe is the primary reason that we have long generated among the highest absorption rates and the rates will rise this year.
And with the strong home price appreciation the market has experienced, it is appropriate to spend a moment addressing affordability.
Our strategy is to target the median household income of a submarket, positioning our homes to be attainable by the largest segment of buyers.
We strive to be below the median new home price and had a reasonable medium -- had a reasonable premium to the median resale price when we open a community and then be opportunistic in raising price based on demand at that location once opened.
Our average selling price on deliveries rose about 9% year over year in 2021, well below the reported increase for overall pricing levels nationally, highlighting the affordability of our locations and products.
As we have discussed on previous calls, we track a number of internal key indicators to gauge changes in consumer behavior that could signal affordability challenges, which we are not seeing at this time.
One of the most telling of these is the square footage of homes that buyers are selecting as they will typically rotate down to a smaller home if they need to in order to achieve homeownership.
Although we offer floor plans below 1,600 square feet in about 80% of our communities, buyers continue to choose larger footage homes.
Over the past year, our deliveries have averaged between 2,000 and 2,100 feet, consistent with our historical trend.
And our homes in backlog are slightly above that range.
We also look at our studio revenues and lot premiums, which we view as discretionary spending for our buyers.
We would expect to see a decline if buyers are stretched, but our studio revenues and lot premiums have increased even as base prices have risen.
On a combined basis, buyers spent about $48,000 per home in these two categories in the fourth quarter, a solid enhancement to our revenues.
Finally, and perhaps most importantly, is the credit profile of our buyers.
Their average FICO score in the quarter was 732, an all-time high.
In addition, about two-thirds of our buyers qualified for a conventional mortgage, and our buyers overall are averaging a down payment of over $67,000.
Taken together, these metrics illustrate our buyers' strong credit.
I'll also note that the recent increases in loan limits, both conventional and FHA should help with mortgage financing, provided an incremental benefit to the industry.
We started over 3,800 homes during the quarter as we worked to position our production for growth in 2022 deliveries.
At year-end, we had over 9,100 homes in production with 90% of these homes already sold.
Generally, our cancellation rate once we start the home is extremely low, and at 5% in the fourth quarter, it remains so.
We're reflecting our customers' strong desire to purchase their personalized homes.
As to build times, while they expanded about two weeks sequentially in the quarter, we are encouraged to see some signs of stabilization.
Construction times in November and December were consistent with September and October, pointing to a leveling out over the last four months.
Our projections for this year, assume that we hold at these levels, and depending on timing, any improvement in build times could increase our expected closings in the latter part of this year.
Our backlog is comprised of over 10,500 homes with a value of $5 billion, representing the bulk of our revenues expected for 2022.
One aspect of our built-to-order business model that tends to get overlooked is the dynamic between our revenue growth and community count.
In our count, we do not include communities that we consider to be sold out, meaning that they have less than five homes left to sell.
That doesn't mean the community has closed out and that those communities will continue to contribute to our revenues and profits.
In fact, our backlog includes almost 1,900 homes from 150 sold-out communities that will deliver approximately $1 billion in 2022 revenues.
While we have not seen a slowdown in demand across our geographic footprint in the past couple of months, and we foresee a strong spring selling season ahead, a combination of factors has resulted in a negative year-over-year net order comparison for the first six weeks of this quarter at 17%.
In the prior year, net orders throughout December and into 2021 were particularly strong creating a difficult comparison.
As the first quarter progresses, and we benefit from the additional community openings we have scheduled, along with easier weekly comparisons, we expect to end the quarter with net orders down about a mid-single-digit percentage year over year, similar to our anticipated decline in average community count for the quarter.
Market conditions remain very healthy as favorable demographics, low mortgage interest rates, and an extremely limited supply of homes, particularly for first-time buyers continue to drive demand.
Specific to KB Home, we believe the location of our communities, price point of our products, and the ability to choose and personalize homes in our built-to-order approach are compelling for buyers.
Shifting gears for a moment.
2021 was also marked by solid progress in our environmental, social, and governance initiatives.
KB Home was once again recognized with multiple honors from the U.S. Environmental Protection Agency, leading our industry with the ENERGY STAR Partner of the Year Award, a record number of ENERGY STAR Market Leader Awards and once again being the only homebuilder to receive the WaterSense Sustained Excellence Award.
Our environmental program is robust, and we are proud that our homes have the lowest national average HERS score among production builders with a long track record of annual improvement in this key metric, which we expect to continue in 2022.
Our ESG leadership is being recognized as KB Home is the only national builder named to Newsweek's list of America's most responsible companies for the second year in a row.
We've significantly increased our volume in 2021 amid the most challenging and fluid operating conditions that I have seen in my homebuilding career.
These results came about from the determined and relentless efforts of our entire team.
In closing, 2021 was a rewarding year for KB Home.
In addition to generating significant revenue and earnings growth, we also produced substantial increases in our book value per share and our return on equity.
Alongside these meaningful financial results, we maintain our leadership in providing the highest customer satisfaction levels among large production homebuilders and continue to drive innovation through the introduction of energy-efficient and healthier home features.
As a result of these and many other factors, KB Home was named to the list of the 250 most effectively managed companies in the U.S., a ranking that was developed by the Drucker Institute in conjunction with The Wall Street Journal.
As we look to the year ahead, during which we will celebrate our 65th anniversary, we anticipate another year of remarkable growth, which we expect will ultimately drive a return on equity of more than 26%.
We look forward to sharing our progress with you as 2022 unfolds.
I will now cover highlights of our financial performance for the 2021 fourth quarter and full year, as well as provide our outlook for the 2022 first quarter and full year.
We finished 2021 with strong fourth-quarter results, including significant year-over-year growth in revenues and a 310-basis-point expansion in our operating margin that drove a 71% increase in our diluted earnings per share.
While we faced supply chain issues that extended our cycle times, as well as construction cost inflation challenges during 2021, our exceptional portfolio of communities and solid operational execution, along with the strong housing market generated impressive full-year results that I will summarize in a few minutes.
With a robust 2021 ending backlog value of nearly $5 billion and 29% year-over-year expansion in the number of lots owned or controlled, we are well-positioned for continued meaningful growth in revenues, community count, earnings per share, and returns in 2022.
In the fourth quarter, our housing revenues of $1.66 billion were up 39% from a year ago, reflecting a 28% increase in homes delivered and a 9% increase in their overall average selling price.
Housing revenues were up significantly in all four of our regions, ranging from a 28% increase in the Central region to 114% in the Southeast.
Looking ahead to the 2022 first quarter, we anticipate housing market conditions will continue to be favorable with strong homebuyer demand while we navigate expected continued supply chain challenges.
For the 2022 first quarter, we expect to generate housing revenues in the range of $1.43 billion to $1.53 billion.
For the 2022 full year, assuming no change in supply chain dynamics, we are forecasting housing revenues in the range of $7.2 billion to $7.6 billion, up over $1.7 billion or 30% at the midpoint as compared to 2021.
Having ended our 2021 fiscal year with our highest year-end backlog level since 2005, along with our expectations for a higher community count and continued strong housing market conditions, we believe we are well-positioned to achieve this top-line performance for 2022.
In the fourth quarter, our overall average selling price of homes delivered increased to approximately $451,000.
Reflecting our higher average selling price per net order in recent quarters, we are projecting an average selling price of approximately $472,000 for the 2022 first quarter.
For the 2022 full year, we believe our overall average selling price will be in the range of $480,000 to $490,000.
Homebuilding operating income for the fourth quarter totaled $214.4 million, up 85% as compared to $115.7 million for the year-earlier quarter.
The current quarter included inventory-related charges of approximately $700,000 versus $11.7 million a year ago.
Our operating margin was 12.8%, up 310 basis points from the 2020 fourth quarter.
Excluding inventory-related charges, our operating margin was 12.9% as compared to 10.7% a year ago, reflecting improvements in both our gross margin and SG&A expense ratio.
We anticipate our 2022 first quarter homebuilding operating income margin, excluding the impact of any inventory-related charges, will be approximately 12%, compared to 10.4% for the year-earlier quarter.
For the 2022 full year, we expect this metric to be in the range of 15.7% to 16.5%, which represents a significant year-over-year improvement of 450 basis points at the midpoint, reflecting continued positive momentum in both our gross margin and SG&A expense ratio.
Our 2021 fourth-quarter housing gross profit margin improved 230 basis points from the year-earlier quarter to 22.3%.
Excluding inventory-related charges, our gross margin for the quarter reflected a year-over-year increase of 140 basis points to 22.4%.
The year-over-year improvement primarily reflected the impact of higher selling prices and lower amortization of previously capitalized interest, partly offset by higher costs for lumber and other construction materials and labor.
We are forecasting a housing gross profit margin for the first quarter in the range of 22% to 22.6%, representing the low point for the year.
We anticipate significant sequential expansion in quarterly gross margin during 2022, mainly driven by price increases that have outpaced cost pressures in our established communities, strong selling margins in our recently opened communities, and an expected reduction in amortization of previously capitalized interest.
For the full year, we expect this metric will be in the range of 25.4% to 26.2%, an increase of 400 basis points at the midpoint as compared to 2021.
Our selling, general, and administrative expense ratio of 9.8% for the fourth quarter improved 50 basis points from a year ago, mainly reflecting enhanced operating leverage due to higher revenues, partly offset by increased performance-based compensation expenses and costs to support our expanding scale.
We are forecasting our 2022 first quarter SG&A ratio to be approximately 10.4%, an improvement of 30 basis points versus the prior year as expected favorable leverage impact from an anticipated year-over-year increase in housing revenues are partially offset by increased investments in personnel and other resources to support a projected meaningful expansion in community count.
We expect that our 2022 full-year SG&A expense ratio will be in the range of 9.4% to 9.9%.
Our income tax expense of $49.7 million for the fourth quarter, which represented an effective tax rate of approximately 22%, was favorably impacted by $7 million of federal energy tax credits, reflecting another benefit of our industry-leading sustainability initiatives.
We currently expect our effective tax rate for the 2022 first quarter and full year to be approximately 25%, both excluding any favorable impacts from energy tax credits.
Federal legislation extending the availability of tax credits for building energy-efficient homes in 2022 has not yet been enacted.
If the Section 45L tax credit is extended at its current level, our 2022 effective tax rate would be favorably impacted by approximately 200 basis points.
Overall, we reported net income of $174.2 million or $1.91 per diluted share for the fourth quarter, a notable improvement from $106.1 million or $1.12 per diluted share for the prior-year period.
Reflecting on the full year, we are very pleased with our strong 2021 financial results.
We increased our housing revenues by 37% to nearly $5.7 billion, expanded our operating margin by 400 basis points to 11.6% with measurable improvements in both our gross margin and SG&A expense ratio, and reported $6.01 of diluted earnings per share, an increase of 92%.
We also completed $188 million of share repurchases, refinanced $390 million of our senior notes, resulting in annualized savings of $16 million of incurred interest, and improved our year-end leverage ratio by 380 basis points.
Turning now to community count.
Our fourth quarter average of 214 was down 9% from 234 in the corresponding 2020 quarter and up 4% sequentially.
We ended the year with 217 communities down 8% from a year ago and up 3% sequentially.
We expect our 2022 first-quarter ending community count to remain relatively flat sequentially and represents a low point for 2022.
On a year-over-year basis, we anticipate our 2022 first-quarter average community count will be down by a low single-digit percentage.
We expect our quarter-end community count to increase sequentially through the remainder of the year starting in the second quarter as openings each quarter are expected to outpace sell-outs.
We anticipate ending the year with a 20% to 25% increase in our community count, supporting additional top-line growth in 2023 and beyond.
During the fourth quarter, to drive future community openings, we invested $622 million in land and land development with $258 million or 41% of the total representing land acquisitions.
In 2021, we invested over $2.5 billion in land acquisition development, compared to $1.7 billion in the previous year.
At year-end, our total liquidity was approximately $1.1 billion including $791 million of available capacity under our unsecured revolving credit facility.
Our debt-to-capital ratio improved to 35.8% at year-end 2021, compared to 39.6% the previous year.
We expect to generate significant cash flow in the current year to fund land investments supporting our targeted 2022 and future years' growth in community count and housing revenues.
Our 2021 year-end stockholders' equity was $3.02 billion as compared to $2.67 billion a year ago, and our book value per share increased by 18% to $34.23.
Finally, one of the most notable 2021 achievements was our significant improvement in return on equity to 19.9% for the full year, a year-over-year expansion of over 800 basis points.
Given our current backlog and community opening plans and the expected continued strength in the housing market, we are confident that we will generate significant year-over-year improvements in our key 2022 financial metrics.
We plan to continue to execute on the principles of our returns-focused growth strategy with an emphasis on meaningfully improving our returns by increasing our community count and top line while producing further expansion in our operating margin.
In summary, using the midpoints of our guidance ranges, we expect a 30% year-over-year increase in housing revenues and significant expansion of our operating margin to 16.1% driven by improvements in both gross margin and our SG&A expense ratio.
These in turn should drive our return on equity of over 26% up and excess of 600 basis points from 19.9% in 2021.
This outlook reflects our view that with our returns-focused growth strategy, attractive business model, seasoned leadership team, and continued favorable housing conditions, we will be able to further and meaningfully enhance long-term stockholder value in 2022.
Alex, please open the lines.
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q4 earnings per share $1.91.
net order value for q4 expanded by $184.3 million, or 12%, to $1.77 billion.
ending backlog grew 35% to 10,544 homes at quarter-end.
qtrly homes delivered rose 28% to 3,679.
sees fy 22 average selling price in range of $480,000 to $490,000.
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My name is Larry Sills, Chairman of the Board.
Our agenda for today is we'll start with Eric who'll review the highlights of the fourth quarter and the year.
Jim will then review some operations and Nathan will then give a more detailed review of the numbers.
When that's complete we will switch over to -- we will start our Q&A session, so a lot to cover.
I truly believe we would not have been nearly as successful in navigating these uncharted waters without their dedication and skills.
I truly could not be more proud of how they guided us through it.
Okay, on to business, we are extremely pleased with our fourth quarter results as we set records for both sales and profits.
Our sales were up $41 million or 17% with both divisions contributing record numbers.
Engine Management was up 15% and was far and away our largest fourth quarter on record.
Some of this was due to entering the period with an order backlog.
As you recall, the third quarter was also quite strong and due to some manpower shortages in our distribution centers we did not fully catch-up until early in the fourth quarter.
But beyond that, incoming volume from our customers continued to be robust throughout the period as well.
I would note that our customer's sell-through in the fourth quarter was in the mid single-digits and we are pleased to see that the positive trend is continued into 2021.
Temperature Controls also had a record, up 30% though the fourth quarter is the lowest sales period of this highly seasonal category.
We enjoyed a very warm summer and similar to Engine Management we ended the quarter with a bit of a backlog.
In addition to this backlog, the warmth continued into the fourth quarter prolonging the selling season.
Customer POS was robust throughout but again this is a light period for the Air Conditioning business.
Reflecting back this was a -- this year was a tale of two halves.
At mid-year we were down nearly 15% due to the sales drop off and the pandemic.
And with the third and fourth quarters strengthening sequentially on a full year basis we were nearly flat with 2019 with Engine Management slightly behind and Temperature Control slightly ahead.
From a profitability standpoint the trend was similar.
After the first half our earnings from continuing operations were down almost 37% and with the record third and fourth quarters, we ended the year up 16%.
Nathan will provide much more detail later in the call.
But overall, we are quite pleased with our year and proud of our performance.
Although we enter 2021 with many positives as previously announced, we were recently informed of a loss of a major account within our Engine Management segment.
At the time of the announcement we knew that the annualized impact was an approximate loss of $140 million that we had yet to finalize any details including timing.
We now know that this business is phasing out over the course of the first quarter of this year during which we expect approximately $20 million in revenue and it will then be totally absent beginning in the second quarter and thereafter.
This account has chosen to pursue a private label strategy as they have with other product categories before and it is our understanding that they have split the business between several suppliers both domestic and overseas.
We now turn our attention to rightsizing our cost structure accordingly meanwhile we seek to replace the volume.
First off we have many exciting opportunities with various customers that are actively in discussion.
And secondly installers all have many sources for their parts needs.
Many of whom we believe to be loyal to our brands.
And we plan to work aggressively in the field helping them find our products.
While this account decided to pursue a different approach, we strongly believe that our full-line, full-service strategy continues to resonate with our other customers as well as with the installers and end consumers.
As evidence of this and of the strength of our partnerships, we are honored to have recently received O'Reilly Auto Parts top honors as their 2020 Supplier of the Year.
I'd next like to speak for a moment about some of our other areas of business that complement our North American aftermarket focus.
First is original equipment; while we do enjoy some OE business for the passenger car market our larger emphasis has been more toward the heavy duty industrial and agricultural arenas.
We believe these are a better fit for us.
The product lifecycle tends to be a bit longer and frankly tend to be a bit more profitable than OE for passenger cars.
In general, the OE market was slower to recover from the pandemic than the aftermarket as new vehicle production and sales were more adversely impacted.
But I'm pleased to report that it has now rebounded quite nicely and we are seeing good run rates entering 2021.
Included in this is our recent Pollak acquisition of which 75% is OE and largely commercial vehicle.
Not only are we seeing a rebound of the acquired product lines, this acquisition has opened new doors for us which we're actively pursuing.
Another original equipment area that has been a real highlight for us has been our compressed natural gas injectors, which are utilized in heavy duty commercial vehicles largely in Asia.
As that region focuses on alternative energy vehicles we have seen strong growth as they build out systems that operate cleaner than conventional power trains.
We sold over a million natural gas injectors last year and the order book remains very strong.
Next, regarding the heavy duty aftermarket portion of the acquired Pollak business we saw the same rapid recovery that we saw in our legacy aftermarket.
But as you'll recall, our intent with this is to focus on reinvigorating what has been a somewhat neglected business from its former owner.
We have added hundreds of SKUs, are refreshing all marketing materials and are building out an organization to aggressively pursue the heavy-duty aftermarket for both Engine Management and Temperature Control.
We see this as a very complementary channel for us.
There are many similar products to what we offer elsewhere and we have acquired a well-known and highly regarded brand on which to build.
Lastly, I'd like to address our Chinese operations.
To remind you, we have three joint ventures all within Temperature Control.
While they provide us with access to high quality, low cost products for our North American aftermarket business there are other purposes to pursue Chinese original equipment business, which is the largest new vehicle market in the world.
As of now about 30% of what we sell out of these JVs is for in-country OE.
Now while these businesses are still quite small the growth potential is substantial.
One that we are really excited about is called CYJ, which manufactures electric compressors for electric vehicles both passenger car and heavy duty truck and bus.
Similar to the natural gas injector discussion a few moments ago, we see real potential in being a basic manufacturer of products for alternative energy vehicles and are excited to be in at the ground floor.
So in summary, 2020 was a rollercoaster of a year.
After a difficult first half, the second half showed the resilience of our industry and we were able to make up essentially all of the lost ground.
And while the ongoing pandemic will continue to cause uncertainty, looking forward to 2021 we see many positives.
Industry trends are all favorable.
Among them average age of vehicles has hit a record 12 years.
Gas prices remain relatively low.
And as mile driven recovers, we expect DIFM, which is our core business will strengthen as well.
Our strong customer sell-through from the second half of 2020 has continued into the first quarter of '21 and while we will feel the near-term impact of the lost business, our relationships in the marketplace have never been stronger.
And with that, I will hand it over to Jim to talk about our operations.
That is Jim Burke and I'd like to touch on two topics from operations today.
First is our supply chain.
2020 was like no other year and I'm very proud of all our team members enduring everything that was thrown at us.
We are deemed an essential business to the transportation industry and we remained open to meet our customer demands.
This entailed retrofitting all of our facilities for safety precautions and social distancing.
We endured wild demand swings dropping 30% to 40% followed by positive swings up 10% to 20%.
At the same time, we were faced with a labor shortage.
Many customers were very complimentary recognizing our employee efforts.
A more recent topic around supply chain has been the disruption in the auto sector from lack in availability of semiconductor chips.
Fortunately, we believe we have an adequate inventory supply and deem this to be a minor risk.
Another supply chain challenge has been the logistics of moving product primarily from the Far East to the U.S. Fortunately we have a very large manufacturing footprint in North America and Poland and are less exposed than others who source a 100% from Asia.
The logistic challenge reflects a combination of container shortages, availability of shipping vessels and ultimately congestion at local domestic ports.
We have been managing through this process by forward booking containers and vessels to meet our needs.
While definitely a challenge, we were able to alleviate more of this risk than others with our North American and Poland manufacturing locations.
Closer to home I would be remiss without addressing the recent storms across the U.S. and in particular Texas.
The polar blast with snow and ice instilled significant hardship and devastation across the midsection of the U.S. affecting many of our plants.
However, Texas was hit hardest where we have our Temperature Control headquarters and distribution center.
We are assessing employee needs to recover and our facility reopened after being shut for four days.
Fortunately, this time of the year we are focused on pre-season orders and will be able to make up the lost days with overtime and weekends.
Our global teams have met all these supply chain challenges head on with pride and are driven to meet our customer needs.
Turning to my final topic, I would like to highlight our SMP inaugural Social Responsibility and Sustainability Report.
For over 100 years SMP has nurtured a culture focused on all our stakeholders including our employees, customers and our communities.
With solely internal resources, our team members produced this outstanding ES&G report which can be found on our website.
With a focus on environmental and social responsibility our report highlights the products we produce that reduce auto emissions, efforts to reduce our carbon footprint in our operations, increasing diversification and inclusion throughout our organization addressing the health and safety of our employees and being engaged in the communities where we are located.
Many of these efforts have been captured under our SMP Cares banner focusing on all stakeholders and striving for continuous improvement.
And I will pass the call over to Nathan for our financial wrap-up.
Now turning to the numbers; I'll walk through the operating results for the fourth quarter and the full year, cover some key balance sheet and cash flow metrics and then also talk a little about our expectations for the year of 2021.
Looking first at the P&L, consolidated net sales in Q4 2020 were $282.7 million, up $41.5 million or 17.2% versus Q4 last year.
Our consolidated net sales for the full year were $1.13 billion finishing down just 0.8% after recovering in the last half of the year as Eric noted earlier.
Looking at it by segment, Engine Management net sales in Q4 excluding Wire and Cable sales were $193.5 million, up $26.2 million versus the same quarter of last year.
This 15.7% increase was driven mainly by catching up on a large order backlog we've carried into the fourth quarter that stemmed from the sharp rebound in business activity after COVID lockdowns were lifted.
For the full year, Engine Management's net sales were down 2% to $691.7 million, a strong second half volume helped offset the pandemic induced declines we saw earlier in the year and brought the segment's full year sales to a level just slightly below 2019.
Wire and Cable net sales in Q4 were $38.3 million, up $3.7 million or 10.6% but for the full year were relatively flat finishing up 0.6% at a $144 million.
Sales during the quarter and for all of 2020 were positively impacted by an increase in DIY sales as consumers stayed at home during the pandemic.
While the Wire and Cable business performed very well in 2020, the business remains in secular decline and we believe sales will be lower by 6% to 8% on an annual basis.
Our Temperature Control net sales in Q4 2020 were $47.7 million, up 30% versus the fourth quarter last year driven by an extended selling season as weather stayed warm well into the fourth quarter across most of the U.S. Like Engine Management, Temp Controls full year sales were more in line with last year ending the year up 1.3% at $282 million as the strong seasonal sales helped the segment finish slightly ahead of 2019.
Looking now at gross margins, our consolidated gross margin in Q4 2020 was 33.3% versus 30.2% last year, up 3.1 points and for the full year it was 29.8% versus 29.2% last year, up 0.6 points.
Looking at the segments, fourth quarter gross margin for Engine Management was 33%, up 2.4 points from Q4 last year.
And for Temperature Control was 30%, an increase of 7.3 points from 22.7% from last year.
The very strong margins in both segments reflect the higher sales volumes we experienced as well as the positive impacts of high fixed cost absorption resulting from increased production.
For the full year gross margins in both segments more closely aligned with long-term trends.
Engine Management gross margin was up 0.5 points to 30.1% while Temp Control was up 1.5 points to 26.7%.
These full year margins reflect strong second half sales and fixed cost absorption and also incremental improvements achieved from our continuous savings programs.
Moving now to SG&A expenses, our consolidated SG&A expenses in Q4 were $61 million ending at 21.6% of sales versus 22.5% last year.
For the full year, SG&A spending was $224.7 million, down $10 million at 19.9% of net sales versus 20.6% last year.
The improvement as a percentage of sales in the quarter mainly reflected improved expense leverage as sales volumes increased.
Lower overall SG&A expenses for the year were helped by cost reduction plans put in place earlier in the year and lower interest rates on accounts receivable factoring programs and to a lesser extent COVID-related government incentives.
Consolidated operating income before restructuring and integration expenses and other income net in Q4 2020 was $33.2 million or 11.7% of net sales, up 4 full points from Q4 2019 and for the full year it was 9.9% of sales, up 1.4 points from last year.
As we note on our GAAP to non-GAAP reconciliation of operating income, our performance result in fourth quarter 2020 diluted earnings per share of $1.08 versus $0.59 last year and for the full year diluted earnings per share of $3.61 versus $3.10 last year.
The increase in our operating profit for the quarter was mainly due to higher sales volumes while the increase for the year mainly reflects higher gross margins and lower SG&A expenses across the company, which overcame the impact of slightly lower sales volumes.
Turning now to the balance sheet, accounts receivable at the end of the quarter were $198 million, up $62.5 million from December 2019 with the increase over last year due both to higher sales in the fourth quarter and management of our supply chain factoring arrangements.
Inventory levels finished the quarter at $345.5 million, down $22.7 million from December 2019 with the decrease from last year mainly reflecting the sharp recovery in sales we experienced in the second half of the year after having lower production levels earlier in the year.
Our cash flow statement reflects cash generated from operations for the year of $97.9 million as compared to a generation of $76.9 million last year.
The $21 million improvement was driven by an increase in our operating income as noted earlier but also by changes in working capital.
The changes in working capital in 2020 were mainly a result of strong second hand half sales and related timing.
Inventory balances finished lower, but accounts payable were higher as we tried to replenish our shelves.
Further, accrued customer returns and rebates were also higher due to timing of sales in the back half of the year.
These favorable movements were partly offset by an increase in accounts receivable as highlighted before.
As we said last quarter we expect this timing around cash flows to normalize as sales and production levels stabilize.
During the year we continued to invest in our business and used $17.8 million of cash for capital expenditures which was more than the $16.2 million used in 2019.
Financing activities included $11.2 million of dividends paid and $13.5 million paid for repurchases of our common stock.
Financing activities also included $46.7 million of payments on our revolving credit facilities.
We finished the year with total outstanding borrowings of $10 million and available capacity under our revolving credit facility of $237 million.
To that end our Board of Directors has approved the quarterly dividend of $0.25 per share on common stock outstanding, which is payable on March 1.
Further, our Board has also authorized an additional $20 million common stock repurchase plan.
This new authorization is on top of the $6.5 million remaining under our existing plan and when added together will allow us to repurchase up to 26.5 million of additional shares.
Lastly, let me talk about our expectations for 2021.
As I said earlier, sales in the last half of 2020 and in the fourth quarter in particular were very strong leading to very favorable gross margin performance.
But as you've heard we -- as we head into the first quarter of 2021 facing the loss of a customer who will be working through cost reductions for the balance of the year while we seek to replace the volume.
While gross margins will vary across the quarters we expect full year 2021 gross margins for Engine to be 29%-plus.
For our Temp Control segment we continue to target gross margins of 26%-plus for the full year in 2021.
Looking at our SG&A cost in 2021, we expect expenses to be in the range of $52 million to $56 million each quarter.
And finally, with regard to working capital we expect balances to normalize as noted earlier.
As a result, we expect cash flows to be driven by using cash to build our inventory back to appropriate levels and to pay customer rebates earned during 2020 and offset by cash generated from the collection of accounts receivable.
Brittany, are you there?
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standard motor productsa nnounces third quarter 2020 results and reinstates quarterly dividend.
q3 earnings per share $1.59 from continuing operations excluding items.
q3 earnings per share $1.59 from continuing operations.
q3 sales $343.6 million versus refinitiv ibes estimate of $327.3 million.
approved reinstatement of quarterly dividend of 25 cents per share.
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Joining us today are Tom O'Hern, chief executive officer; Scott Kingsmore, senior executive vice president and chief financial officer; and Doug Healey, senior executive vice president of leasing.
As we pass the midpoint of the year, we find ourselves at an inflection point.
As we said on our last call, we also expected that occupancy hit a low point at March 31, 2021, and that appears to be the case.
As we look today, almost all of our operating metrics have started to trend positive, including occupancy.
And many of these metrics are even trending positive compared to pre-pandemic second-quarter 2019.
Improving operating results, including leasing volumes, occupancy gains and most importantly, tenant sales, which have trended very positively.
In fact, to give you some month-by-month numbers, March tenant sales were up 8.6%, April sales were up 9.9%, May and June were both up a strong 15%.
Those increases are versus the same periods in 2019.
And we're not comparing sales to 2020.
Those are compared to 2019.
Traffic is still lagging a bit at around 90% of pre-COVID levels on average.
So what we're seeing is an improved capture rate for the retailers compared to pre-COVID.
We do expect for traffic to continue to increase in the second half of the year.
I would say brick-and-mortar mall-based retail is back with a vengeance, albeit helped to some degree by stimulus checks and revenge buying.
Because of the robust leasing environment, and it feels much better to us than when we emerged from the great financial crisis in 2009 and 2010.
So some of these second-quarter highlights include, on a sequential basis, occupancy gains of 90 basis points.
Leasing volumes for the quarter and year-to-date were in excess of 2019 levels.
We saw same-center NOI growth in 11.5%.
We expect the second half of 2021 to be even better.
We raised the bottom end of FFO guidance range and moved the midpoint up, even factoring in the impact of issuing equity during the second quarter.
In terms of balance sheet activity, we also used the ATM to a small degree in June.
Since our last earnings call, we issued 6.4 million shares at an average price of $18.20.
We raised $114 million of capital, and that was used to reduce debt.
Trading was good for us in the quarter and in June, and ended the second quarter as the second best performing REIT, up 58%.
In other balance sheet activity, in addition to our sale of Paradise Valley Mall in March, we're still expecting to close on the sale of another noncore asset or two in the second half of 2021, and that's in our guidance.
Net proceeds expected to be in the $100 million range.
The balance sheet moves we made in the first half to significantly improved our leverage metrics.
Year-to-date, we've paid down over $1.3 billion of debt.
Focusing for a moment now on leasing.
We are seeing incredible demand for space, including big box space and perimeter locations.
And that includes multifamily, healthcare fitness, wellness uses, food and beverage and other traditional -- of nontraditional retail uses.
A great example of the latter is that during this past quarter, we announced a 222,000 square foot SCHEELS sporting goods lease in the former Nordstrom's box at Chandler Fashion Center.
This store will be their first in the Arizona and will feature 16,000 gallons of saltwater aquarium, a wildlife mountain, a restaurant and more.
Nontraditional mall retail demand in smaller format also continues to accelerate with the digitally native brands getting active again on our brick-and-mortar locations after a hiatus during COVID.
Other interesting additions include a host of new electric car companies taking space in many of our malls, including Polestar and Lucid.
They've done multiple deals with us this year.
So many of our traditional retailers are back with even greater demand for space than pre-pandemic, and Doug will elaborate on that in a few moments.
We are very optimistic about our business as we move forward to the balance of the year and into year 2022.
For the most part, in the U.S., with 58% of the population vaccinated, the worst of the pandemic is now behind us.
The leasing environment is strong and getting better by the month, and we expect significant gains in occupancy, net income and FFO growth as we then move on through the year and into next year.
Before I report on the financial highlights of the quarter, I would like to make an announcement.
At the end of this year, Jean Wood will be hanging up her Investor Relations cleats and stepping gracefully into retirement.
Jean has been an incredible asset to Macerich for the past 27-plus years.
Her dedication to the company started within just a few months after Macerich's IPO in 1994, and we sincerely appreciate her contributions, her partnership, and her friendship over these many, many years.
Over the coming months, Jean will be transitioning her role to Samantha Greening, our new director of investor relations.
Samantha has been with Macerich for over nine years in various capacities.
Now on to the highlights of the financial results for the quarter.
Same-center NOI rebounded very well in the quarter, increasing 11.5% relative to the second quarter of 2020, including our lease termination income.
Given the prevalence of retroactive rent relief adjustments within our 2021 results, we believe it is now an appropriate measure of our 2021 same-center operating performance by including rather than excluding lease termination income.
If we were to exclude lease termination income, same-center NOI growth still increased 10.4%.
Funds from operations for the second quarter of 2021 was $0.59 per share, up $0.20 or 51% from second-quarter 2020 at $0.39 per share.
EBITDA margin has increased over 6% to 63.9% relative to 57.7% at the end of the second quarter in 2020 and is approaching pre-COVID EBITDA margin of 65.3% at the end of the second quarter in 2019.
As Doug will soon explain, portfolio occupancy rate has increased in the quarter, and our leasing spreads showed sequential improvement relative to the end of the first quarter of 2021.
Suffice to say, this was a relatively noisy earnings quarter with many moving pieces supporting our positive earnings news that we've also released today.
To expand on those, the primary factors contributing to these NOI and FFO gains are as follows: On the NOI front, one, the quarter increased in the -- the quarter increases include a $0.06 increase in percentage rents resulting from the dramatic increase in sales that we reported earlier today.
And two, common area income has contributed another $0.04 of NOI and FFO, including from our urban parking garages.
Our common area business has also proven that -- to be quite elastic and resilient and is recovering very well.
In fact, our common area revenue performance has exceeded our expectations from when we entered into 2021.
And three, our bad debt expense represents a comparative $50 million or $0.23 improvement quarter-over-quarter, including a $40 million bad debt expense incurred during the second quarter of 2020 at the onset of COVID and a net $10 million bad debt reversal within last quarter, the second quarter of 2021.
Offsetting these NOI factors were: one, $46 million or $0.21 in reduced minimum rent and recovery income from reduced occupancy as well as approximately $15 million retroactive rent abatements and rent relief of primarily 2020 rents.
To pause on this point, the previously mentioned $10 million bad debt reversal in the quarter should be viewed in tandem with a negative $15 million impact of rent abatements from our second quarter.
In other words, the net impact of COVID workout deals on same-center NOI in the second quarter was a negative $5 million when considering both line items.
And so if you want to normalize same-center NOI for what is essentially the majority of the remaining COVID workout deals, then add back $5 million or 3% roughly to same-center NOI.
Note also that as I mentioned last quarter, we expected a reduced amount of retroactive rent abatements in the second quarter, and that was, in fact, the case.
I also expect that we are in -- and I also said that we expect a very negligible impact in the second half of the year from such retroactive abatement concessions, and we still expect that to be the case.
Secondly, the shopping center expenses increased by approximately $0.06.
This is driven by the widespread closures of our center in the second quarter of last year relative to the full operational status of our portfolio throughout the second quarter of 2021.
And lastly, a few other factors included: one, second quarter included increases of positive $0.09 in valuation adjustments, net of provision for income taxes from our indirect investments in various retailers that we at Macerich have previously invested in through a venture capital firm.
This positive impact shows up in other income from unconsolidated joint ventures, and it is worth noting that this was into thinking when we last updated our guidance at the end of the first quarter.
And two, the second quarter also included an increase in land sale income totaling approximately $0.05, which was factored into our original guidance and planning as we entered into 2021.
2021 FFO is now estimated in the range of $1.82 to $1.97 per share, which represents a $0.03 increase at the midpoint.
While certain guidance assumptions are provided within our supplemental filing, here are some further anecdotes.
This guidance range assumes no further government-mandated shutdowns of the retail properties.
This guidance factors in the issuance of common equity to date, which I will further describe in a few moments, and Tom also mentioned previously.
So as I mentioned during the prior two quarterly calls, we anticipate strong double-digit growth in the second half of 2021, and we still anticipate that to be the case.
And in fact, we have increased the midpoint by $0.03 per share, which is also $0.04 or 2% greater than consensus estimates.
This is now due to -- primarily to a much stronger operating environment as reflected within the second-quarter results.
And then as for our balance sheet, within the first-quarter filings, again, we disclosed that we had sold $732 million of common equity through our ATM programs again last quarter.
Since then, we sold an additional $116 million at an average price of $18.20.
As part of our continuing commitment to deleveraging our balance sheet, since the end of our first quarter and through today, we have repaid approximately $1.3 billion debt.
Sources to accomplish this include common stock sold through our ATM programs and dispositions of various assets, including Paradise Valley at the end of March and some numerous sales of undeveloped land parcels in the Phoenix marketplace.
Our EBITDA continues to improve.
And as our deleveraging efforts continued in the second quarter, the company's debt service coverage ratio improved to two and a half times at the end of the second quarter of '21.
And as previously stated on many occasions, we still do expect to harvest positive operating cash flow after recurring capex and dividends of well over $200 million per year from 2021 through 2023, which supports a path to continued leverage reduction in the range of 8x by the end of 2023.
This is relative to our leverage in the quarter of mid-11s at the end of 2020 on the heels of COVID.
Including undrawn capacity on our revolving line of our credit, of which $200 million of the $525 million aggregate capacity is currently outstanding, we have approximately $500 million of liquidity today.
So from a secured financing standpoint, we are working on an extension of the loan on Danbury Fair through the middle of 2022, and we are currently marketing the shops at Atlas Park for a refinance loan.
Those are the company's final two remaining loan leases -- maturities that are within 2021.
As the year has progressed and as reported to you last quarter, we continue to see green shoots in the debt capital markets with the execution of a growing number of retail deals on sequentially improving terms.
The leasing environment continues to improve with leasing productivity outpacing COVID 2019 levels.
And 2019 was our highest leasing volume year since 2015.
Sales were strong in June, and on top of a very productive April and May.
June small shop sales were up 15% when compared to June 2019.
Most importantly, all categories, including our food and beverage, showed positive comps for the first time since the beginning of the pandemic.
Looking at the quarter, the second-quarter small shop sales were up 13% over the second quarter of 2019.
And year-to-date through June, small shop sales were up 5% when compared to the same period in 2019.
Occupancy at the end of the second quarter was 89.4%.
This is up 90 basis points from 88.5% in the first quarter.
On our last call, we stated that we thought the first quarter would be our trough and we still believe that to be the case, given the healthy retailer environment that exists today, coupled with our strong leasing pipeline, we also anticipate that occupancy to continue to increase throughout the remainder of this year and into 2022 and beyond.
Pace of bankruptcies continues to decrease.
In fact, year-to-date, bankruptcies within our portfolio are the lowest we've seen since 2015.
And in the second quarter, only two tenants filed for bankruptcy.
One of the two tenants was a theater chain and had just two locations with us.
Both locations were rejected and one of those locations has already been released.
The other was a small tenant that had eight locations with us to a total of just 9,000 square feet.
Our trailing 12-month leasing spreads were negative 0.2%, and that's an improvement from negative 2.1% last quarter.
Average rent for the portfolio was $62.47 as of June 30, 2021, and that's flat for a year-over-year basis.
2021 lease expirations remain an important focal point, and we continue to make progress.
To date, we have commitments on 81% of our 2021 expiring square footage with another 19% or the balance in the letter of intent stage.
And with -- well on our way into 2022 business with 27% of the expiring square footage committed and 64% at the letter of intent stage.
In the second quarter, we opened 251,000 square feet of new stores, resulting in this total annual rent rate of $6.5 million.
Notable openings in the second quarter include lululemon at Fashion Outlets of Chicago; American Eagle's new concept OFFLINE by Aerie at Freehold Raceway Mall; Indochino at Washington Square; Starbucks at Fashion District, Philadelphia; Blue Nile and Psycho Bunny, Scottsdale Fashion Square; Faherty and the UpWest at Village at Corte Madera; and Vuori at Twenty Ninth Street.
We also opened 7 locations with Charming Charlie and 4 locations with FYE.
We opened a 24,000 square foot office for the county of San Bernardino at Inland Center.
So lastly, we opened the 95,000 square foot Shoppers World at Fashion District Philadelphia in the former Century 21 space, which we lost last year due to a bankruptcy liquidation.
Now let's look at leases that we signed in the second quarter, and this is where it gets really exciting because unlike our store openings, which represent past leasing, recent signed leases represent what we're doing really well in real time.
Signed leases define leasing velocity and are the leading indicator of the leasing environment that exists today.
And with that said, we see that the leasing environment as robust and dynamic.
This is confirmed by our leasing activity, which is stronger than it's been in recent history.
And let me be clear, and when I say that in recent history, I'm not talking about the 16 months we've been dealing with COVID.
I'm comparing back to 2019, which, again, was our highest leasing volume year since 2015.
So said another way, we're currently on pace for our highest volume leasing year since 2015.
In the second quarter, we signed 223 leases for 692,000 square feet, resulting in $37 million in total annual rent.
In the first half of this year, we signed 488 leases for some 1.9 million square feet, resulting in $88.7 million in total annual rent.
Now this represents 18% more leases, 34% more square footage and 11% more rent during the same period from 2019.
Noteworthy leases signed in the second quarter that includes several new to Macerich retailers, including Versace at Fashion Outlets of Chicago; Christian Louboutin, Alo Yoga and FORWARD at Scottsdale Fashion Square; and Avacado at Village at Corte Madera.
These and others bring the total square footage of new to Macerich deals either signed or in lease in the last 12 months to just over 530,000 square feet.
In addition to Shoppers World opening at Fashion District Philadelphia, which I mentioned earlier, we signed a second lease with the -- to take over the 72,000 square foot location at Green Acres Mall that Century 21 also rejected to bankruptcy.
So by the end of this year, we will have filled the two Century 21 boxes that we lost in the bankruptcy, and this totals approximately 170,000 square feet, an impressive feat considering Century 21's liquidation occurred just 10 months ago.
Other notable leases signed in the second quarter include Free People Movement at Kierland Commons; Warby Parker at Washington Square; La Encantada and Williams-Sonoma and Lucid Motors at The Village at Corte Madera; Zwilling [Inaudible] at the Tysons Corner Center; and Peloton at Washington Square.
Turning to our leasing pipeline.
At the end of the second quarter, we had signed leases for just over 500,000 square feet of new stores still to open in 2021.
And looking into 2022 and 2023, we have signed these leases for another 935,000 square feet of new stores to open.
In addition to these signed leases, we're currently negotiating leases for new stores totaling 1.1 million square feet.
The majority of which will open in 2021 or in early 2022.
In total, that's over the 2.5 million square feet of signed and in-process leases for new store openings throughout the remainder of this year and into 2022 and 2023.
As stated on our last call, and this is our -- the trajectory that we expected and it's only going to improve as we are constantly reviewing and improving new deals on a regular basis.
So in conclusion, sales are higher than they were pre-COVID.
Occupancy is up from last quarter and is expected to continue to increase.
Bankruptcies are at their lowest levels since 2015.
Leasing velocity is as strong as it's been in recent history.
So if I sound overly optimistic, it's because I am.
Maybe it's the stats and the metrics we talked about.
They don't lie, and maybe it's the mood out there in the field.
It feels really good.
Maybe it's the many different uses we now have to choose for them to fill our space.
Maybe it's just the best-in-class portfolio of shopping centers that we have.
Maybe it's all of the above, I don't know but what I do know is we find ourselves in a very good place and extremely well positioned to take advantage of the really strong leasing environment that we -- that exists out here today.
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compname posts quarterly loss per share $0.06.
quarterly loss per share $0.06.
same center net operating income, including lease termination income, increased 11.5% in q2 2021.
ffo, excluding financing expense in connection with chandler freehold, was $0.59 per share-diluted during q2 2021.
sees fiscal year 2021 eps-diluted from loss of $0.06 to earnings of $0.09.
sees fiscal year 2021 ffo per share – diluted, excluding financing expense in connection with chandler freehold $1.82 - $1.97.
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I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion.
Our conference call slides and our third quarter Form 10-Q are on our website and provide additional information that you may find helpful.
Yesterday, Graco reported third quarter sales of $487 million, an increase of 11% from the third quarter of last year.
The effect of currency translation added two percentage points of growth or approximately $6 million in the quarter.
Reported net earnings were $104 million for the third quarter or $0.59 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises and certain nonrecurring tax adjustments, net earnings were $100 million or $0.57 per diluted share.
Gross margin was down 110 basis points from the third quarter of last year as the favorable effect from realized pricing, increased factory volume and currency translation were not enough to offset the unfavorable gross margin rate impact of higher product costs.
These higher product costs, such as material, labor and freight, decreased our gross profit by $14 million in the quarter with $10 million of this impacting the Contractor segment.
At current cost and volumes, we estimate that on a dollar basis, realized price and increased factory volumes will offset higher product costs for the full year; however, these costs will continue to be decremental to the gross margin rate.
Supply chain constraints, such as logistics capacity and component availability, also had an unfavorable impact on our factory's ability to deliver in the quarter and will likely persist for the remainder of the year.
These challenges were predominantly felt in the Contractor segment as this is our highest volume business.
Operating expenses increased $20 million or 19% in the quarter.
Sales and volume-based expenses increased $9 million, new product spending increased $2 million and changes in currency translation rates increased operating expense by $1 million in the third quarter.
The adjusted tax rate for the quarter was 18%.
Cash flows from operations are $357 million for the year compared to $263 million last year.
This increase is due to the improvement in earnings, partially offset by increases in working capital that reflects the growth in business activity.
Significant uses of cash are dividend payments of $95 million and capital expenditures of $83 million, including $33 million for facility expansion projects.
A few comments as we look forward to the fourth quarter.
Subsequent to the end of the third quarter, Graco entered into an agreement, in which approximately $63 million of pension obligations were transferred to an insurance company through the purchase of an annuity contract.
The annuity contract purchase will be funded with existing plan assets.
This arrangement is part of the company's effort to reduce the overall size and volatility of its pension plan obligations.
We expect to recognize a noncash pre-tax pension settlement charge of approximately $12 million in other nonoperating expense in the fourth quarter.
Based on current exchange rates, the full year favorable effect of currency translation is estimated to be 2% on sales and 4% on earnings, with the most significant impact having occurred in the first half of the year.
Also for the remainder of 2021, we expect unallocated corporate expense to be approximately $26 million to $28 million.
The decrease from prior estimates is due to lower stock compensation expense for the year.
Our full year adjusted tax rate is expected to be 18% to 19%.
Capital expenditures are estimated to be $150 million, including $80 million for facility expansion projects.
Finally, 2021 will be a 53-week year with the extra week occurring in the fourth quarter.
Sales in the third quarter grew high single digits, driven by the continued recovery in both our Industrial and Process segments.
Contractor North America had difficult comparisons from last year's record third quarter.
Contractor demand was solid in Europe and Asia with double-digit gains in both regions.
Heading into the fourth quarter, business remains robust.
For the first three weeks of October, our global orders continued to outpace billings in all three segments.
Normally, we don't talk about backlog since most of our business is book and ship.
However, given the current environment, which is rife with component shortages and logistical disruptions, backlogs are worth mentioning.
At the end of the third quarter, our consolidated backlog was approximately $280 million, which is $25 million higher than what it was at the end of the second quarter, and $121 million higher than our backlog at the end of last year.
Orders are abundant; however, our biggest challenge is getting the materials and components we need and then navigating the logistical challenges inherent in today's environment.
We expect conditions to remain this way for a while, and there is nothing unique to what Graco is experiencing when it comes to these issues.
One more thing before commenting on our segments.
It's anticipated that our planned pricing actions in 2022 will be enough to fully offset current cost pressures.
Our annual pricing cadence has been appreciated by our channel partners and has tangible commercial value in the marketplace.
Now turning to some commentary on our segments.
I'll start with Contractor equipment.
The residential construction and home improvement markets remained strong globally.
On a dollar basis, incoming order rates have been relatively stable and overall demand has exceeded our expectations, given the surge that we experienced last year.
Contractor backlogs are elevated at $46 million, which is up $6 million from June and up $22 million from the same time last year.
The overall pace of business, including out-the-door sales, is robust.
The Industrial segment grew at high teens for the quarter, with year-to-date sales exceeding previous high set in 2018.
We experienced broad-based growth in all major end markets and reportable regions, which is a nice bounce back from what we faced a year ago.
Consistent with our other businesses, the biggest challenge in this segment is getting product out the door.
And user demand is very strong, and we anticipate this to continue for the balance of the year.
Process segment sales grew 21% for the quarter, with year-to-date sales exceeding previous high set in 2019.
Similar to Industrial, broad-based growth continues in all major end markets and reportable regions.
The recovery of both our lubrication and process pump businesses drove sales and earnings growth for the quarter in the segment.
Moving to our outlook.
With demand persisting, we confirm our full year outlook of mid- to high-teen organic revenue growth on a constant currency basis for the full year 2021.
While we expect continued headwinds from raw material costs, logistics, component availability in the fourth quarter, we believe we are positioned to deliver a record year.
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qtrly diluted net earnings per common share $0.66.
qtrly diluted net earnings per common share, adjusted $ 0.59.
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Dan Amos, Chairman and CEO of Aflac Incorporated, will begin with an overview of our operations in Japan and the US.
Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives, including how we are navigating the pandemic.
Members of our US executive management team joining us for the Q&A segment of the call are: Teresa White, President of Aflac US; Virgil Miller, President of Individual and Group Benefits; Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US.
We're also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan: Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; Koji Ariyoshi, Director and Head of Sales and Marketing and Assistant to Director Sales and Marketing.
Before we begin, some statements in this teleconference are forward looking within the meaning of federal securities laws.
Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature.
Actual results could differ materially from those we discuss today.
We encourage you to look at our Annual Report on Form 10-K for some of the various risk factors that could materially impact our results.
aflac.com and includes reconciliations of certain non-US GAAP measures.
I'll now hand the call over to Dan.
At our first quarter conference call one year ago, we were facing the early days of the pandemic.
At that time, I shared with you, actions that we've taken to ensure that we protect the employees, the distribution partners, the policyholders, and the communities.
I'm proud of our response and our ability to handle these challenging times for everyone.
Our People First embodies the spirit of corporate culture, which we refer to as the Aflac way.
Within the pandemic environment, we are encouraged by the production of the distribution of the COVID-19 vaccines.
But we also recognize that vaccination efforts are still in the early stages around the world.
Our thoughts and prayers are with everyone affected.
And we are cautiously optimistic, while also remaining diligent.
There is one essential message that I continue to emphasize with our management team.
It is imperative that we control the factors we have the ability to control.
And what we don't have the ability to control.
We must monitor continually to be ready to adapt.
This approach allows us to respond in the most effective way possible.
In the first quarter adjusted earnings per diluted share increased 26.4%.
While earnings are off to a strong start for the year, it's important to bear in mind that they are largely supported by low-benefit ratio associated with -- excuse me associated with a pandemic condition.
Before covering our segments, I'll make a few comments about the overall perspective.
Pandemic conditions in the first quarter continued to impact our sales results, as well as earn premium and revenues, both in the United States and Japan.
We continue to expect these pandemic conditions to remain with us through the first half of 2021, but look for improvement in the second half of the year, as communities and businesses, further open-up, allowing more face to face interactions.
Despite the fact that sales in both the United States and Japan had been suppressed considerably due to the constrained, face-to-face opportunities, we did not sit still.
We continue to make progress in integration of our accelerated investment in our platform, while continuing strong earnings performance.
Looking at the operations in Japan in the first quarter, Aflac Japan generated solid overall financial results with a profit margin of 23.1%, which was above the outlook range that we provided at the Financial Analyst briefing.
Aflac Japan also reported strong premium persistency of 95%.
Sales were essentially flat for the first quarter, with the January launch of our new medical product.
All said, that continued impact of the pandemic conditions.
We are encouraged by the reception of the new medical product, by both, consumers and the Salesforce.
In addition, Japan Post group's announcement, to resume proactive sales in April, paves the way for gradual improvement in Aflac Cancer Insurance sales in the second half of the year.
We are actively working with Japan folks to ready the platform, recognizing that it will take time to return to the full string.
We continue to navigate evolving pandemic conditions in Japan, including the recent reestablished state of an emergency, for Tokyo, Osaka and two other prefectures, affected from April, the 25th, through May the 11th.
Restrictions will be tightened to curb the movement of people and group activities during the major holiday known as Golden Week.
Turning to the US, we saw a strong profit margin of 27.3%, Aflac US also reported very strong premium persistency of 80%.
Max will cover the persistency later.
Current pandemic conditions continue to notably impact our sales results, largely due to reduced face-to-face activity.
As expected, we saw modest sequential sales improvement in the quarter with an overall decrease of 22.1%.
In the US Small businesses are still in the recovery mode, and we expect that they will be that way for most of 2021.
At the same time, larger businesses remain focused on returning employees to the worksite rather than modifying the benefits for their employees.
We strive to be where the people want to purchase insurance.
That applies to both Japan and the United States.
In the past, this is meeting face-to-face with individuals to understand their situation, propose the solution and close the sale.
Face-to-face sales are still the most effective way for us to convey the financial protection only Aflac products provide.
However, the pandemic has clearly demonstrated the need for virtual means.
In other words, non face-to-face sales that help us reach potential customers and provide them with the protection that they need.
Even prior to the pandemic, we've been working on building our virtual capacities.
Given the current backdrop, we have accelerated investments to enhance the tools available to our distribution in both countries, and continue to integrate these investments into our operation.
In addition, we continue to build out the US product portfolio with previously acquired businesses that serve as a base for Aflac network dental and vision and group, absence management and disability.
While these acquisitions have a modest near-term impact on the top line, they better position Aflac for future long-term success in the United States.
Our core earnings drivers, which are persistency, underwriting profits, investment income and expense ratios continue to drive strong pre-tax margins both in the United States and in Japan.
Both Japan and the US, we experienced sequential sales growth in the months of January, February and March.
In addition, provided we don't experience the setback in terms of pandemic conditions, we're forecasting a sequential increase in absolute sales in the second quarter over the first quarter in both the US and in Japan.
As always we placed significant importance on continuing to achieve strong capital ratios in the US and in Japan on behalf of our policyholders and shareholders.
We remain committed to prudent liquidity and capital management.
We issued our first sustainability bond in March as we seek to allocate proceeds from the issuance to reinforce our commitment to social and environmental initiatives as we balance purpose for profit.
We treasure our 38-year track record of dividend growth and remain committed to extending it, supported by the strength of our capital and cash flows.
At the same time, we will continue to tactically repurchase shares.
Focus on integrating the growth investments we've made in our platform.
By doing so, we look to emerge from this period in a continued position of strength, and leadership.
I've always said that the true test of strength is how one handles adversity.
This past year confirms what I knew all along, and that is that Aflac is strong, adaptable and resilient.
We will continue to work to achieve long-term growth, while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in a continued position of strength and leadership.
I don't think it's a coincidence that we've achieved success, while focusing on doing the right things for the policyholders, the shareholders, the employees, the sales distribution, the business partners and the communities.
In fact, I believe success, and doing the right thing go hand-in-hand.
I'm proud of what we've accomplished by balancing purpose with financial results.
This is ultimately translated into a strong, long-term shareholder value.
Now I turn the program over to Fred.
I'm going to touch briefly on current pandemic conditions in Japan and in the US, then focus my comments on efforts to restore our production platform in 2021.
Japan has experienced approximately 575,000 COVID cases and 10,000 confirmed deaths since inception of the virus.
Through the first quarter of 2021 and since the inception of the virus, Aflac Japan's COVID impact has totaled approximately 10,500 claimants with incurred claims of JPY1.9 billion.
We continue to experience a low level of paid claims for medical conditions other than COVID, as policyholders refrain from routine hospital visits.
There are essentially three areas of focus in building back to pre-pandemic levels of production in Japan.
Our traditional product refreshment activities, online sales driving productivity in the face of pandemic conditions and active engagement with Japan Post to begin the recovery process in cancer insurance sales.
As Dan noted, there has been a positive reception to our revised medical product.
This product was designed to better compete and the independent agent channel where we had seen a decline in market share heading into 2020.
Sales of medical insurance are up 34% over the first quarter of 2020 and up 8% over the 2019 quarter.
The new product called EVER Prime has enhanced benefits that on average result in 5% to 10% more premium per policy versus our old medical product.
The product also includes a low claims bonus structure that has contributed to growth among younger demographics.
We have technology in place to allow agents to pivot from face to face to virtual sales, and an entirely digital customer experience.
The agent is not removed from the process.
The agent can make the sale and process the policy from point of solicitation to point of issuance entirely online without face-to-face contact.
We introduced this capability in October of 2020 and for the month of November, we processed 1,600 applications utilizing this digital experience.
In the month of March that number doubled to approximately 3,200 applications.
Not surprisingly, we are seeing higher adoption rates among younger demographics.
On March, 26, we launched a national advertising campaign promoting the capability and expect to see increased utilization.
We see this capability contributing to productivity even after pandemic conditions subside.
On Japan Post, as Dan noted, we anticipate sales volume will recover gradually in the second half of 2021.
Separate from Japan Post activities to revive sales, Aflac Japan is actively supporting recovery in the sale of cancer insurance.
This includes reinforcing communication on Japan Post sales policy, down to the postal branch level, training and education on our latest cancer products, and sales proposal strategies and identifying existing cancer policyholders in the Japan Post system to both explain the benefits of their current products and create an opportunity for potential upgrade.
It's important to remember that the Japan Post sales force has been inactive for 18 months.
Therefore product training and sales coaching are critical efforts in the coming months.
Turning to the US, there is approximately 32 million COVID-19 cases and 575,000 deaths as reported by the CDC.
As of the end of the first quarter, COVID claimants since inception of the virus has totaled approximately 38,000, with incurred claims of $130 million.
Along with infection rates declining from peak levels in 2020, our data suggests hospitalization rates and days in the hospital have trended lower.
However infection hotspots in areas of the US remain.
And as is the case in Japan, there is concern over a potential fourth wave of infection.
Executive orders requiring premium grace periods are still in place in nine states with six states having open ended expiration dates, persistency has improved.
However, most of that improvement is attributed to the combination of state orders and lower overall sales as we typically experienced higher lapse rates in the first year after the sale.
Turning to recovery and restore efforts, we have seen our agent channel and small business benefit franchise hurt by the pandemic.
It's important to note that roughly 390,000 of our 420,000 US business clients have less than 100 employees, critical areas of investment include recruiting, training, technology advancement and product development, key indicators of recovery include agent and broker recruiting, a built in average weekly producers and traction in the rollout of our dental and vision products.
For the first quarter, we are running at approximately 70% of the average with the producers during the same period in pre-pandemic 2019.
Trends are positive, and we expect to narrow this gap throughout the year assuming pandemic conditions improve.
We are experiencing favorable recruiting numbers, have reopened training centers closed during the pandemic and veteran agents are reengaging, after a difficult year.
We are in the early days of our national rollout of Aflac network dental and vision.
Our dental product is approved in 43 states, and vision in 41 states with more states coming online throughout the year.
Network dental and vision is critical in the small business marketplace, and a key component to agent productivity, along with new account growth, retention and penetration or seeing more employees at a given employer.
This month, we are completing the national training programs, making select product refinements and reinforcing incentives to drive new dental accounts.
In addition, we are busy upgrading our administrative platforms to ready for increased volumes.
2021 is the year of launch, learn and adjust, and we expect to see our pipeline, close rate and new accounts gradually increasing throughout the year.
Our premier life and disability platform acquired from Zurich is now operating under the Aflac brand.
We have started to see our quoted pipeline build in the last 45 days.
However, many employee -- employers are reluctant to move critical benefit plans while sorting through returning to work site and changing workforce dynamics.
In addition, benefit consultants often proceed with caution in a year or so after an acquisition.
We need to remain patient over the next few years as we settle into this new line of business.
Our competitive calling card is the proven premier service and technology capabilities of the acquired platform, coupled with Aflac Group's core leadership in supplemental work site benefits.
We will not resort to winning business via relaxed underwriting and pricing standards in this highly competitive market.
Finally, earlier this year, we launched our new e-commerce direct-to-consumer platform, Aflac Direct.
We offer critical illness, accident and cancer and are approved in approximately 30 states with more states and product coming online throughout the year.
This platform targets individuals, the self employed, gig workers and part-time employees.
In short, those who are not offered traditional benefit packages at the work site.
We are actively building out a licensed agent call center to better manage conversion rates and control overall economics.
With a modest amount of committed marketing dollars, we are attracting about 500,000 visitors per month to aflac.com, which has resulted in 120,000 leads for call center conversion this year.
We are currently experiencing a 15% conversion rate once in the call center.
This is a data analytics-driven business and core metrics will improve as this model matures.
In terms of the contribution of these businesses to overall sales in 2021, we expect these three growth initiatives will make up roughly 10% of sales in 2021 after having contributed less than 5% to 2020 sales.
We remain committed to the revenue growth targets discussed at our November investor conference.
We expect these initiatives to drive incremental revenue in excess of $1 billion over the next five to seven years.
As these separate initiatives mature, they leverage off each other.
Network dental and vision drives agent recruitment and conversion to average weekly producers, employer paid benefits drives supplemental work site sales, and direct-to-consumer expands our addressable market, while being leveraged to funnel work site leads to our agents in the field.
In the future, as employees leave the work site, a digital relationship directly with Aflac helps with persistency and customer satisfaction.
As Dan noted, we issued our inaugural sustainability bond, raising $400 million to be invested toward our path to net zero emissions by 2050 and investments that support climate, as well as diversity and inclusion efforts.
The bond offering itself is an important step, in that it requires formal processes around reporting, tracking and auditing of qualified sustainable investments.
This rigor serves to benefit the control environment surrounding our enterprisewide ESG reporting and accountability.
In addition, Aflac Global Investments announced late February, a partnership with Sound Point Capital Management to create a new asset management business, focused on the transitional real estate loan market.
As part of that alliance, we have made an initial $1.5 billion general account allocation to the newly created Sound Point Commercial Real Estate Finance, LLC, with $500 million of that amount dedicated to providing transitional and other debt financing to support economically distressed communities, designated as qualified opportunity zones.
Aflac will hold a 9.9% minority interest in this newly created investment LLC, with the ability to grow our stake over time in line with future growth of the new venture.
I'll now pass on to Max to discuss our financial performance in more detail.
Let me follow my comments with a review of our Q1 performance, with a focus on how our core capital and earnings drivers have developed.
For the first quarter, adjusted earnings per share increased 26.4% to $1.53, with a $0.02 positive impact from FX in the quarter.
This strong performance for the quarter was largely driven by lower utilization during the pandemic, especially in the U.S. and a lower tax rate compared to last year.
Variable investment income went $24.5 million above our long-term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses, grew 20.6%, and the adjusted ROE, excluding the foreign currency impact, was a strong 16.7%, a significant spread to our cost of capital.
Starting with our Japan segment.
Total earned premium for the quarter declined 3.6%, reflecting first sector policies paid up impact, while the earned premium for our third sector product was down 2.2%, as sales were under pressure in 2020.
Japan's total benefit ratio came in at 68.4% for the quarter, down 100 basis points year-over-year, and the third sector benefit ratio was down -- was 58%, also down 100 basis points year-over-year.
We experienced slightly higher than normal IBNR release in our third sector block as experience continues to come in favorable relative to initial.
This quarter, it was primarily due to pandemic conditions constraining utilization.
Persistency remains strong, with a rate of 95%, up 50 basis points year-over-year.
Our expense ratio in Japan was 21.3%, up 130 basis points year-over-year.
With improved sales activity, expenses naturally pick up in our technology-related investments into converting Aflac Japan to a paperless company continues, which also includes higher system maintenance expenses.
Adjusted net investment income increased 6.9% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed and floating rate portfolio.
The pre-tax margin for Japan in the quarter was 23.1%, up 60 basis points year-over-year, a very good start to the year.
Turning to the US, net earned premium was down 4.1% due to weaker sales results.
Persistency improved 240 basis points to 80%, as our efforts to retain accounts and reduce lapsation show early positive results.
As Fred noted, there are still nine states with premium grace periods in place.
So we are monitoring these developments closely.
Breaking down the 240 basis points persistency rate improvement further, 70 basis points can be explained by the emergency orders in place, 90 basis points by lower sales as first year lapse rates are roughly twice total in-force lapse rates.
And the residual of 80 basis points includes conservation efforts executed on last year.
Our total benefit ratio came in much lower than expected.
At 39.1%, a full 900 basis points lower than Q1 2020.
In the quarter, we experienced lower paid claims, especially in the month of January, as pandemic conditions impacted behavior of our policyholders.
This is in line with disclosures in 2020, indicating a negative correlation between infection levels and claims generating activities like accidents, elective surgeries and physical exams.
This low activity level related to non-COVID claims accounted for most of the year-over-year drop in the benefit ratio.
Our total incurred COVID-related claims also came in lower than expected due to an IBNR release.
We estimated new COVID claims at approximately $42 million, and this was offset by an IBNR release of $41 million.
As our experience accumulates, we have refined our assumptions, and this led to this IBNR reserve release.
We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders.
For the full year, we now expect our benefit ratio to be toward the lower end or slightly below our guided range of 48% to 51%.
Our expense ratio in the US was 38.5%, up 10 basis points year-over-year, but with a lot of moving parts.
Weaker sales performance negatively impacts revenue.
However, the impact to our expense ratio is largely offset by lower DAC expense.
Higher advertising spend increased the expense ratio by 70 basis points along with our continued build-out of growth initiatives, group life and disability, network and innovation and direct-to-consumer.
These contributed to a 110 basis point increase to the ratio.
The strategic growth initiative investments are largely offset by our efforts to lower core operating expenses as we strive toward being the low-cost producer in the voluntary benefit space.
Net-net, despite a lot of moving parts, Q1 expenses are tracking according to plan.
In the quarter, we also incurred $6 million of integration expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the US was down 0.6% due to a 22 basis points contraction in the portfolio yield year-over-year, partially offset by favorable variable investment income.
Profitability in the US segment was very strong, with a pre-tax margin of 27.3%, with a low benefit ratio as the core driver.
With Q1 now in the books, we are increasing our pre-tax margin expectation for the full year.
Initial expectations were for us to be toward the low end of 16% to 19%.
We now expect to end up for the full year toward the high end of this range indicated at start.
In our Corporate segment, we recorded a pre-tax loss of $26 million as adjusted net investment income was $20 million lower than last year, due to lower interest rates at the short end of the yield curve.
Other adjusted expenses were $7 million lower as our cost reduction activities are coming through.
Our capital position remains strong, and we ended the quarter with an SMR north of 900% in Japan and an RBC of approximately 563% in Aflac Columbus.
Unencumbered holding company liquidity stood at $3.9 billion, $1.5 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments.
Leverage, which includes the sustainability bond, increased but remains at a comfortable 23% in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $650 million of our own stock and paid dividends of $227 million, offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital.
And with that, I'll hand it over to David to begin Q&A.
[Operator Instructions] Natasha, we will now take the first question.
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q1 adjusted earnings per share $1.53.
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These statements are based on management's expectations, plans and estimates of our prospects.
Today's statements may be time sensitive and accurate only as of today's date, Thursday, October 21, 2021.
We assume no obligation to update our statements or the other information we provide.
Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.
Our team continued its strong performance in 2021 by delivering another great quarter, highlighted by increased in-service occupancy, new development leasing and continued strong growth in rental rates on new and renewal leasing.
As importantly, we were also successful in readying land for new development starts and replenishing our pipeline with strategic land acquisitions.
I'll discuss those successes in more detail shortly, but let me first update you on the overall strength of the U.S. industrial market.
Per CBRE EA, net absorption was a healthy 120 million square feet in the third quarter, while completions came in at 79 million square feet.
Through the first three quarters of this year, net absorption was 292 million square feet, significantly outpacing new supply of 193 million.
In our portfolio, we grew occupancy 50 basis points to finish the third quarter at 97.1%.
Cash, same-store NOI increased 6.9% and cash rental rates for new and renewal leases were up 22.8%.
Looking at rental rate growth for the full year.
As of today, we have signed roughly 98% of the 2021 expirations and including new leasing, our overall cash rental rate increase is 15.3%, which puts us on pace to top our previous company record of 13.9% in 2019.
With respect to 2022 expirations, we're off to a great start with 29% of renewals signed and a cash rental rate increase of 19%.
Let me move now to the primary driver of our external growth, our Development program.
As most of you know, as part of our underwriting process and risk management discipline, we operate with a self-imposed speculative leasing cap.
Due to continued robust fundamentals in the industrial market, the strength of our balance sheet and growth in our portfolio and the significant opportunities we have to create shareholder value through new investments, we've increased our speculative leasing cap by $175 million, bringing the total to $800 million.
Now, let me walk you through our recent land acquisitions, as well as three exciting new development starts that will put some of the incremental cap capacity to good use.
During the third quarter, we closed on three development sites, totaling 122 acres for $59 million.
two are in the Inland Empire East and the third is in Denver.
In total, these sites can accommodate up to 2.1 million square feet of new development.
And one of the new Inland Empire East sites, we are starting our First Pioneer Logistics Center, a 461,000 square foot cross-dock facility.
Our total projected investment is $73 million, with a targeted cash yield of 6.8%.
The Inland Empire continues to be one of the strongest logistics real estate markets in the U.S., helped by significant net absorption from activity related to the two largest ports in North America.
Market vacancy in the Inland Empire is sub-2%, and market rents have grown more than 80% since we went under contract on this site in early 2020.
We look forward to adding this prime asset to our Southern California portfolio, which represents approximately 23% of our rental income, as of the end of the third quarter.
Moving to the East Coast.
We are starting another development in South Florida to serve the strong tenant demand, we have experienced there, with our recent leasing successes at First Park Miami and First 95 Distribution Center.
FirstGate Commerce Center will be a 132,000 square foot, Class A distribution facility in the infill Coral Springs submarket.
Market rents in Broward County have grown 15% to 20% since the end of 2019.
Our total estimated investment is $24 million, and our targeted cash yield is 5.5%.
In the fourth quarter, we acquired a site in Bordentown, New Jersey, just off of Exit 7, on the Jersey Turnpike, for $8 million.
We immediately started construction, a First Bordentown Logistics Center, a 208,000 square foot facility.
We look to build upon our past successes in this location, where our two prior developments were leased near-construction completion.
The Central New Jersey market has been exceptionally strong, with asking rents up 34% versus last year, according to a recent market report from CBRE.
Our total projected investment is $33 million, with an estimated cash yield of 5.8%.
In summary, these three planned fourth quarter starts total approximately 800,000 square feet, with an estimated investment of $130 million and a cash yield of 6.3%.
Including these planned starts, our developments in process totaled 6.4 million square feet, with a total investment of approximately $725 million.
At a cash yield of 6%, our expected overall development margin on these projects is approximately 65%.
With development as our primary driver of external growth, we're also focused on replenishing our land holdings.
In the fourth quarter to date, in addition to the New Jersey site, I just discussed, we also acquired a total of 10 acres in the Inland Empire and Northern California for a total of $10 million.
As of today, adjusted for our planned fourth quarter starts and the aforementioned land acquisitions, our balance sheet land can support approximately 12.5 million square feet of new development.
Our share of the Phoenix Camelback joint venture is an additional 3.8 million square feet.
In total, that's north of 16 million square feet and represents approximately $1.7 billion of potential new investment activity.
Now, let me update you on our recent Development leasing successes.
We just leased the entire 548,000 square footer at First Park @ PV303, in Phoenix, at completion, to a leading omnichannel retailer.
As part of this lease, we are also expanding the building, another 254,000 square feet, for a total of 802,000 square feet.
The total estimated investment for the project, including the expansion is $72 million, and the estimated cash yield is 6%.
The tenant is expected to take occupancy of the just-completed space by year-end, with the expansion ready for use in the second quarter of 2020.
We also leased 100% of our 303,000 square foot First Wilson Logistics Center in the Inland Empire that will be completed in the first quarter of 2022.
With a cash yield of 8.7%, we substantially outperformed our underwritten yield.
This lease further showcases the rapid rental rate growth in the Inland Empire that I discussed earlier.
We are pleased that we have land sites in this high-growth market that can support another 2.8 million square feet of development.
As another example of the strength of the Southern California market and our platform, we just leased our Laurel Park redevelopment project in the South Bay.
This property is very well suited for port-centric warehouse distribution users, given its great location and highly sought-after yard for surface use.
Our first year yield is 7.5% on our $21 million investment, which represents a margin of around 150%.
Moving on to sales.
During the quarter, we sold six properties and four units for $14 million.
And in the fourth quarter, we have sold four additional buildings in Detroit, totaling $7 million, bringing our year-to-date total to $126 million.
Given current visibility on our disposition pipeline, we now expect sales for the year to total $175 million to $225 million, a $75 million increase from the prior midpoint of $125 million.
Let me start by summarizing our results and leasing stats for the third quarter.
NAREIT funds from operations were $0.51 per fully diluted share, compared to $0.49 per share in 3Q 2020.
Excluding approximately $0.04 per share of income related to the final settlement of an insurance claim, 3Q 2020 FFO was $0.45 per share.
Our cash basis same-store NOI growth for the quarter, excluding termination fees, was 6.9%, primarily due to higher average occupancy, an increase in rental rates on new and renewal leasing, rental rate bumps and lower bad-debt expense, slightly offset by an increase in free rent.
We commenced approximately 2.4 million square feet of leases.
Of these, 500,000 were new, 1.4 million were renewals and and 500,000 were for developments and acquisitions with lease-up.
Tenant retention by square footage was 85%.
Cash rental rates for the quarter were up 22.8% overall, with renewals up 21% and new leasing up 27.5%.
And on a straight-line basis, overall rental rates were up 36.2%, with renewals increasing 34.9% and new leasing up 39.5%.
Moving on to some capital markets activity.
As previously announced in early July, we closed on two financing transactions.
First, we expanded our line of credit to $750 million and improved our pricing to LIBOR plus 77.5 basis points, a reduction of 32.5 basis points, compared to our prior facility.
The maturity is now pushed out five years, including our two six-month extension options.
We also refinanced our $200 million term loan.
The new term loan matures in July 2026 and has an interest rate of LIBOR plus 85 basis points, a reduction of 65 basis points in the spread, compared to our prior facility.
With our interest rate swaps in place, the new fixed interest rate on the term loan is 1.84%.
On the equity side, through our ATM, we issued 1.1 million common shares, at a weighted average price of $55.35 per share, for total net proceeds of $59 million to help fund the new investments, Peter spoke about.
Our guidance range for NAREIT FFO is now $1.93 to $1.97 per share, which is a $0.02 per share increase at the midpoint, reflecting our third quarter performance and an increase in capitalized interest due to our announced development starts.
Key assumptions for guidance are as follows: in-service occupancy at year-end of 96.75% to 97.75%.
This implies a full year quarter-end average in-service occupancy of 96.5% to 96.8%, an increase of 15 basis points at the midpoint.
Fourth quarter same-store NOI growth, on a cash basis, before termination fees of 6% to 7.5%.
This implies a quarterly, average same-store NOI growth for the full year 2021 of 4.3% to 4.7%, an increase of 25 basis points at the midpoint due to our third quarter performance.
Please note that our full year same-store NOI guidance excludes the impact of approximately $1 million from the gain from an insurance settlement.
Our G&A expense guidance is now $34 million to $35 million, an increase of $1 million at the midpoint, and guidance includes the anticipated 2021 costs related to our completed and under-construction developments at September 30, plus the expected fourth quarter starts of First Pioneer Logistics Center, First Gate Commerce Center, and First Bordentown Logistics Center.
In total, for the full year 2021, we expect to capitalize about $0.08 per share of interest.
We're excited about our growth prospects, as we continue to put into production our landholdings that can currently support more than 16 million square feet of value-creating developments.
We are also focused on replenishing our pipeline with new sites in higher-barrier markets.
We continue to benefit from robust sector fundamentals that are reflected in strong net absorption, high occupancy levels and increasing rents.
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q2 earnings per share $0.40.
q2 ffo per share $0.48.2021 ffo guidance increased $0.03 at midpoint to $1.93 per share/unit.
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We're obviously quite content to being able to provide black numbers, maybe to the surprise of many of you.
Q1 '21 was a fairly quiet quarter corporate-wise as we are in a good position financially and no major transactions were concluded during the quarter.
We continue from Frontline a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-19 infections.
Our technical and operations team are doing a fantastic job in mitigating the challenges that arise and I'm very happy to report that they are well under way in vaccinating our sailors.
Let's move to Slide 3 and have a look at the highlights.
The Q1 '21 performance is very much a testament to keeping true to our strategy.
Being mostly spot exposed and not expecting an imminent recovery in the market, our charter investment remains true to trading the ships in a month where we allow our vessels to commit to long voyages securing income but potentially giving away upside.
Our modern fuel-efficient fleet is built for this purpose and it also gives us this flexibility.
This proved to be the right call.
In the first quarter of 2021, we made $19,000 per day our VLCC fleet, $15,000 per day on our Suezmax fleet, and $12,000 per day on our LR2/Aframax fleet.
So far in Q1, we have booked 70% of our VLCC days at $18,100 per day, 63% of our Suezmax days have $13,600 per day, and 59% of LR2/Aframax days have $14,200 per day.
All these numbers in the table are on the load to this chart basis.
Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well.
We took delivery of two of our four LR2s coming this year.
Front Fusion and Front Future in March and April respectively, bringing our number of LR2s on the water to 20.
Further, subsequently, we confirmed acquisition through the resale of six high-spec ECO-scrubbers fleet of VLCCs to be delivered from Hyundai Heavy Industries in Korea.
Five in 2022 and one early in 2023.
I'll now let Inger take you through the financial highlights.
Let's turn the slide to Slide 4 and look at the income statement.
As I said, we are happy to report numbers in black, and Frontline achieved total operating revenues and work expenses of $107 million in the first quarter.
We also have an adjusted EBITDA of $59 million and net income of $28.9 nine million, or $0.15 per share.
Further, we have an adjusted net income of $8.8 million or $0.04 cents per share.
The adjustments consist of a $15.7 million gain on derivatives, a $3.1 million unrealized gain on marketable securities, a $1.2 million on amortization on acquired time charters, and $0.1 million results of associated companies.
The adjusted net income in the first quarter has increased by $21 million compared with the previous quarter.
The increase was driven by a decrease in ship operating expenses of $11 million, mainly as a result of $6.4 million lower dry-docking fund.
We also had an increase of cash and cash equivalents of $6.4 million and that was due to the prior TCE rates, as well as we had a $11.2 million decrease in other costs.
Let us then take a look at the balance sheet on Slide 5.
The total balance sheet numbers have increased by $10 million in the first quarter.
The balance sheet movements in the quarter were related to taking delivery of the energy sector from Fusion in addition to ordinary debt payments and depreciation.
As of March 31, 2021, Frontline had $318 million in cash and cash equivalents including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimal cash requirements.
Let's then take a closer look on Slide 6 on the cash breakeven rates and the opex.
We estimate that risk cash costs break-even rate will remain for 2021 of approximately $21,500 per day for VLCC, $17,700 for days for the Suezmax tankers, and $15,900 per day for LR2 tankers.
This gave a fleet average of about $18,100 per day.
These rates, they are all-in day rates.
That's our vessel rates to cover budgeted operating costs and dried up estimated interest expenses, TCE, and bearable high, and installments on loans, and G&A expenses.
In the quarter, we recorded opex expenses of $7,300 per day for the VLCCs, $7,100 a day for the Suezmax tankers, and $7,200 for the LR2 tankers.
We did dry dock one Suezmax tanker in the first quarter only, and we expect to dry dock up two Suezmax tankers and four LR2 tankers in the second quarter.
Let's then look at the graph on the right hand of the slide.
As usual, we show the incremental cash flow after debt service per year and per share.
Assuming $10,00, $20,000, $30,000, or $40,000 per day achieve rates in excess of all the cash breakeven rates.
The numbers include vessel on timeshare are distant from building deliveries.
And then looking at the period of 365 days from April 1, 2021.
So in this graph, as an example, with a fleet average cash possibly breakeven rates of $18,100 per day and assuming $30,000 on top of the average fleet earnings, then the TCE rate would be $48,100 one per day.
A strong fund would then generate a cash flow per share of the debt service of $3.45.
With this, I'll leave the word to Lars again.
And let's move to Slide 7 and have a look here for a recap of the Q1 '21 tanker market.
And it goes without saying that it's been somewhat demanding.
So total world oil consumption rose by 4.3 million barrels from January to March and reached to 96.5 million barrels per day.
On the other hand, supply fell by 0.5 million barrels.
This was mostly fueled by the actions from Saudi Arabia and their volunteer cuts to -- turn it up at 93.5 million barrels per day at the end of the quarter.
As we continued to draw on inventory, tanker demand remained basically unchanged.
We did, during the quarter, see return of Libyan volumes.
And we had toward the end of the quarter a U.S. -- the U.S. cold snap that created a lot of volatility.
So tanker rates firmed toward the end of the quarter, and this is I find quite positive because it actually is indicating a thinner balance than what may be perceived.
So basically, to wrap up Q1, we see demand or consumption is running ahead of supply and the draw on inventories is come for mitigating that volume.
If you look at the chart on the right-hand side, you see what I refer to as a ripple rather than a very strong market, but we see how quickly rates react where we saw, firstly, the Aframax market move in line with the Libya opening up.
cold snap, affecting what was inside of the U.S. Gulf.
So let's move on to Slide 8 and look at the tanker order books.
On all asset classes, we are observing delayed recycling.
We see very little support for keeping older tonnage in this market.
But they remain in the fleets.
Recycling prices are up 30% year to date and are now count being negotiated around %550 per long ton or $23 million for a VLCC.
This is, to some extent, being outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price -- buyers with relatively firm prices.
The overall tanker order book has shrunk year to date by approximately 4%.
This as vessels deliver and new ordering has been fairly muted.
We've seen on the VLCC's 20 new -- 28 new orders placed, but as 25 vessels are delivered at the same time, the order book remains to be fairly flat.
The VLCC order book stands at around 9% of the existing fleet, and the overall order book for tankers is up to around 7% of the existing fleet.
Let's move to Slide 9 and recap what's going on the asset prices.
So the asset prices are on the move.
We have, over the last six months, see more -- seen more than 170 new orders for containerships.
We've also seen quite some ordering on LPG.
And also seeing confirmation of LNG orders, which has further contributed to the activity.
And in line with the entire commodity space, steel prices have appreciated sharply.
The fundamentals of the tanker market suggest a tightening of capacity over the coming years.
And the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel-efficient ships.
Propulsion is yet not the driver.
Right now, it's the yard capacity or rather the lack of it which is driving prices together with the steel.
So let's move to Slide 10 and look at the short-term outlook.
So we're currently right in the middle of OPEC plus productions increasing.
They are increasing somewhat slowly, but they are adding to transportation demand.
Currently, Asia, and in particular, China, are coming out of refinery maintenance.
And oil demand continues to recover.
and Europe in focus as we're coming out of lockdowns.
Inventories, both on land and floating, are now normalized and at pre-COVID-19 levels.
From where we are now, according to EIA, oil supply is expected to grow by 6 million barrels by year-end.
If you look at the graph on the left-hand side below, we see that most of these increases are expected to happen basically from where we stand now and over the summer.
The key to the demand bounces in 2021, you can find on the right-hand side.
We know that gasoline demand fell by 3.3 million barrels per day in 2020.
And it's now expected to grow by 1.8 million barrels per day in 2021.
For jet, it's affected the crude oil balances by 3.2 million barrels per day and negative in 2020 and about 1.3 million barrels per day is expected to return this year.
For diesel, we're actually adding more than we lost, 1.2 million barrels per day.
For fuel oil, we're keeping at level.
Other kind of uses of oil is also linked to this at 0.7 million barrels per day.
Let's move over to Slide 11 and my summary.
So basically, to wrap this up, all key macro indicators points toward a firm recovery.
And global GDP is expected up 6% this year.
Asset prices are on the move as yard capacity is tightening and steel prices are increasing.
I've just mentioned, global oil supply is expected to grow by 6 million barrels by the end of 2021.
The COVID-19 vaccination pace in the developed countries is very encouraging and countries are opening up.
We can see on the graph below, which indicates activity within the various key segments of the shipping sector.
That the cyclical recovery run has started.
All key shipping sectors are firm.
The tankers are lagging.
Frontline is ideally positioned to capitalize on the anticipated recovery in tanker markets with our modern, spot-exposed, fuel-efficient fleet.
And with that, I would like to open up for question-and-answer session.
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q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.18 billion.
net interest income $1.0 billion for quarter, up 27.5% compared to q2 a year ago.
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These risks and uncertainties may cause actual company results to differ materially.
On the call today are Kathy Warden, our chairman, CEO, and president; and Dave Keffer, our CFO.
Kathy Warden -- Chairman.
We delivered another quarter of strong results in an increasingly complex environment.
In the last quarter, we've seen developments in the global fight against COVID-19 and macroeconomic changes, such as a tightening labor market, supply chain challenges, and growing inflation.
But we've also seen evolving threats to our National Security, which has further eliminated the value of Northrop Grumman products and services.
I am proud of how our team has demonstrated remarkable resiliency and adaptability during these dynamic times.
Our company continues to deliver strong operating performance.
As we announced earlier today, we had a segment operating margin rate of 11.9% in the third quarter, and year to date, an exceptional segment operating margin rate of 12%.
In addition, earnings per share in the quarter were $6.63, an increase of 13% compared to last year.
And our transaction-adjusted free cash generation continues to be strong, increasing 15% year to date.
We ended the quarter with just over $4 billion in cash, providing significant flexibility in support of our capital deployment initiatives.
With respect to the top line, our year-to-date organic growth was 8%.
This robust growth reflects the alignment and strength of our broad portfolio to our customers' priorities and future needs.
As expected, our organic growth rate slowed in the quarter from the rapid pace that we saw in the first half of the year.
In addition to having fewer working days in the second half of the year, which we discussed on each of our last two calls, we are also seeing an impact on our sales from the broader economic environment due to COVID-19.
During the third quarter, this included employee leave-taking at a higher level than planned, a tighter labor market, and certain supply chain challenges.
We continue to focus on the safety and well-being of our employees, customers, and partners as we work to mitigate the impact of these factors.
As you know, the president recently issued an executive order generally requiring employees to federal contractors to be fully vaccinated by early December.
We have shared the details of this mandate with our U.S. workforce, and we are working to help them meet the requirements.
We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increased attrition.
Based on the team's strong third-quarter performance and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment OM and earnings per share for the year and narrowing our sales guidance to approximately $36 billion.
Dave will provide more details on the quarter, our updated guide, as well as our initial outlook for 2022.
Turning to budget updates from Washington.
We're seeing strong bipartisan support for National Security broadly and Northrop Grumman programs specifically.
We are pleased that an agreement was reached on the continuing resolution and debt ceiling that will fund the government through December 3.
We are hopeful that Congress will finalize the fiscal year 2022 appropriations and avoid a protracted continuing resolution.
With respect to the FY '22 defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request.
We are hopeful that this additional funding will be supported in final appropriations.
Over the past several weeks, senior customers, members of Congress, and administration officials have made increasingly public comments about strategic competition in the National Security environment and the need to counter and deter evolving threats.
One clear and consistent message has been the need to invest in and more rapidly field advanced capabilities.
Our company's portfolio and capabilities are strongly aligned to the five National Security priority areas, particularly in advanced weapons, strategic deterrence, mission systems, and space.
And we're using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio.
I'll share a few highlights to demonstrate how our performance today continues to position us for the future.
With the emergence of more sophisticated air defense systems, the need for standoff capabilities and speed to target is critical for our customers.
To address this requirement, Northrop Grumman developed AARGM-ER, a high-speed, long-range air-to-ground missile.
And in the third quarter, after just 28 months in engineering, manufacturing, and development, we achieved a critical milestone, clearing the wafer production.
In September, we received our first low-rate initial production award for the program.
Also during the quarter, we, along with our industry partner, Raytheon, successfully tested the hypersonic air-breathing weapon concept known in HAWC.
Northrop Grumman supplies the scramjet propulsion system for HAWC, allowing speeds of greater than Mach 5.
AARGM-ER and HAWC are just two examples of how we're providing the higher speed and longer-range weapons needed to be relevant in today's threat environment.
Another key area where we are supporting our customers is in the need and urgency to enhance our country's strategic deterrence capabilities, especially in light of recent disclosures of investments that other nations are making in modernizing their strategic capabilities.
The triad is the foundation of the security strategy for the U.S. and its allies and has been an effective deterrent for decades, preserving peace and deterring aggression.
As highlighted by recent customer and administration comments, modernizing the triad remains a high priority.
Northrop Grumman is the prime on two of the three legs of the triad with the bomber and strategic missiles, and we're a significant supplier for submarines as well.
For the bomber, the B-21 program continues to advance.
As Air Force Secretary, Frank Kendall recently noted, there are now five units in various stages of production and the systems are, in his words, making good progress to real fielded capability.
For strategic missiles, we continue to make solid progress on the EMD portion of the ground-based strategic deterrent program.
We completed key milestones earlier this year, and we are tracking toward our first flight as planned.
The GBSD program has ramped significantly this year, and we now expect that it will add just over $1 billion in incremental revenue to our 2021 results and another approximately $500 million of incremental revenue in 2022.
For both B-21 and GBSD, we have applied digital transformation concept as a key enabler to reduce risk, increase productivity, shorten cycle time, and improve the system's ability to adapt to changing threats.
In today's rapidly changing threat environment, our Mission Systems portfolio, including in communications and artificial intelligence, is making a critical contribution in the advancement of technology and capability needed to allow legacy platforms to be more capable and survivable, and therefore, more relevant toward addressing the increasingly sophisticated threats.
To this end, during the third quarter, our next-generation electronic warfare system, which will equip domestic F-16, had its first test flight on a testbed aircraft at the Northern Lightning exercise.
This system, in conjunction with our SABR radar, demonstrated full interoperability in a simulated contested electromagnetic spectrum environment.
With the radio frequency spectrum becoming increasingly contested, this critical set of electronic warfare capabilities will allow the platform to remain survivable.
We anticipate an EMD contract for next-generation electronic warfare in 2022 with an overall lifetime opportunity of up to $3 billion.
And in Missile Defense, emerging threats from hypersonic missiles are creating new challenges for customers.
We are helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise.
Earlier this year, we were awarded a contract to deliver a prototype satellite as part of MDA's hypersonic and ballistic tracking-based sensor, HBTSS, program.
This program is designed to detect and track hypersonic vehicles which have a very different flight profile and signature than ballistic missiles.
They required new sensing capabilities in order to detect and track them.
In September, we conducted a successful HBTSS critical design review and are progressing toward a 2023 launch.
In the space domain, Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threats.
Many of these programs are classified.
And consistent with increased demand in this area, we received $1.2 billion in restricted space awards in the third quarter.
I've touched on several major contributions that we've made this quarter to National Security, all of which highlight our strong performance, technology leadership, and broad portfolio.
I also want to share examples of our collaboration with partners to accelerate innovation and create discriminating technologies.
As I've noted before, we are actively engaging in partnering with early stage technology and nontraditional defense companies.
In the quarter, we closed an investment in Orbit Fab, a space logistics company whose goal is to put gas stations in space.
Their vision fits well with our on-orbit satellite refueling and space logistics capabilities.
We also continue to work with Deepwave Digital, an innovative company we invested in at the end of last year.
Deepwave Digital provides a hardware and software solution, enabling very efficient AI-enhanced, software-defined radios for deep learning applications at the edge, which we believe will enhance our efforts in both autonomy and JADC2.
These partnerships, as well as other venture investments, support our strategy to create solutions at speed for our customers' toughest national security challenges.
I'll begin my comments with third-quarter highlights on Slide 3.
We continued to generate strong operating results, delivering another quarter of solid organic sales growth, higher segment operating margin rate, and outstanding earnings per share and transaction-adjusted free cash flow.
We continued to return cash to shareholders through our buyback program and quarterly dividend, returning over $800 million in the quarter.
Slide 4 provides a bridge between third-quarter 2020 and third-quarter 2021 sales, excluding sales from the IT services divestiture, our organic growth was 3%.
This rate was below our first-half growth due in part to the broader labor market and supply chain trends that Kathy outlined.
Next, I'll review our earnings per share results on Slide 5.
Compared to the third quarter of 2020, our earnings per share increased 13% to $6.63.
Strong segment operational performance contributed about $0.14 of growth and lower corporate unallocated added another $0.55.
This included a $60 million benefit from insurance settlements related to shareholder litigation involving the former Orbital ATK business prior to our acquisition.
Corporate unallocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible asset amortization and PP&E step-up depreciation.
Pension costs contributed $0.17 of growth, driven by higher non-service FAS income.
Our marketable securities performance represented a headwind of $0.17 compared to the third quarter of 2020, which benefited from particularly strong equity markets.
Lastly, we experienced a slightly higher federal tax rate in the period due to lower benefits from foreign-derived intangible income.
Turning to sector results on Slide 6.
We saw some broad-based COVID-related impact.
the most significant of which were in our Aeronautics sector.
Aeronautics sales declined 6% for the quarter.
Year to date, its sales are down 1%.
As we've described in recent quarters, several programs in our AS portfolio are plateauing or entering a phase of their life cycle where you would not expect to see growth.
This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts, F-35, B-2 DMS, and Global Hawk programs.
We expect this overall trend to continue at AS in 2022, which we'll discuss in more detail momentarily.
At Defense Systems, sales decreased by 24% in the quarter and 22% year to date.
On an organic basis, sales were down roughly 2% in the quarter and year-to-date periods driven by the completion of our activities on the Lake City small-caliber ammunition contract last year.
Lake City represented a sales headwind of roughly $75 million in the quarter and $335 million year to date.
This was partially offset by higher volume on several mission-readiness programs.
Mission Systems sales were down 5% in the quarter and up 4% year to date.
Organically, MS sales increased 1% in Q3, and year to date, they are up a robust 9%.
As we've noted previously, the timing of material volume at MS has been weighted more toward the first half of 2021 than the second.
Organic sales growth in the third quarter and year-to-date periods was broad-based across programs such as G/ATOR, JCREW, and various restricted efforts.
And finally, Space Systems continued to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year to date.
Sales in both business areas were higher in the quarter and year-to-date periods reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs and Artemis.
Turning to segment operating income and margin rate on Slide 7.
We delivered another quarter of excellent performance with segment operating margin rate at 11.9%.
Aeronautics third-quarter operating income decreased to 10% due to lower sales volume and a $42 million unfavorable EAC adjustment on the F-35 program.
The adjustment was driven by labor-related production inefficiencies, reflecting COVID-related impacts on the program.
The AS operating margin rate decreased to 9.7% in Q3 as a result of this adjustment with year-to-date operating margin slightly ahead of last year at 10.1%.
The Defense Systems operating income decreased by 19% in the quarter and 16% year to date largely due to the impact of the IT services divestiture.
Operating margin rate increased to 12.4% in the quarter and 12% year to date, largely driven by improved performance and contract mix in Battle Management and Missile Systems, partially offset by lower net favorable EAC adjustments.
At Mission Systems, operating income was relatively flat in the quarter and up 10% year to date.
Third-quarter operating margin rate improved to 15.3% and year to date was 15.5%, reflecting strong program performance and changes in business mix as a result of the IT services divestiture.
Space Systems operating income rose 29% in the quarter and 36% year to date, driven by higher sales volume.
Operating margin rate was also higher at 10.7% in the quarter and 10.9% year to date, driven by higher net favorable EAC adjustments.
Moving to sector guidance on Slide 8.
Note that this outlook assumes a relatively consistent level of impact in Q4 with what we've been experiencing so far this year from the effects of COVID on the workforce and supply chain, and it does not include any potential financial impacts on the company related to the vaccine mandate.
We have updated our 2021 sales estimates for each segment based on our year-to-date results and current expectations for Q4.
For operating margin rate, we're increasing our guidance at Defense and Space, and the margin rates at AS and MS remain unchanged.
Before we get to our consolidated guidance, I'd also like to take a moment to discuss some of the factors to consider in comparing our fourth-quarter revenue to last year on Slide 9.
In Q4 of 2020, the IT services business contributed almost $600 million of sales, and the equipment sale at AS generated over $400 million.
Q4 of 2021 also has four fewer working days than the same period in 2020, representing a headwind of about 6%.
Adjusting for these three items, our Q4 2021 sales would grow at 3% to 4% based on our latest full-year guidance.
Moving to Slide 10.
Based on what we now see, we expect sales of approximately $36 billion.
We're raising our 2021 outlook for segment and total operating margin and for EPS.
Our segment operating margin rate guidance is 10 basis points higher at 11.7% to 11.9%, reflecting our continued strong performance.
Our net FAS/CAS pension adjustment has increased $60 million for the full year as a result of the annual demographic update we performed in Q3.
Other corporate unallocated costs are $70 million below our previous guidance, now at approximately $120 million for the year.
As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3, as well as additional benefits from state taxes.
These updates translate into an increase of 50 basis points in our operating margin rate to a range of 16% to 16.2% in our updated guidance.
Remember that the gain from the IT services divestiture in Q1 contributed approximately 5 percentage points of overall operating margin benefit for the full year.
We continue to project the 2021 effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance.
Lastly, we're raising our earnings per share guidance, which I'll cover on Slide 11.
Segment performance is contributing about $0.15 of the increase with the benefits to corporate unallocated and pension contributing the remainder.
In total, this represents an $0.80 improvement in our transaction-adjusted earnings per share guidance.
With this latest increase, our 2021 earnings per share guidance is up by about $2 since our initial guidance in the beginning of the year.
Before we move to 2022, I wanted to give you an update on our cash performance.
Year to date, we've generated over $2.1 billion of transaction-adjusted free cash flow, up 15% compared to 2020, and we ended the quarter with over $4 billion in cash on the balance sheet.
Keep in mind that we have a roughly $200 million payroll tax payment in Q4 from the Cares Act legislation with the second similar payment in 2022.
Additionally, we expect to pay the balance of our transaction-related tax from the IT services divestiture in the fourth quarter.
Our healthy cash position has enabled us to repurchase over $2.7 billion of stock so far this year, on track with our full-year target of $3 billion or more.
As we look ahead to 2022, on Slide 12, our outlook is based on the same set of assumptions that we described for 2021 guidance regarding the COVID environment and vaccine mandate.
It also assumes that the continuing resolution does not extend beyond 2021.
And like our 2021 guidance, it assumes that we do not experience a breach of the debt ceiling.
We expect Space to be our fastest-growing segment again in 2022, driven by GBSD, NGI, and several restricted efforts as they continue to ramp.
Mission Systems and Defense Systems should also produce organic growth.
Regarding Aeronautics Systems, after several years of strong growth, our latest 2021 sales guidance calls for a mid-single-digit decline, and we see that trend continuing in 2022.
We've talked in recent quarters about the headwinds in our HALE portfolio.
We're also projecting lower sales on JSTARS, F-18, as well as our restricted portfolio.
Looking further to the future, it's an exciting decade for defense aerospace.
Rapidly evolving threats are spurring a new wave of autonomous vehicle and sixth-generation fighter development.
So, the opportunity set in AS remains solid, and we will continue to invest in the cutting-edge technologies that allow our customers to stay ahead of the threat environment.
Altogether, we currently expect 2022 sales at the company level to reflect continued organic growth.
Looking at segment margin, we expect the strong results we've demonstrated in 2021 to continue in 2022 with excellent program performance offsetting a portion of the 20 to 30 basis point benefit we generated from pension-related overhead rate changes in Q1 of 2021.
While we project higher sales and strong segment operating margin, we expect transaction-adjusted earnings per share to be down next year as a result of several nonoperational headwinds.
Lower CAS pension recoveries and higher corporate unallocated expenses are currently projected to create an earnings per share headwind next year of more than $2.
For FAS pension, our outlook for 2022 will depend on our updated actuarial assumptions, including discount rates and plan asset returns, which we will determine at the end of the year.
Earnings per share driven from sales growth, strong operating margin performance, and lower share count will help to offset these nonoperational items.
Next, I'd like to spend a moment discussing cash.
We expect relatively stable cash flow at the program level in 2022, but there are a few temporal items that should be factored into the year-over-year comparison of overall free cash flow.
First is lower CAS pension recoveries.
As you can see on Slide 13, our CAS recoveries are currently expected to be lower by $350 million next year.
The second is cash taxes.
Excluding the impact of the IT services transaction, we expect cash taxes to be modestly higher next year.
In addition, as we've noted in the past, current tax law would require companies to amortize R&D costs over five years, starting in 2022, which would increase our cash taxes by around $1 billion next year and smaller amounts in subsequent years.
There continues to be uncertainty in the tax environment with potential new legislation that could change the R&D amortization provision and other provisions.
We will provide updates on each of these items on our January call.
Taking all of these cash flow factors into consideration, we would expect to decline in 2022 transaction-adjusted free cash flow, followed by a double-digit growth CAGR through 2024, driven by strong operational performance.
Regarding capital deployment, investing in the business through disciplined R&D and capital spending continues to be our priority.
We expect capex to be roughly flat next year in absolute dollar terms.
We believe these investments allow us to stay at the forefront of technology as we invest in our business.
And as we've said, we continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases.
Kathy Warden -- Chairman.
In summary, we have delivered excellent year-to-date results and operating performance, and we are pleased to be increasing our full-year earnings per share guidance for the third consecutive quarter.
We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID-related risks and continue to keep our programs on track.
As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that align well to National Security requirements and our customer funding priorities.
So, as we look forward, 2022 is expected to deliver another year of organic sales growth and excellent performance, paving the way for longer-term margin expansion and free cash flow growth.
We remain focused on protecting the safety and well-being of our employees, delivering the capabilities our customers need to protect National Security and sustain our planet, and delivering value to our shareholders.
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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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Actual results may vary materially from the assumptions presented today.
All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affects our business, including those discussed in our Form 10-K and other SEC filings.
These results exclude certain non-operating and non-recurring items including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
All adjustments in the quarter and for the full year 2020 are detailed in the reconciliations in the appendix.
Before we begin, I'd like to provide a brief overview of our fourth quarter GAAP results compared to prior year.
Q4 revenue decreased 1.5% to $709 million.
Segment operating income increased 11.6% to $120 million.
And reported earnings per share was a net loss of $0.16.
This is principally driven by a $137 million charge related to the successful termination of our U.S. pension plan and other items, including tax charges totaling $17 million, partially offset by $52 million asbestos insurance settlement benefit.
I truly hope that everyone is healthy and safe.
I'm humbled by the way this team continues to respond to the crisis and want to express my sincere gratitude for all you have done.
Your efforts to serve our customers and drive exceptional performance in a safe, fast and productive manner are a testament to the commitment, perseverance and your hard work.
Mark joined ITT in January of this year after a successful 13-year career at Honeywell and has hit the ground running.
I'm happy and excited to have Mark on the ITT team to drive our global investor Relations strategy.
As a result of our focus on the health of our people and our efforts, we delivered another strong performance in the fourth quarter.
Early last year, we took some difficult and swift actions to respond to the pandemic.
These actions ensured that ITT continued to outperform in 2020 and will emerge stronger in 2021 as the economic environment recovers.
Let me now highlight some key financial achievements for the quarter.
We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on a 4% organic sales decline.
And we improved our decremental margin every quarter in 2020.
For the full year, our decremental margin was 22% at the low end of our range.
As a result, we delivered adjusted earnings per share of $1.01, a sequential and as well as a year-over-year increase.
We generated free cash flow of $102 million for Q4 and $372 million for full year.
Throughout the year, we drove cash collections and optimized inventory, while applying strict control over capital investments.
These drove a free cash flow margin of 15% at the high end of our guidance that we increased just last quarter.
On capital deployment, in 2020, we increased our dividend by 15%.
We repurchased ITT shares totaling 73 million and we increased our majority stake in our Wolverine China joint venture as we continued to expand our market share in Asia.
Despite the restrictions posed by COVID, I was fortunate to safely visit many of our facilities around the globe, including in China, Europe, the Middle East and across the U.S. As you know, I consider this fundamental to identifying and executing the many operational and commercial opportunities we at ITT have around the globe.
In 2020, we reduced the number of recordable incidents by 25% and implemented safer workplace protocols globally.
This is an important element in ensuring the health of our people.
And it also contributed to a significant reduction in workers' compensation expense in the U.S. Safety is foundational for our operational excellence and all of us should expect a continued reduction in incidents in the future.
From a commercial perspective, sales in Friction outpaced global auto production rates by more than 600 basis points for the full year.
We increased market share by almost 400 basis points in North America, more than 200 basis points in China and almost 100 basis points in Europe.
And when it comes to EVs, we secured position on 42 new electric vehicle platforms during the year.
In Industrial Process, we continue to execute on our footprint rationalization projects.
We finalized our first consolidation in Europe this quarter and are progressing according to plan on our second project; this one in North America.
We are making progress in sourcing efficiencies through aggressive negotiations and supplier rationalization.
As I noted before, I believe there are still many opportunities to improve our purchasing performance, as well as further lean out our operations.
Industrial Process delivered 15.1% adjusted segment operating margins this quarter.
This is a milestone still in IP.
At the end of last year, I visited our industrial valve site in Amory, Mississippi.
I was impressed with the order management process implemented by Angie and her team that has resulted in best-in-class on-time delivery performance and unparalleled service for our customers.
This is also true from a project management performance standpoint where IP continue to drive near-perfect execution and on-time delivery, while driving margin expansion for many of our large projects.
While CCT's end markets remain challenged, we are deploying the same operational excellence playbook that we successfully executed in MT and IP.
We expect to reach pre-COVID margin levels at CCT in the next two to three years.
Today, I'm also pleased to provide our outlook for 2021 that reflects all that we have done to strengthen our operations, our people and our potential.
We anticipate full year organic sales growth of 2% to 4% driven by continued share gains in Motion Technologies, as well as the broader auto market recovery.
We expect the rest of our markets to be flat to slightly down.
We plan to expand adjusted segment margins by 130 to 180 basis points.
The increased sales volume and the carryover impact of our 2020 cost actions, coupled with the strong productivity from 2021 initiatives, we'll generate adjusted earnings per share in the range of $3.45 to $3.75%, which equates to 8% to 17% growth versus prior year.
Because of our strong free cash flow performance in 2020, we're well-positioned to deploy capital in 2021.
First, we would invest in our businesses with approximately $100 million of capital expenditures, up over 55% versus 2020.
Second, we will aggressively and diligently pursue acquisitions in our core markets to effectively put our cash to work and build on our strong businesses.
This is our ninth consecutive dividend increase.
And finally, we are planning to repurchase ITT shares totaling $50 million to $100 million reducing the full year weighted average share count by approximately 1%.
From a top-line perspective, Motion Technologies delivered a strong performance, growing over 10% organically, driven by continued share gains and double-digit growth in auto in North America and China.
This was offset by lower short-cycle demand in Industrial Process as we anticipated and the impact of commercial aerospace dynamics in CCT.
Our focus on operational excellence is producing strong results.
Motion Technologies expanded margins over 400 basis points to 19.5%.
Industrial Process grew margin 90 basis points to 15.1% despite a 10% organic sales decline.
The MT and IP performances more than offset Connect and Control Technologies' margin decline.
For the full year, I'd like to point out a few highlights in addition to those that we have already discussed.
First, working capital as a percentage of sales continues to decline and we saw 70 basis points of improvement in 2020, excluding the impact of FX.
Second, free cash flow increased 40% versus prior year despite the challenges posed by the global pandemic.
We hit the high end of our full year target for free cash flow margin, while also investing in the business through growth capex of more than $35 million for the year.
Third, we continue to effectively manage our legacy liability profile.
As I mentioned in our last earnings call, early in Q4, we successfully transferred our U.S. pension liability to a third party.
This will reduce our administrative costs and end all future funding requirements for the plan.
We also continue to successfully negotiate asbestos-related insurance settlements with our carriers.
And we drove an increase in our insurance assets of $52 million in the fourth quarter and $100 million for the full year.
As a result, our net asbestos liability that we have recently brought to a full-horizon valuation is now $487 million.
Years back, our Friction team developed a strategy to penetrate the growing EV segment, while continuing to gain share on conventional vehicle platforms.
We focused our technical expertise in addressing tighter noise and vibration requirements, while continuing to deliver a frictionless customer experience.
In China, our EV Brake-Pad Development Center continues to effectively partner with our customers in the largest EV market in the world.
And in 2020, we continued to see the results of our strategy by winning content on new electric vehicle platforms, including several platforms wins with The EV manufacturer.
We also won both the front and rear axle for a new U.S. performance crossover vehicle.
The strength of our Friction technology continues to be on display as we assist automakers in significantly reducing braking distance of heavier vehicles.
All of these is a testament to the innovation and the engineering prowess behind our brake-pad technology.
In Industrial Process, our redesigned between-bearing API pump has seen new orders increase over 50% this year.
Our customers are benefiting from improved hydraulic efficiency and performance with reduced lead times at a competitive price point.
In Q3, we further expanded and improved our hydraulic pump offering and have an active funnel of potential orders already.
Our new i-Alert remote monitoring offers diagnostic capabilities and tailored solution that predict customer equipment failure and improve asset up-time.
Finally, in Connect and Control Technologies our Enidine business is teaming with Bell Textron to produce passive vibration control technology for the 360 Invictus.
The Invictus is Bell's competitive prototype to the U.S. Future Attack Reconnaissance Aircraft or the FARA program.
Together with Bell, the Enidine team is developing technology for use in a mission-critical defense application suitable for the FARA program.
As we embarked on 2021, we remain laser focused on operational excellence and customer centricity.
These has been the ITT playbook for the last four years.
We continue to make significant progress and we, again, saw the benefits of this commitment in the results we delivered in Q4.
We will continue to be good stewards of ITT, driving performance for our customers, while searching for organic and inorganic opportunities to deploy capital and grow the business.
Our effective and comprehensive capital deployment strategy with clear priorities on organic investments, first and foremost, followed by close-to-core acquisitions and then return to shareholders will ensure that our cash is efficiently put to work.
Let me begin with Motion Technologies.
Our Q4 organic growth of 10% was primarily driven by strong performance in our Friction OE business.
We delivered 640 basis points of outperformance in 2020 on a global basis; further evidence that the MT machine continues to win in the marketplace.
For the quarter, Friction sales in North America were up 43% and sales in China, up 19%, while growth in our Wolverine business was over 12% with strength in Europe and Asia-Pacific as we gained market share in both brake shims and sealings.
Segment margins were incredibly strong again expanding 410 basis points on incremental margins of 46%.
This was mainly driven by higher volume and productivity that allowed us to continue to fund growth investments.
We are very pleased with the pace and the strength of the recovery in MT as we head into 2021.
For Industrial Process, sales were down, as we anticipated, with declines in short-cycle due to pandemic-related impacts that affected our previous two quarters' bookings.
Our project business, which encompasses most of our oil and gas exposure in IP, saw declines in pump bookings as large projects continued to shift to the right.
However, our short-cycle orders in the quarter were up 1%, driven by aftermarket demand.
IP margins expanded 90 basis points on 7% decremental margins.
The impact of the sales decline was almost entirely offset by productivity benefits, restructuring savings and price.
Furthermore, IP's working capital as a percent of sales improved 590 basis points versus prior year and we still see further opportunities to optimize inventory as we consolidate footprint and enhance materials planning.
IP finished the quarter with less than 20% working capital as a percent of sales.
Lastly, in Connect and Control Technologies, we continued to see weak demand across all major end markets.
Sales in aerospace and defense were down over 30%, driven by lower passenger traffic and lower build rates from airframers.
The de-bookings we saw in aerospace in the second and third quarters declined sequentially in the fourth quarter to minimal levels.
We expect that the sales weakness we saw this quarter in commercial aerospace will likely persist into the first half of 2021.
Connected sales were down over 10%, mainly due to North America aerospace and defense.
On a positive note, we are encouraged by the recovery in orders in defense and industrial connectors.
These contributed to a book-to-bill of more than 1 in Q4.
CCT margins were impacted mostly by lower volumes, partially offset by an aggressive cost reduction plan.
While this year was challenging for CCT, we are encouraged by the productivity, which was over 400 basis points this quarter and the full year.
I am now on Slide 7 to present a deeper look at the margin performance this quarter.
I want to highlight two main points.
First, we generated productivity of 230 basis points.
For the full year, that number was over 300 basis points.
This is the result of a multi-year approach to reduce ITT's cost structure by driving operational excellence across the enterprise and moving toward a leaner ITT in all three segments and at corporate.
We have successfully executed this playbook at Motion Technologies and we are in the early stages of the journey with Industrial Process.
At CCT, we're still laying the foundation and over time we expect results similar to what we experienced in Motion Technologies.
The second key takeaway is on strategic investments.
While we made necessary cuts to discretionary expense this year to manage through the pandemic, these did not come at the expense of growth investments.
We continued to selectively fund the most promising growth initiatives in key markets, including in EVs globally, to ensure we continue to win in the marketplace as we did with our successful launch of copper-free brake pads several years back.
For the full year, we achieved cost reduction savings in excess of $100 million, including $40 million in the fourth quarter.
This came from a combination of headcount reductions, reduced Executive and Board compensation and discretionary cost actions.
We delivered approximately $65 million of structural reduction in fixed costs for the full year, with the remainder comprising temporary savings, which will partially reverse in 2021.
We are continuing to drive footprint optimization at both IP and CCT, while remaining diligent with strong cost control and accelerated sourcing performance.
We expect that the carryover impact of actions in 2020 will generate approximately $10 million to $15 million of additional savings in 2021.
We also expect to fund and execute new footprint rationalization and cost reduction plans in addition to the normal productivity we will generate.
As a result of these measures, our decremental margins improved every quarter since Q2 and we finished the year at 22% at the lower end of our target, given the strong performance in Q4.
In 2021, we expect incremental margins north of 35% as volumes recover and we leverage our optimized cost structure.
Keep in mind, this will vary from quarter to quarter based on our quarterly performance in 2020 and the mix among our businesses.
Our end markets are showing signs of recovery.
Still, the full year economic outlook remains somewhat uncertain at this time.
We intend to remain flexible and manage our costs to coincide with the expected gradual recovery.
Despite the ongoing disruption from the COVID pandemic, we see general economic conditions continuing to improve throughout 2021, particularly in the second half of the year.
We expect total revenue will be up 5% to 7% versus 2020 and up 2% to 4% on an organic basis.
The strong organic growth we see in Friction, stemming from continued share gains and the resurgence in auto, will likely be offset by declines in industrial pumps as customer opex continues to be constrained and project activity remains weak.
Notably, we expect sales in Motion Technologies in 2021 to get back to 2019 levels.
In commercial aerospace, activity will slowly recover, starting in the second half of 2021 as inventory levels normalize and passenger air traffic begins to recover.
Defense should be relatively stable as the large order we won in the fourth quarter of last year will convert into revenue toward the end of 2021.
Finally, in oil and gas, we expect modest growth from downstream activity improvement.
However, the growth rate will be impacted by lower project bookings in 2020 as a result of the market downturn.
We expect to see stronger growth in the Middle East and Asia-Pacific in particular.
We expect adjusted segment margins to expand by a 150 basis points at the midpoint, driven by higher volumes, continued productivity and the incremental benefits from structural reductions to our cost structure in 2020.
All segments should deliver triple-digit margin expansion.
We're guiding to adjusted earnings-per-share growth of 8% to 17%.
This assumes an approximate 1% reduction in our full year weighted average share count from repurchases and an effective tax rate of 21.5%.
Free cash flow will be in a range of $270 million to $300 million and we expect free cash flow margin to be 10% to 12%.
This is lower than the 15% delivered in 2020 as we expect to increase capex spending, including $5 million to $10 million of investments into green projects and increase working capital dollars to support top-line growth.
However, we expect working capital to continuously decline as a percent of sales over the long term.
At these levels, adjusted free cash flow conversion will approximately be a 100% aided in part by working capital optimization.
On Slide 10 we show the walk to our 2021 adjusted earnings per share guidance.
The majority of our earnings growth will be generated by stronger volume and net productivity, partially offset by the reversal of temporary cost savings and the incremental investments for growth.
The reversal of temporary cost savings is due to a combination of higher compensation costs, travel expense and CARES Act benefits that will become a headwind to earnings in 2021.
Foreign exchange is expected to contribute positively to earnings and tax rate is expected to be slightly higher than 2020 at 21% -- 21.5% with a variance of 20 basis points around the mean, depending on the jurisdictional mix of our income.
Our planning rate currently implies a $0.02 earnings per share headwind.
Lastly, as Luca highlighted, we expect to repurchase $50 million to a $100 million in ITT shares, which will generate a $0.01 to $0.03 tailwind.
Before we wrap up, I also want to share some additional details on what we are seeing thus far in 2021 and what we expect in the first quarter.
Year-to-date, we are on track.
Our first quarter outlook assumes continued double-digit organic sales growth in Motion Technologies, offset by mid-to-high-teens declines in both Industrial Process and Connect and Control.
In Industrial Process, soft 2020 bookings will continue to weigh on revenue near-term, particularly in the chemical and oil and gas segments.
Our short-cycle business will decline due to customers maintaining tight operating expense controls and lower ending backlog.
However, we expect that IP short-cycle will improve sequentially in the second quarter and then grow in the second half of 2021.
In CCT, the declines will be driven by weak commercial aero demand.
This will be partially offset by growth in connectors, given the strong beginning backlog after over 30% sequential order growth in Q4.
The margin expansion will be driven by MT and IP, given the higher order volumes and the cost actions executed in 2020.
Despite progress, CCT's margin will be lower than last Q1, which was still largely unaffected by the pandemic.
While there remains a fair amount of uncertainty in some of our end markets, we're confident in ITT's ability to continue to execute and outperform the competition, which will likely generate Q1 adjusted earnings-per-share growth of mid-to-high-single-digits versus prior year.
Let me pass it back to Luca for closing remarks.
I'm proud of the results we delivered in 2020.
We focused on what we could control, acted quickly and continued to invest in our businesses.
Our Motion Technologies business is our springboard for growth.
Friction continues to win in the marketplace with a focus on capturing share in the fast growing EV segment.
We are progressing in our transformation at both Industrial Process and Connect and Control technologies with a lot of runway.
And finally, our financial health is strong entering 2021 with ample capacity to deploy capital.
We intend to fund high-return growth initiatives, aggressively and diligently pursue strategic acquisitions, pay a competitive dividend and systematically reduce our share count, while continuing to wind out our legacy liability exposure.
We have clear priorities, we are aligned and purposely committed and accountable and we are seeing the benefits of our rigor in our results.
With that, Maria, could you please open the line for Q&A?
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q3 adjusted earnings per share $0.99.
sees fy revenue up 11 to 13 percent.
raised its full-year 2021 guidance.
expect full-year 2021 adjusted earnings per share of $4.01 to $4.06 per share.
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Today, we'll update you on the company's first quarter results.
In the first quarter, we had all-time record sales of almost $2.7 billion, an increase of 17% as reported or 9% on a constant basis with adjusted operating income of $329 million, our highest ever first quarter earnings per share of $3.49.
Our business continued to strengthen in the first quarter and did not reflect the industry's normal seasonality.
Around the world, consumers are continuing to invest in their homes and new flooring plays a major role in most remodeling projects.
We're also starting to see moderate improvement in commercial demand as global economies expand and businesses begin to invest in an anticipation of a return to normal.
In most countries, construction is considered an essential business, so our sales have been less impacted by government restrictions.
Those specific regions have interrupted our customers' businesses.
Our Flooring Rest of World segment continues to outperform with strong residential sales of our flooring, improved mix from our premium products and less exposure to commercial channels.
The segment benefited from lower marketing expenses, product mix and increased days, which resulted in a greater margin in the first quarter.
Our other segments also performed well with strong growth in residential products and expanding operating margins, while their results were impacted by low commercial sales and severe storms in the United States.
Market demand strengthened as the period progressed, and our order backlog remains robust going into the second quarter.
Most of our businesses are running at high production rates, though inventories remain lower than we would like.
Our production and operating costs were impacted in the period by supply limitations in many of our markets as well as absenteeism, new employee training and severe winter weather in the United States.
Our margins have benefited from stronger consumer demand, our restructuring and productivity actions and leverage our SG&A costs.
With increased prices in most product categories and geographies, reflecting inflation in raw materials, labor, energy and transportation.
Global transportation capacity has been limited, increasing our cost and delaying receipt of our imported products.
We've seen similar constraints on local shipments and are increasing our freight rates to respond.
The investments we made in our U.S. trucking fleet and local delivery systems have enabled us to provide our customers with more consistent service while improving our efficiencies.
Even with COVID surges in some markets, we anticipate continued strengthening of economies around the world.
Government actions and monetary policies are stimulating higher economic growth rates and stronger housing markets, and vaccination program should reduce the risk of COVID related disruptions.
Recent U.S. stimulus actions as well as proposed infrastructure spending should further expand economic growth and employment level.
Though government investments are lower than in the U.S. Other countries are beginning to see their economies expand, which should support ongoing demand in our product categories.
We continue to implement our restructuring plans, which have achieved $75 million of our anticipated $100 million to $110 million in savings.
The balance of the savings will be spread over the next three quarters as specific projects are completed.
In the first quarter, we purchased $123 million of our stock at an average price of $179 for a total of $686 million since we initiated our purchasing program.
Our balance sheet remains strong with net debt less short-term investments of $1.3 billion.
Our leverage is now below onetime adjusted EBITDA.
Given our higher sales and operating levels, we are reviewing additional investment opportunities to expand our business and capacity.
Jim will you review the first quarter financials.
Sales in Q1 2021 were $2,669 billion.
That's a 17% increase as reported and 9% on a constant basis.
All segments showed positive volume growth with Flooring Rest of the World being the strongest.
As a reminder, Q1 had three additional shipping days and Q4 will have four fewer days.
Gross margin was 29.7% as reported or 30.1% excluding charges, increasing from 27.5% in the prior year.
The year-over-year increase was driven primarily by higher volume and productivity, greater manufacturing uptime, improved price mix and favorable FX, partially offset by increased inflation.
The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed later today.
SG&A, as reported, was 17.
8% or 17.7% versus 20.3% in the prior year, both excluding charges, as we saw strong leverage on the increased volume and productivity actions, partially offset by inflation in FX.
Gives us an operating income, as reported, of 11.9% of sales.
Restructuring charges for the quarter were $11 million, and our savings, as Jeff said, are on track as we have recorded approximately $75 million of the plan.
Operating margin excluding charges of 12.3%, improving from 7.2% in the prior year or 510 basis points.
Similar to gross margin, the increase was driven by stronger volume productivity actions, improved price/mix and FX, greater manufacturing uptime, partially offset by the increased inflation.
Interest expense of $15 million includes the full impact of the 2020 bond offerings.
Other income of $2 million, mainly the result of favorable transactional FX.
Our non-GAAP tax rate was 22% versus 20% in the prior year, and we expect the full year to be 21.5% to 22.5%.
Giving us an earnings per share as reported of $3.36 or excluding charges, $3.49, which is 110% improvement versus prior year.
Now turning to the segments.
Global Ceramic had sales of $930 million, a 10% increase as reported, or approximately 5% on a constant basis with strong geographic growth, especially in Brazil, Mexico and Russia, while the U.S. was unfavorably impacted by the February ice storm.
Operating income, excluding charges of 9.6%, that's up 400 basis points versus prior year, and this improvement was from strengthening volume and price/mix increased manufacturing uptime and productivity, partially offset by unfavorable inflation.
In Flooring North America, sales of $969 million or a 14% increase as reported or 9% on a constant basis, driven by strong residential demand with commercial beginning to recover from its trough.
Operating income excluding charges of 9.3%, that's an increase of 410 basis points versus prior year.
The improvement similar to global ceramic was driven by increased volume and productivity, less temporary shutdowns, partially offset by higher inflation.
And finally, Flooring Rest of the World with sales of $770 million.
That's an increase of 31% as reported or 15% on a constant basis as our focus on the residential channel drove improvement across product -- all our product groups led by laminate, LVT and soft surface business in Australia and New Zealand.
The operating margin excluding charges of 20.9%, an increase of 740 basis points versus prior year, driven by the higher volume, favorable impact of price/mix and productivity, partially offset by the increase in inflation.
Corporate and eliminations came in at $11 million, and I expect for the full year 2021 to be approximately $40 million to $45 million.
Turning to the balance sheet; cash and short-term investments are approximately $1.3 billion, with free cash flow in the quarter of $145 million.
Receivables at just over $1.
8 billion, giving us a DSO improvement to 54.
4 days versus 57 days in the prior year.
Inventories were just shy of $2 billion.
That's a decrease of approximately $200 million or 9% from the prior year, with the marginal sequential increase of 4% from Q4 or approximately $80 million.
Inventory days remained historically low at 105.5 days versus almost 130 in the prior year.
Property plant equipment just over $4.4 billion with CapEx for the quarter of $115 million versus D&A of $151 million.
Full year CapEx is currently estimated at $620 million with us reevaluating our plan, and we will most likely see an increase from that level.
Full year D&A is projected to be $583 million.
And lastly, the overall balance sheet and cash flow remained very strong with gross debt of $2.7 billion.
As I said, total cash and short-term investments of over $1.3 billion, giving us a leverage of 0.9 times adjusted EBITDA.
First quarter sales of our Flooring Rest of World segment increased 31% as reported or 15% on a constant basis, exceeding our expectations.
Sales across all our product categories and geographies were strong as housing and residential renovation continued at a brisk pace.
Margins expanded over last year to approximately 21% due to higher volume, favorable price and mix and positive leverage on SG&A, partially offset by inflation.
During the period, most of our facilities ran at high levels, though some supply constraints limited our utilization.
At this point, we anticipate some material shortages continuing into the second quarter.
Our backlog has increased as customer inventories remain low.
We have raised prices across all product categories and have announced additional increases where material inflation has continued to expand.
Our laminate business, the segment's largest product category continues to record significant growth as consumers embrace our more realistic visuals and superior performance.
Our leadership in premium laminate products and our higher volumes drove improved margins during the period.
Our unique manufacturing methods create proprietary products that cannot be duplicated.
Our next-generation laminate technology provides premium wood consumers with features that exceed traditional wood in beauty and durability.
In the second quarter, we are installing additional manufacturing assets to support future growth.
During the period, our LVT sales rose substantially with significant growth in rigid LVT.
Our margins expanded from enhanced formulations and operational improvements that increased our production speeds.
In the period, our sales were restricted by material supply disruptions that caused unscheduled shutdowns.
We anticipate continued improvement in our operations as the material supply normalizes and production increases to expand our new rigid LVT collections.
Our sheet vinyl sales were limited in the period by COVID lockdowns of our retailers in Europe.
We anticipate sheet vinyl sales improving as government restrictions are lifted and our customers reopen their shops.
Our Russian sheet vinyl business continues to expand rapidly as we broaden our customer base and product offering.
We have initiated a third shift at the plant to support higher sales volumes.
Our insulation business continues to grow as our panels provide the best option for energy conservation.
Sales growth was robust in most of our geographies, though COVID restrictions in Ireland impacted our plant operations and results.
Chemical supply problems have limited our production and dramatically increased our costs.
We have announced our third price increase to offset the continued inflation and chemical shortages are expected to last through the second quarter.
Our wood panels business delivered improved performance with our plant running full and operating margins expanding.
As market demand for panels grows, we are allocating our production.
We improved our mix during the period with increased sales of our higher-value decorative products and mezzanine floors.
We're installing a new melamine press to expand production of our higher-value products and increased efficiencies.
Our new plant that uses waste to create energy for the facilities is operating well and benefiting our results.
Sales in both Australia and New Zealand increased significantly and margins expanded due to higher volume, improved productivity and favorable price mix, partially offset by inflation.
Sales grew in soft and hard surfaces with a strong residential performance driven by high levels of remodeling and a solid housing market.
Our updated carpet collections and SmartStrand and Wolf have enhanced our sales and mix.
We increased our sales by leveraging our comprehensive soft and hard service collections, strong sales organization, and industry-leading service.
The commercial performance was stronger, primarily driven by projects that were postponed.
For the period, our Flooring North America sales increased 14% as reported or 9% on a constant basis.
Adjusted margins expanded to 9% due to higher volume, productivity gains and mix improvements, partially offset by inflation.
Our performance was seasonally stronger than historical first quarters with consumers increasing investments in residential remodeling and new construction.
Our commercial business continued to improve sequentially from its trough with growing investments in new projects.
Our order rates remain strong and our backlog is higher than normal.
We have increased prices as a material and transportation costs have escalated and we'll adjust further as required.
All of our operations are maximizing their output to support higher sales and improve our service.
In the period, we managed through interference from labor shortages and supply constraints, which impacted our production levels.
Our inventories and service levels have also been impacted by delayed shipment of our imported products due to bottlenecks in ocean freight.
We are continuing to execute our restructuring initiatives, which will provide ongoing benefit to our results as they are completed this year.
Our residential carpet sales improved as consumers desire more comfortable, quieter spaces in their homes.
Retail remodeling was our strongest channel, improving our mix through increased sales of our premium products.
We are expanding our proprietary SmartStrand franchise with new collections that offer superior design and performance.
We have significantly reduced operational complexity by simplifying our yarn and product strategies and reducing low-volume SKUs.
So that our workforce to meet higher market demand, we have implemented extensive training processes and are relocating assets to increase production where necessary.
Our commercial sales are recovering as business remodeling increases along with the economic improvement.
We are also seeing increasing volume of higher-value products as larger specified projects are commencing.
The April Architectural Billing Index reflects the highest level of project inquiries since 2019.
We have increased carpet tile production in anticipation of the commercial markets improving.
In our commercial LVT business, we are managing supply limitations and import delays.
Our laminate sales are setting records as the appeal of our realistic visuals and waterproof performance expands across all channels.
Through numerous process improvements, we have significantly increased our domestic production and are supplementing it with imports from our global operations.
We are installing additional production at the end of this year to further expand our sales.
Our new line will also produce the next generation of Redwood, which is already being well accepted by European consumers.
We have completed upgrades and streamlined our MDF board facility to enhance our volume and cost.
We are ramping up production of our premium ultra wood, the first waterproof natural wood flooring that also features industry-leading scratch, dent and fade resistance.
Ultra wood is being well received as a superior alternative to traditional engineered wood flooring.
Our LVT and sheet vinyl sales continue to increase in the new construction and residential retail channels.
We are upgrading our LVT offering with enhanced visuals unique water type joints and improved stain and scratch resistance.
Our local manufacturing has continued its improvement and production output increased as we implemented processes similar to those proven to work in our European operations.
Our service has been impacted by material supply disruptions in the U.S. and delays in shipments of sourced products.
We anticipate our supply will increase and we will see further improvements in our domestic offering and production output.
In the quarter, our Global Ceramic sales rose 10% as reported and 5% on a constant basis, with sales increases in each of our markets, driven by growth in residential remodeling and new construction.
The segment's adjusted margin expanded to approximately 10% due to volume, price, mix and productivity gains, partially offset by inflation.
Our Russian, Brazilian and Mexican ceramic businesses delivered strong results though they were limited by their capacities and are allocating production as necessary.
All of our businesses are facing rising material, energy and transportation costs, and we have taken pricing actions to offset.
Our U.S. ceramic residential sales grew from remodeling and new construction and commercial sales are improving from their low levels.
Our strongest growth was in new residential construction, and we are seeing activity strengthen with contractors at our service centers.
We are introducing higher-value products, including polished, mosaic, decorative wall and antimicrobial collections to improve our mix.
We are focusing on the fastest-growing channels and implementing advanced technologies to make doing business with us faster, easier and more profitable for our customers.
Across the business, our plants are running at higher levels, and we have increased our productivity with our restructuring actions.
Escalating freight costs have hurt our margins, and we are raising prices to offset.
Our quartz plant is improving its productivity, and we are introducing more sophisticated bank collections, which are increasing our mix and should enhance our margins.
In the period, the ice storm that hit the Southwest temporarily stopped production at most of our manufacturing facilities by interrupting our electricity and natural gas supply.
The facilities have all recovered and are operating as expected, improving our service.
Our European ceramic business delivered a strong performance in the quarter, risk productivity, improving mix and greater consumer demand.
Sales grew substantially in Southern Europe and in our export markets, led by a robust residential business and with some improvement in commercial projects.
Our operations are running at high rates to satisfy the greater demand and improve service, leveraging our cost and enhancing our results.
We are increasing our production levels through improvements in our processes and equipment as well as optimizing product flows to support growth and enhance our mix.
Our ceramic businesses in Mexico, Brazil and Russia are all benefiting from lower interest rates and expanded credit, which are driving greater home remodeling and housing sales.
In all three businesses, our order backlog is high, and we are allocating production as necessary.
We have streamlined our product offering and enhanced our planning strategies to optimize service.
Our inventory levels are low, and we are maximizing our output by enhancing our manufacturing and scheduling processes.
In Brazil and Mexico, we are increasing capacity this year to improve our sales and mix.
In Russia, we are optimizing our tile production and ramping up our new premium sanitary ware plant to meet growing demand.
Sanitary Ware complements our floor and wall tile offering and allows our owned and franchised stores to provide a more complete solution to satisfy our customer needs.
Given higher market demand and our increased sales, we are reviewing the expansion of our ceramic capacities.
As we progress through the year, we anticipate that historically low interest rates, government actions and fewer pandemic restrictions should improve our markets around the world, which we see the present robust residential trends continuing with commercial sales slowly improving in the second period.
Across the enterprise, we will increase product introduction to provide additional features to strengthen our offering and margins.
We're enhancing our manufacturing operations to increase our volume and efficiencies while executing our ongoing cost savings programs.
Our suppliers indicate that material availability should improve from the first quarter though some operations could still face supply constraints.
We are managing challenging labor markets in some of our U.S. communities and supplemental federal unemployment programs could interfere with staffing to maximize those operations.
If raw materials, energy and transportation costs continue to rise, further price increases could be required around the world.
Given these factors, we anticipate our second quarter adjusted earnings per share to be $3.57 to $3.
67 excluding any restructuring charges.
Currently, our strong backorder -- backlog reflects the escalated levels of residential demand across the globe.
We're introducing new product innovations to enhance our offering and optimizing our production to improve our service.
We're preparing for an improvement in commercial projects, anticipating an economic expansion and a return to normal business investments.
With strong liquidity and historically low leverage, we will increase our capital investments and take advantage of opportunities to expand.
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compname reports q1 earnings per share of $3.49 excluding items.
q1 earnings per share $3.49 excluding items.
sees q2 adjusted earnings per share $3.57 to $3.67 excluding items.
q1 earnings per share $3.36.
q1 sales rose 16.8 percent to $2.7 billion.
anticipate some material shortages continuing at least in q2.
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A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we will be using combined historical results for the third quarter, defined as three months of legacy IFF results and three months of N&B results and for nine months year-to-date defined as nine months of legacy IFF January to September and eight months of N&B February to September, in both the 2020 and 2021 period to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our recently appointed Executive Vice President and CFO, Glenn Richter.
As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer.
I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team.
Rustom played an important role in our combination with DuPont N&B.
And for that, we are immensely grateful.
He has been important in putting IFF in the strong position it is today.
Before we conclude today's call with a question-and-answer session, Glenn will also speak to our outlook for the remainder of the year.
Now as I mentioned, I'd like to kick us off on Slide six by discussing our financial highlights for the first nine months of 2021.
Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021.
In the first nine months of 2021, IFF achieved $8.6 billion in sales, representing 10% growth or 7% on a currency-neutral basis, a strong reflection of the strength of our market-leading platform and the compelling position we have established with our customers as a combined company.
We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%.
As we will discuss in more detail, we continue to confront meaningful inflationary pressure due to higher raw material, logistics and energy costs.
We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million free cash flow or approximately 10% of our trailing nine months sales, driven by strong cash generation.
This cash generation has enabled us to stay on track to meeting our deleveraging target.
Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.
I'm pleased to share that we have completed the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022.
Together, these two important divestitures will create a more focused IFF, allowing us to hone in on the constraints of our core business segments and it creates a stronger, more focused business.
We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divesting other noncore businesses.
We started this year with a simple commitment to focus on execution and deliver on the potential of the new IFF.
I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives, while delivering strong results with continued sales momentum and profit growth.
Now turning to Slide 7.
I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months.
First, I'm excited to share that we continue to experience strong growth in all four of our key operating regions despite ongoing and unique market uncertainties that have persisted across each geography.
In North America, we achieved 7% growth across all four of IFF's business divisions, led by high single-digit growth in Nourish and Scent.
These two divisions have continued to perform exceptionally well, quarter after quarter.
In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India as well as a low single-digit growth in China, even amid particularly strong recent market complexities in the region.
From a business unit perspective, Nourish, Scent and Pharma Solutions continued to carry the region's growth throughout the year-to-date.
Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth, largely fueled by double-digit growth in our Nourish and Scent divisions and continued local currency strength.
Perhaps, most impressive is a 7% sales growth that our EMEA region achieved to date, which includes a robust double-digit increase in the third quarter, impressive performance on our Scent and Nourish divisions growth, this encouraging rebound with Scent delivering double-digit growth led by our Fine Fragrance business and Nourish delivering high single-digit growth led by our Food Service business.
We expect this momentum to continue through the remainder of the year, and we will stay diligent to ensure our business remains nimble, positioned to perform against any new supply chain challenges that may arise.
Moving now to Slide 8, I'd like to take a closer look at our nine months year-to-date sales performance across IFF's key business segments.
Our largest division, Nourish, has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strength from our Flavors, Ingredients and Food Design businesses.
Scent has had a similar strong year delivering 8% in currency-neutral growth to date, led by impressive double-digit growth in Fine Fragrance as well as strong growth in Consumer Fragrance and Ingredients.
Health & Bioscience has seen strong demand in key focus areas including Home & Personal Care, Animal Nutrition and Cultures & Food Enzymes.
As you know, we are in the process of selling our Microbial Control unit, which has continued to experience headwinds through this year but has rebounded from COVID-impacted lows with growth in both Q2 and Q3.
This divestiture should further enhance the performance of this important division.
Pharma Solutions, despite significant challenges, is flat so far for the year.
Supply chain challenges have had an outsized impact on this division throughout the year.
While we have seen encouraging growth in our Industrial business, the division still struggles to meet customer demand due to raw material availability challenges and logistics issues.
Now on Slide 9, you will see that we have outlined some of the factors influencing the growth and profitability of each of our four divisions so far this year.
As I previously mentioned, Nourish has had a strong year with Flavors and Ingredients experiencing double-digit growth.
We have been working hard in our execution to manage volume and cost to limit margin impact from higher raw material costs, which continued to be a headwind on our profitability.
While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds, while delivering meaningful growth.
Our team has did an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward.
In Health & Bioscience, we mentioned broad-based growth across the markets, but here, we are seeing significant margin impacts from higher logistic costs.
As shared on our second quarter call, part of this that freight rates have increased significantly, but also we are having higher logistic costs to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth, investing in R&D and plant technology to increase output later this year and into 2022.
The Scent division has certainly realized the strongest, all-around bounce back as consumer demand rises across end markets.
Notably, Fine Fragrances alone has realized 36% growth year-to-date with double-digit growth in Cosmetic Active and continued solid performance in Consumer Fragrances.
At the time, sales profitability expansion of 110 basis points has been led by higher volume, favorable mix and higher productivity.
As I mentioned, Pharma Solutions was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demand.
These challenges, including supply and logistic constraints and ongoing inflation have, in turn, significantly pressured our margin compared to the first nine months of 2020.
Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics, and we'll continue to prioritize returning our Pharma Solutions business to the profitability we know is achievable.
And in the fourth quarter, we're expecting year-over-year top and bottom line performance to improve.
As we have been talking about today, IFF is realizing very strong sales momentum across our business.
This is a reflection of the powerful new position we have created through our combination with the N&B business and a compelling value proposition we can offer to our customers.
While we are pleased to put many of the gross headwinds related to the pandemic behind us, it is important to understand that our growth this year is, in fact, meaningful above pre-pandemic results.
If you look at the total business, you will see that on a comparable 9-month pro forma basis, the new IFF has realized 9% sales growth over 2019 results.
This strength is broad-based too.
Each segment is realizing strong growth above pre-pandemic levels.
Nourish is a business that was particularly hard hit through the pandemic, is now strongly growing with sales growth of 9% compared to pro forma 2019 9-month period.
And important, especially given that much of the integration work is coming from within this division, these results showcase how our position in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers.
Moving to Slide 11, I would like to discuss the strong progress we have made in terms of synergy realization.
For just nine months, since completing our merger with N&B, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company.
Having received significant and highly encouraging positive feedback from our customers, along with persistent robust customer demand, we are confident in our ability to meet our revenue target.
To date, revenue synergies have started to contribute to our top line performance, and we are pleased that our project pipeline is strong and growing.
In the first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target with one quarter to go.
This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing our organization.
I'm confident that we will more than exceed our $45 million year one synergy target.
And I'm encouraged by the continued progress we are making toward achieving our 3-year run rate of cost synergy target of $300 million.
His background is perfect, but there are two areas I think really stand out.
First, he brings tremendous depth with private and public companies and leading finance teams to enhance discipline and build processes that drive toward a goal of shareholder value creation.
He has time and time again shown an ability to help businesses accelerate top line growth while driving margin expansion.
In this way, he consistently implements productivity initiatives with lasting impact.
Second, he has been through several large-scale M&A integrations with a track record of strong success.
As we continue to execute on our multiyear transformational integration, this experience is invaluable.
Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community.
And the most common questions I've been asked is why did I join IFF and what are my near-term priorities.
Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction.
There were three very compelling reasons for me to join IFF.
First, and perhaps most importantly, IFF is a company that is truly making a difference in helping solve some of the world's biggest challenges.
We are delivering reliable, innovative and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment.
Second, the industry has very attractive organic growth characteristics, benefiting from continued strong consumer tailwinds from increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets and new consumer needs presented by aging demographics in developed markets.
I also believe that scale will become an important basis of competitive advantage as customers demand leading ESG platforms, increased innovation and speed to market, global supply chain resiliency and help in navigating increasingly complex regulations.
Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry-leading platform.
And since joining IFF, I've tried to immerse myself in the business completely, visiting sites, meeting with our business and operations teams and spending time at our R&D and creative centers.
I've also prioritized hearing from you, our investors and analysts.
And frankly, today, I'm even more bullish on the strength of IFF's global capabilities and the tremendous long-term potential we have to drive strong top and bottom line growth.
Relative to my near-term priorities, I have four primary areas of focus.
By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses.
Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital.
A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity.
And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining.
In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you.
With that, I'd now like to provide an overview of our consolidated third quarter results.
In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division and strong increases in both Scent and Health & Biosciences.
In terms of contribution, volume performance was the primary driver of our growth as pricing represented approximately two percentage points in the quarter.
Though our gross margin continued to be challenged by inflationary pressures, it was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%.
And while we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases or approximately 50% in the third quarter when we include raw material, logistics and energy increases.
As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis but expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization.
Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of $1.47.
On the next few slides, I will dive deeper into the third quarter financial results for each of our four divisions.
Turning to Slide 13, I'll start with our Nourish division, which had an exceptional quarter.
In Q3, Nourish achieved 17% year-over-year sales growth or 15% on a currency-neutral basis, driven by robust double-digit growth in Flavors for the second consecutive quarter.
Ingredients also grew double digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosics, LPG and food protection, increasing double digits.
Food Design also grew double digits, led by Food Service, where pandemic-related restrictions continue to be lifted with away-from-home consumer behaviors returning to more typical levels.
As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.
On Slide 14, you'll see that our Health & Biosciences division saw year-over-year sales growth of 7% or 5% on a currency-neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures & Food Enzymes.
Our Health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a 2-year basis.
As Andreas mentioned earlier, inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand has challenged our margins across our business, with H&B particularly impacted, which drove an operating EBITDA decrease of 12%.
Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher air freight volumes, where we have increased intercompany shipments to manage available capacity.
As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output.
Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin.
Turning now to Slide 15.
Our Scent division continues to perform extremely well and experienced strong growth, achieving 10% year-over-year growth or 9% growth on a currency-neutral basis.
This performance was driven by Fine Fragrances' continued rebound, which grew approximately 36%, led by new customer wins and improved volumes.
Our Ingredients category also continues to perform well and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter led by strong performance in both Cosmetic Actives and Fragrance Ingredients.
While our Consumer Fragrances business saw modest low single-digit growth against a strong double-digit year ago comparison, this is a marked improvement from Q2, and we expect further growth as we move forward.
On a 2-year average basis, Consumer Fragrance remained strong at 9% in the third quarter.
Scent also experienced adjusted operating EBITDA growth of 10%, driven by strong volume growth and favorable mix.
Margin was down modestly due to higher raw materials and logistics costs, a trend we see continuing.
I will provide more context shortly.
Lastly, in our Pharma Solutions business, we saw a currency-neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistics disruptions, which have made it challenging to meet persistent and growing customer demand.
While Industrials has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison.
The division's adjusted operating EBITDA and margin also continue to be impacted by higher sourcing, logistics and manufacturing costs.
We also continue to see the impact of force majeures and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines.
While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic and as Andreas mentioned earlier, we remain focused on returning the division to profitability as these industry conditions stabilize.
Now on Slide 17, I would like to review our cash flow position and leverage dynamics for the first nine months of 2021, both of which remain a top priority for us.
So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion.
As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.
Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back half weighted.
From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target, with our cash and cash equivalents finishing at $794 million, including $122 million restricted cash, with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan.
Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt to credit-adjusted EBITDA.
With our continued strong cash flow generation, including proceeds from divested noncore businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than three times net debt to EBITDA within 20 to 36 months, post-transaction close.
Turning to Slide 18.
I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year.
As I mentioned earlier, IFF and the industry at large have seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.
The inflationary pressures we are seeing today are significant.
Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October.
The price of wheat is up almost 40% in the last 12 months through October.
Brent crude prices have more than doubled over the past 12 months to the highest level since October 2018.
In the U.S., natural gas prices are up 100% from a year ago and in the U.K. grew up about 500%.
And transportation rates have increased significantly given the high demand and limited capacity to ship.
Across the raw materials, logistics and energy markets, like many industries around the world, we have seen costs accelerate each quarter, which has led to our margins being adversely impacted.
For example, in the first half of 2021, gross margin was down about 150 basis points, while in the third quarter, we were down about 210 basis points.
As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.
Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as well as improve our sourcing efficiencies, accelerate operational improvements and capture targeted integration synergies to drive profit growth.
Now moving to Slide 19.
I would like to share what this means for our consolidated financial outlook.
For the full year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand.
For the full year 2021, we are targeting $11.55 billion in total revenue or approximately 8.5% growth, up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter.
We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid.
As mentioned, unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry, and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures.
And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%, down from approximately 21.5% that was forecasted in September.
About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends we see in the fourth quarter.
For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges.
We also adjusted our capex spend outlook down as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses.
Overall, we are pleased of the progress we've made to date, strong top line growth and a commitment to meet near-term macro cost pressures, and we're confident that IFF is on the right path and poised for continued success across our core business.
Before I wrap it up, I'd like to reiterate how proud I am of IFF and our thousands of employees around the world who have showcased a remarkable resilience toward an evolving and continuously uncertain industry environment.
We have continued to deliver strong year-over-year sales and profit growth, and I'm confident that with our top-notch financial and operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile, while continuing to deliver for both our shareholders and our customers.
Q4 is off to a solid start, and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets.
In sum, it is clear to me that IFF is in an incredible strong position.
We knew entering this year that the new IFF was poised to change our industry.
But to do so, we had to execute.
As we look at industry-leading sales growth for the full year, I'm just so proud of how everyone here stepped up and executed on our vision and delivered against our potential.
IFF is once again the clear leader of this field, creating another iconic chapter in this company's 132-year legacy.
This core strength of the business is why I felt now was the perfect time to start the transition to find IFF's next CEO.
I have every confidence that now is the right time to let the next chapter of IFF legacy begin.
As we announced, the search has begun for my successor, and we expect that person to be in place by early 2022.
I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future.
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qtrly adjusted earnings per share except amortization $1.47.
achieves strong double-digit sales growth in quarter; on-track to grow 8.5% for full year 2021.
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We have posted to www.
I hope everyone on the call is staying safe and healthy.
I'm pleased to update you on how we continue to respond to and overcome the challenges of the pandemic.
I'll first discuss our financial results, then we'll cover our performance with respect to our strategic priorities and operations and will end with our expectations for the remainder of 2021.
For the first quarter, organic growth was negative 1.8% which positions us for a very strong recovery for 2021.
Going forward, we expect to see positive organic growth.
The new disciplines, we have disclosed are as follows.
CRM Precision Marketing which includes our market consulting, digital and direct marketing agencies, CRM Commerce and Branding Consultancy includes our branding consultancies, shopper marketing and specialty production agencies, CRM Experiential includes our events agencies and CRM Execution & Support is unchanged for the most part, from our prior reporting and includes primarily our field marketing research agencies and our agency servicing the not-for-profit sector.
We believe this additional level of disclosure will allow you to have a better understanding of our operations.
Getting back to our organic growth by geography, in the United States organic growth was down 1% an improvement of over 8% from the fourth quarter.
Advertising and Media and CRM Precision Marketing were positive in the US while the rest of our disciplines, continued to be negative with CRM Experiential having the largest negative impact on our growth.
Europe continued to face significant challenges due to the pandemic in Q1.
Although overall, the markets continued to improve while the rollout of vaccine in Europe lags that of the United States and the UK.
Some countries like Germany and the Netherlands are starting to make progress.
The UK was down 6.4%, about half the decline in the fourth quarter.
CRM Precision Marketing, CRM Commerce and Branding Consultancy and health were all positive in the UK, primarily offset by a significant reduction in CRM Execution & Support due to our field marketing operations.
The Euro and the non-Euro markets were down 3.2% as compared to a negative 9.2% in Q4.
Multiple countries had positive growth in the quarter and the majority continued to improve sequentially.
As you turn positive in Q1 with organic growth of 2.5% Australia continued to perform well and we saw a significant return to growth in our events business in China which combined with improvements in the other operations in the market resulted in double-digit growth.
Latin America experienced negative 2.4% growth in Q1 and meaningful sequential improvement compared to the fourth quarter.
EBIT margin in the first quarter was 13.6% as compared to 12.3% in the first quarter of 2020.
EBIT improved due to the repositioning and cost management actions we took in 2020.
In 2021, our management teams are continuing to align cost with revenues and we're also seeing continued benefits from reductions in addressable spend.
While we expect addressable spend will not return to pre-COVID levels, travel and certain other addressable costs will likely increase during the course of 2021, as conditions improve.
Overall, our expectation is that operating margins for the full year of 2021 will exceed our 2020 operating margin, excluding repositioning costs incurred in Q2 of 2020.
Net income for the quarter was $287.8 million, an improvement of 11.5% from 2020 and earnings per share was $1.33 per share, a year-over-year increase of 11.8%.
Turning to our liquidity, the refinancing steps we took earlier in 2020 combined with our enhanced working capital processes and the curtailment of our share repurchase program, have positioned us extremely well.
We generated $383 million in free cash flow in the quarter and ended with $4.9 billion in cash.
Given the continuing improvements in our operations, strong liquidity and credit profile, our Board has approved the resumption of our share repurchases beginning in the second quarter.
This follows our recent decision to increase our dividend by 7.7% to $0.70 per share.
Both actions are a testament to the steady improvement in our results and our expectations for further improvement for the remainder of 2021.
Our traditional uses of our free cash flow paying dividends, pursuing accretive acquisitions and using our remaining cash for share repurchases is now fully back in effect.
Phil will cover our first quarter performance in more detail during his remarks.
Turning now to our strategy and operations.
In the midst of the pandemic, our key strategic objectives served us well.
These strategies are centered around hiring and retaining the best talent, driving organic growth by evolving our service offerings, improving operational efficiencies and investing in areas of growth.
As part of this process, we continue to make internal investments in our agencies across all practice areas during a very difficult year.
We made good progress on enhancing our capabilities throughout our portfolio, and we will continue to pursue investments with a specific focus in precision marketing, MarTech and digital transformation, commerce, media and healthcare.
We are also accelerating our pursuit of acquisitions in these areas and we've recently completed two transactions; Omnicom Health Group acquired US-based Archbow Consulting.
Archbow helps pharmaceutical and biotech companies design, build and optimize market access operations, product distribution and patient access.
These capabilities will deepen Omnicom's health group's consultative services to biotech and pharma companies across a broad spectrum from operations to marketing.
Also in the quarter Credera, our MarTech and digital transformation consulting business and part of Omnicom's Precision Marketing Group acquired Areteans.
Areteans will extend through their depth in digital transformation, digital marketing and e-commerce.
The company specializes in the design, delivery and implementation of real-time interaction and digital customer relationship management for some of the world's largest brands.
It expands our operations in Australia, India, New Zealand, Singapore and the UK.
Turning to Omni our data and insights platform, as I've mentioned in our last call; looking beyond our media business our practice areas are increasingly leveraging Omni to identify insights for their specific disciplines and clients.
Last quarter Omnicom Public Relations Group launched OmniEarned ID a solution that allows clients to evaluate the outcomes of Earned Media with the same precision as paid media.
More recently, our Health Group launched Omni Health which integrates key healthcare data sets within a privacy compliant ecosystem.
Since we launched Omni 3 years ago, we've continued to [Indecipherable] and insights platform.
As compared to other solutions built on limited -- open source approach -- connects more data sources across more media and commerce platforms to deliver better outcomes to our clients.
In Q2, we will be launching Omni 2.0 using next generation API connections to seamlessly orchestrate, identity sources and platforms -- insights and superior decisioning for our clients across all our networks and practice areas.
Just as important Omni 2.0 continues to build on our commitment to consumer privacy and transparency.
Our data neutral approach, which results in the most diverse compilation of data sets continues to be rooted in a robust data privacy compliance methodology.
This approach puts us in a strong position for a post-cookie world; a few points on this are, through our pioneering work creating data clean rooms, we have direct connections to the first-party data of many of our clients.
Because we are open source and data neutral, Omni works seamlessly across walled garden environments, as well as the broader ecosystem.
At the same time, we orchestrate datasets from about 100 privacy compliance sources to provide a comprehensive view of the consumer across devices.
As the marketplace and technologies continue to rapidly advance, we are confident, our talent, platforms and the strategies built on a foundation of our creative culture, give us a competitive advantage in effectively serving both new and existing clients.
As testament to this success, we've had several key new business wins this past quarter, including a multi-year agreement with Alliance, a leading financial services provider for creative development and production services.
Through this master framework agreement, Omnicom will produce work for Alliance on a global and local level, offering creative solutions to activate the global brand strategy for more than 70 countries, where Alliance operates.
In addition, after recently selecting OMD as its US media agency of record Home Depot has named BBDO as its creative agency of record.
Avocados from Mexico hired GSD&M as its agency of record.
TWBA\Chiat\Day LA was named Agency of Record for three new clients; Behr Paint, Moderna and Schwan's Company.
Through the strategic and creative accounts for Vanguard and Vantage and OMD won the media business for Dr. Scholl's.
In summary, we've made significant strides in evolving our services, capabilities an organization to better service our clients with data science and technology, while remaining grounded in our core strength of creativity.
I'm proud to lead a company with an extraordinary group of people who continually deliver the best creative work in our industry.
From their unwavering dedication, creativity and innovation came the number of industry awards and recognition.
Here are just a few highlights.
For the drums, wealth creator rankings Omnicom was the number one holding company for the fourth year in a row and BBDO won the network category.
[Indecipherable] was named campaign US's 2020 advertising agency of the year.
Critical Mass was named Ad Age's 2021 best places to work with.
BBDO, TBWA and Goodby Silverstein & Partners, were all named to Fast Company's prestigious list of Most Innovative Companies for 2021 making Omnicom the only holding company -- there are three agencies ranked in the top 10 in the advertising sector.
And PHD was named EMEA's Media & Network of the Year and UK Media Agency of the Year Campaign's UK Agency of the Year Award.
Our people have a wealth of knowledge, experiences and perspectives that lead us to this innovation and forward thinking look.
The diversity of our group is something that needs to be celebrated, prioritized and improved upon and it's a strategic focus for us in the year ahead.
With our launch of OPEN2.0 last year, we have made a clear action plan for achieving systemic equity across Omnicom.
We have more than doubled the number of DE&I leaders throughout Omnicom and we are establishing specific KPIs for our networks and practice areas to deliver on and to be measured by.
I look forward to sharing the progress we are making on DE&I on our future calls.
As I discussed earlier, we are confident in both our organic growth expectations and EBIT performance for 2021.
It has taken some time to turn the corner and we are now on a clear path to return to growth.
At the same time, we know that we must continue to monitor the COVID-19 situation and to adapt to any unforeseen challenges that may arise.
As we continue to enhance our operations, we are also evaluating what the future of work looks like at Omnicom; our leadership on a local and office level are working on gathering feedback from employees and clients to help us decide what the new normal will be; one where we can service our clients efficiently while also connecting with colleagues in the safest and most flexible way possible.
The incredible talent within Omnicom has helped us maintain business continuity through the lows of 2020 and overcome its challenges.
As John said, as we move through the first quarter of 2021, we continue to see an improvement in business conditions particularly when compared to the peak of the pandemic during the second quarter of 2020.
As we anticipated, we again saw a sequential improvement in organic revenue performance, a decrease of 1.8% in the first quarter of this year which is a considerable improvement in comparison to the last three quarters of 2020.
And now that we've cycled through a full year of operations since the start of the pandemic, we expect to return to positive organic growth in the second quarter and for the full year.
We continue to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories and the benefits from our repositioning actions taken back in the second quarter of 2020.
Turning to slide 3 for a summary of our revenue performance for the first quarter, organic revenue performance was negative $60.6 million or 1.8% for the quarter.
The decrease represented a sequential improvement versus the last three quarters of 2020, including the unprecedented decrease in organic revenue of 23% in Q2 11.7% in Q3 and 9.6% in Q4.
Regionally, although we continue to experience declines in the Americas, we continue to see improvement when compared to what we experienced over the previous three quarters.
In Europe, FX gains helped to offset negative organic growth and our Asia-Pacific region saw positive organic growth with a mixed performance by country.
The impact of foreign exchange rates increased our revenue by 2.8% in the quarter.
Above the 250 basis point increase we estimated entering the quarter, as the dollar continued to weaken against some of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 0.4% in line with our previous projection, and as a result our reported revenue in the first quarter increased 0.6% the $3.43 billion when compared to Q1 of 2020.
I'll return to discuss the details of the changes in revenue in a few minutes.
Returning to slide one, our reported operating profit for the quarter was $465 million, up 10.8% when compared to Q1 of 2020 and operating margin for the quarter improved to 13.6% compared to 12.3% during Q1 of 2020.
Our operating profit and the 130 basis point improvement in our margins this quarter was again positively impacted from our actions to reduce payroll and real estate costs during the second quarter of 2020, as well as continued savings from our discretionary addressable spend cost categories including T&E general office expenses, professional fees, personnel fees and other items, including cost savings resulting primarily from the remote working environment.
Our reported EBITDA for the quarter was $485 million and EBITDA margin was 14.2% also up 130 basis points when compared to Q1 of last year.
As we've discussed previously, we have and will continue to actively manage our cost to ensure they are aligned with our current revenues.
In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization.
Focusing on real estate portfolio management, back office services, procurement and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
They increased by about $7 million in the quarter but excluding the impact of exchange rates, these costs were down by about 2.6%.
While it was a reduction in base compensation overall from the staffing actions we undertook during the second quarter of last year, it varies by agency, and certain of our agencies have added people as business conditions improved in their markets.
In addition third-party service costs were effectively flat on a reported basis and down slightly on a constant currency basis.
In comparison, these costs which are directly linked to changes in our revenue decreased nearly 40% in the second quarter of last year, 20% in the third quarter and 12.7% in the fourth quarter of 2020, consistent with the decline in our revenues across all of our businesses in those quarters.
Occupancy and other costs, which are less linked to changes in revenue declined by approximately $18 million reflecting our continuing efforts to reduce our infrastructure Call as well as the decrease in general office expenses since the majority of our staff has continue to work remotely.
In addition, finally, depreciation and amortization declined by 3.7 million.
Net interest expense for the quarter was $47.5 million compared to Q1 of last year and down $500,000 versus Q4 of 2020 -- 2020 our gross interest expense was down $1.5 million an interest income decreased by $1 million.
When compared to the first quarter of 2020, interest expense was down -- from $4.7 million, mainly resulting from $7.7 million charge we took in Q1 of 2020 in connection with the early retirement of $600 million of senior notes that were due to mature in Q3 of 2020.
That was offset by the incremental increase in interest expense from the additional interest on the incremental $600 million of debt we issued at the onset of the pandemic in early April 2020.
Net interest expense was also negatively impacted by a decrease in interest income of $6.4 million versus Q1 of 2020 due to lower interest rates on our cash balances.
Based on -- effectively flat in 2021 when compared to 2020.
Our effective tax rate for the first quarter was 26.8% up a bit from the Q1 2020 tax rate of 26% but in line with the range, we estimate for 2021 of 26.5% to 27%.
Earnings from our affiliates was marginally positive for the quarter, representing an improvement compared to the last year.
And the allocation of earnings to the minority -- year in our less than fully owned subsidiaries.
As a result, our reported net income for the first quarter was $287.8 million up 11.5% or 29.7% million when compared to Q1 of 2020.
Our diluted share count for the quarter decreased 0.3% versus Q1 of last year to 216.8 million shares.
As a result, our diluted earnings per share for the first quarter was $1.33 up $0.14 or 11.8% per share when compared to the prior year.
Returning to the details of the changes in our revenue performance on Slide 3, organic revenue performance improved again compared to the reductions in client spending, we experienced during the last three quarters.
We continue to see our clients across a wide spectrum of industry sector -- modify spending as they -- pandemic on their businesses.
While helped by FX -- was [Technical Issues] or up $20 million 0.6% from Q1 of 2020.
CRM precision marketing which includes our precision marketing and digital direct marketing agencies which were previously included in our CRM Consumer Experience discipline.
CRM commerce and brand comprised of the Omnicom Commerce Group and our brand consulting agencies; both previously included in CRM Consumer Experience CRM Experiential which includes our events and sports marketing businesses which was also included in CRM Consumer Experience and our CRM Execution and Support discipline which includes our field marketing, merchandising and point of sale, research and not-for-profit consulting agencies and remains largely unchanged.
Turning to the FX impact, on a year-over-year basis the impact of foreign exchange rates was mixed when translating our foreign revenues to US dollars.
The net impact of changes in exchange rates increased reported revenue by 2.8% or $95.7 million in revenue for the quarter.
While the dollar weakened against some of our largest major foreign currencies, we also saw some strengthening against the handful of others.
In the quarter, the dollar weakened against the euro, the British pound, the Chinese yuan and the Australian dollar while the dollar strengthened against the Brazilian real, the Russian ruble and the Turkish lira.
In light of the recent strengthening of our basket of foreign currencies against the US dollar and where currency rates currently are, our current estimate is that FX could increase our reported revenues by around 3.5% to 4% in the second quarter and moderate in the second half of 2021 resulting in a full year projection of approximately 2% positive.
These estimates are subject to significant adjustment as we move forward in 2021.
The impact of our acquisition and disposition activities over the past 12 months resulted in a decrease in revenue of $15.1 million in the quarter or 0.4% which is consistent with our estimate entering the year.
Our projection of the net impact of our acquisition and disposition activity for the balance of the year, including recently completed acquisitions and dispositions is currently similar to Q1.
As previously mentioned, our organic revenue decreased $60.6 million or 1.8% in the first quarter when compared to the prior year.
The impact of the COVID-19 pandemic on the global economy and on our client's planned marketing spend appears to be moderating in certain major markets.
As long as the COVID-19 pandemic remains a public health threat, global economic conditions will continue to be volatile.
We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy moderates.
We expect to return to positive organic growth in the second quarter and for the full year.
For the first quarter -- the split was 59% for advertising and 41% for marketing services.
As for the organic change by discipline, advertising was up 1.2% Our media businesses achieved positive organic growth for the first time since Q1 of 2020 and our global and national advertise -- when compared to the last three quarters although performance mixed by agency.
[Technical Issues] 7.2% on a continued strong performance and the delivery of a superior [Technical Issues] service offering.
CRM commerce and brand consulting was down 4.2% mainly related to decreased activity in our shopper marketing businesses due to client losses in prior quarters.
CRM experiential continued to face significant obstacles due to the many restrictions from holding large events.
In the quarter, the discipline was down over 33%.
CRM Execution and Support was down 13% as our field marketing non-for profit and research businesses continue to lag.
PR was negative 3.5% in Q1 on mixed performance from our global PR agencies, and finally, our healthcare agencies again facing a very difficult comparison back to the performance of Q1 2020 when they experienced growth in excess of 9% were flat organically.
So the businesses remained solid across the group.
Now, turning to the details of our regional mix of business on page 5 you can see the quarterly split was 54.5% in the US, 3% for the rest of North America.
10.4% in the UK, 17.1% for the rest of Europe, 11.7% for Asia-Pacific, 1.8% for Latin America and 1.5% for the Middle East and Africa.
In reviewing the details of our performance by region, organic revenue in the first quarter in the US was down $18 million or 1%.
Our advertising discipline was positive for the quarter on the strength of our media businesses and our CRM precision [Technical Issues] which once again experienced our largest organic decline over 34% in the US while our other disciplines were down single-digits [Technical Issues] down 3.2%.
These were down 6.4% organically.
Our CRM precision marketing, CRM commerce and brand consulting and healthcare agencies continued to have solid performance.
They again were offset by reductions from our advertising, CRM Experiential and CRM Execution and Support businesses.
The rest of Europe was down 3.2% organically.
In the Eurozone, among our major markets Belgium, Italy and the Netherlands were positive organically.
Germany, Ireland and France were down single-digits while Spain was down double-digits.
Outside the Eurozone organic growth was up around 5% during the quarter and organic revenue performance in Asia-Pacific for the quarter was up 2.5%.
Positive performance from our agencies in Australia, Greater China and India, were able to offset decreases in Japan, New Zealand, Singapore and Indonesia.
Latin America was down 2.4% organically in the quarter.
Our agencies in Mexico and Colombia were positive in the quarter, a double-digit decrease from our agencies in Brazil offset that performance.
And lastly, the Middle East and Africa was down 10% for the quarter.
On Slide 6, we present our revenue by industry information for Q1 of 2021.
Again, we've seen general improvement in the performance across most industries when compared to the previous few quarters.
But the overall mix of revenue by industry was relatively consistent to what we saw in prior quarters.
Turning to our cash flow performance on Slide 7, you can see that in the first quarter, we generated $382 million of free cash flow, excluding changes in working capital which was up about $20 million versus the first quarter of last year.
As for our primary uses of cash on Slide 8 dividends paid to our common shareholders were up $140 million, effectively unchanged when compared to last year.
The $0.05 per share increase in the quarterly dividend that we announced in February will impact our cash payments from Q2 forward.
Dividends paid to our non-controlling interest shareholders totaled $14 million.
Capital expenditures in Q1 were $12 million, down as expected when compared to last year.
As we mentioned previously, we reduced our capital spending in the near term to only those projects that are essential or previously committed.
Acquisitions including earn-out payments totaled $9 million and since we stopped stock repurchases, the positive $2.7 million in net proceeds in net proceeds represents cash received from stock issuances under our employee share plans.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $210 million in free cash flow during the first 3 months of the year.
Regarding our capital structure at the end of the quarter, our total debt is $5.76 billion, up about $650 million since this time last year, but down $50 million as of this past year end.
When compared to March 31 of last year, the major components of the change were the issuance of $600 million of 10-year senior notes due in 2030, which were issued in early April at the outset of the pandemic.
Along with the increase in debt of approximately $80 million resulting from the FX impact of converting our billion-euro denominated borrowings into dollars at the balance sheet date.
While the change from December 31 was the result of just the FX impact of converting the euro notes.
Our net debt position as of March 31 was $863 million up about $650 million from last year-end, but down $1.5 billion when compared to Q1 of 2020.
The increase in net debt since year-end was the result of the typical uses of working capital that historically occur which totaled about $840 million and was partially offset by the $210 million we generated in free cash flow during the past three months.
Over the past 12 months, the improvement of net debt is primarily due to our positive free cash flow of $860 million.
Positive changes in operating capital of $537 million and the impact of FX on our cash and debt balances which decreased our net debt position by about $190 million.
As for our debt ratios, our total debt to EBITDA ratio was 3.1 times and our net debt to EBITDA ratio was 0.5 times and finally, moving to our historical returns on Slide 10.
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expect q1 2021 adjusted ebitda to improve sequentially from q4 2020.
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Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer.
We're also joined by Chris Cragg, Oil States' Executive Vice President, Operations; and Ben Smith, President of GEODynamics, our Downhole Technologies segment.
To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
As you can imagine, the market dislocations caused by the global response to the COVID-19 pandemic have been unprecedented.
The impact on the energy industry is even more extreme due to the rapid demand destruction for crude oil and the resulting massive inventory builds across the globe that have resulted.
Partially cushioning this very negative industry backdrop is the agreement reached at the OPEC+ Summit earlier this month, whereby both short-term and long-term supply cuts were agreed to.
The announced duration for the short-term cuts totaling 10 million barrels per day, extend for two months through May and June.
This is the single largest coordinated output cut in history, but nonetheless, it falls far short of the estimated 25 million to 30 million barrels per day of demand destruction.
Importantly, the longer-term cuts extend to April 2022, with supply reductions compressing over the extended term.
Given the duration of the cuts, the industry should be able to better manage through the unprecedented crude oil demand destruction once we get beyond the immediate impact of inadequate storage globally with well shut-ins and supply constraints that follow.
We have important matters to discuss with you today beyond just our results for the first quarter.
In conjunction with our discussion of the quarter, we plan to highlight our initiatives undertaken to shore up liquidity, give you our thoughts on near-term market conditions and summarize our efforts to mitigate costs, both capital and operating, as we navigate this difficult market.
First, I'd like to provide a brief update regarding COVID-19 and its impact on our global operations.
We have implemented stringent protocols in an effort to protect our employees, customers, suppliers and the broader communities within which we work.
Measures applied include working remotely, we're able to do so, adhering to social distancing guidelines, limiting visitors to our work sites to essential personnel, adjusting shifts and work schedules to minimize close contact, mandatory stay-at-home principles when employees show symptoms of illness, performing enhanced cleaning protocols, along with other safety measures.
To date, we have only been notified of two confirmed cases of COVID-19 in our global workforce with one of the two now testing negative and returning to work.
As various states began to reopen nonessential businesses, we have stressed how critical it is that we maintain our diligence to help prevent a second wave of cases developing in our communities.
Demand for oil and gas, and therefore, our products and services depends on a fully functional economy, and we intend to set an example for others in working safely during this pandemic based upon what we have learned.
Moving on to the quarter.
We reported a large headline loss during the quarter resulting from various impairments taken due to impacts on our business from the global response to the COVID-19 crisis.
However, our first quarter results, excluding the impairments taken, exceeded our guidance issued in February.
During the first quarter, our Completion Services revenues were modestly up sequentially with margins improving 370 basis points.
In our Downhole Technologies segment, revenues improved 7% sequentially and margins increased 420 basis points.
Revenues in our Offshore/Manufactured Products segment decreased sequentially due to delays in our project-driven sales arising from global disruptions in our own operations and in various parts of our supply chain.
Segment backlog at March 31, 2020, totaled $267 million, a decrease of 4% sequentially.
Our segment book-to-bill ratio for the quarter approximated one times.
Despite exceeding our first quarter guidance, we are acutely aware of the challenging market conditions that we will face during the remainder of 2020 and into 2021.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs through such a downturn.
Lloyd will review with you our efforts taken with our lenders to amend our current cash flow-based revolving credit facility and convert it into an asset-based lending arrangement.
We have also taken significant actions on the cost side of our business to adjust to significantly declining revenues, particularly those ties to shale completions in the United States, which are currently in three fall.
We will closely manage our debt, working capital and cash flow generation in the quarters to come.
Lloyd will now review our consolidated results of operations and financial position in more detail, before I go into a discussion of each of our segments.
During the first quarter, we generated revenues of $220 million, while reporting a loss of $405 million or $6.79 per share.
Our first quarter results were reduced by significant noncash impairment charges, including the following: a $406 million or $6.48 per share of goodwill written off; a $25 million or $0.34 per share inventory impairment; and a $5 million or $0.07 per share fixed asset impairment, driven by the expected duration of this unprecedented market downturn.
Our first quarter EBITDA totaled $22 million with an EBITDA margin of 10%.
The goodwill impairment charges were taken in all segments but related primarily to our Downhole Technologies and Completion Services businesses, arising from, among other factors, the significant decline in our stock price and that of our industry peers, along with reduced growth expectations in the next couple of years, given weak energy market conditions resulting from demand destruction, caused by the global response to the COVID-19 pandemic.
In addition, given the negative market outlook, our estimated weighted average cost of capital increased approximately 500 basis points compared to year-end 2019.
We remained essentially cash flow neutral during the quarter with $5 million in cash flow from operations, offset by $6 million in capital expenditures.
In the first quarter, we collected $4 million in proceeds from the sale of equipment and repurchased $6 million in principal amount of our convertible senior notes at a 17% discount to par value.
For the first quarter 2020, our net interest expense totaled $4 million, of which $2 million was noncash amortization of debt discount and issuance costs.
At March 31, our net debt-to-book capitalization ratio was 23%, which increased from year-end 2019 due to the noncash asset impairments recorded during the first quarter.
At March 31, our liquidity totaled $132 million, and we were in compliance with our debt covenants.
It is important to fully understand our leverage position, which, at March 31, consisted of $72 million of senior secured revolving credit facility borrowings and $217 million of other debt, consisting primarily of our 1.5% convertible senior notes due in February 2023.
Our credit agreement underlying our revolving credit facility is the only debt agreement that is subject to leverage covenants.
Accordingly, we are working with our bank group to amend our existing cash flow-based revolving credit facility to convert it into an asset-based lending arrangement, giving a negative market outlook and the uncertainty regarding the level of EBITDA to be generated as we progress through to 2020, coupled with the leverage covenants, governing both total net debt and senior secured debt to EBITDA.
The amended facility is expected to be subject to a borrowing base based on our accounts receivable and inventory with differing advance rates depending on the age and geographic location of the various assets.
While the amount of the borrowing base has not yet been finalized, we expect the amended facility size to range from $175 million to $200 million, and it will not contain similar leverage covenants.
At March 31, 2020, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $348 million compared to borrowings outstanding under our revolver totaling $72 million, which yielded a 4.8 times coverage level.
In terms of our second quarter 2020 consolidated guidance, we expect depreciation and amortization expense to total approximately $25 million, net interest expense to total approximately $4 million, of which $2 million is noncash, and our corporate expenses are projected to total $8.5 million.
Corporate expenses in the first quarter of 2020 and forecast for the second quarter reflect reductions in both short-term and long-term incentive compensation expense.
We are reducing our capex spending during 2020 to a range of $15 million to $20 million, which at the midpoint is roughly 70% less than our 2019 capital expenditures.
In our Offshore/Manufactured Products segment, we generated revenues of $91 million and segment EBITDA of $13 million during the first quarter.
Revenues decreased 16% sequentially due primarily to delays in our project-driven revenues due to global disruptions in our operations and in our supply chain.
Segment EBITDA margin was 14% in the first quarter of 2020 compared to 15% in the prior quarter.
Orders booked in the first quarter totaled $87 million, resulting in a quarterly book-to-bill ratio of approximately one times.
At March 31, our backlog totaled $267 million, a 4% sequential decrease, but it, nonetheless, reflected a 14% increase from the $234 million of backlog that existed at March 31, 2019.
For 75 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical deepwater and offshore environments.
Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers.
In 2020, we are bidding on potential award opportunities to support our subsea, floating and fixed platform systems, drilling, military and wind energy clients globally.
However, with reduced market visibility, given much lower crude oil prices and reduced customer spending, we now believe 2020 bookings will be lower than the levels achieved in 2019.
In our Well Site Services segment, we generated $88 million of revenue, $12 million of segment EBITDA and a segment EBITDA margin of 14% compared to 10% reported in the preceding quarter.
The sequential improvement in our results was driven by sound cost controls during the quarter.
However, we know the sequential improvement cannot be sustained, given expected materially lower U.S. land completion activity and the reduced number of frac spreads in operation.
International and Gulf of Mexico market activity comprised 20% of our first quarter Completion Services revenues.
As announced last year, we have discontinued our drilling operations in the Permian, reducing our marketed fleet from 34 rigs to nine rigs with the remaining assets serving customers in the Rocky Mountain region.
We recorded an additional $5 million noncash fixed asset impairment charge in the first quarter, given the negative outlook for the vertical rig market for the remainder of 2020.
As of early April, none of our marketed rigs were working.
We are highly focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
While focusing on value-added services in 2019, we closed or consolidated eight North American operating districts or 19% of our locations and reduced headcount in our Completion Services business by 20%.
Sadly, these headcount reductions and facility closures must continue in 2020 in order to sustain the company through this extreme market downturn.
We will continue to focus on core areas of expertise and actively develop new proprietary products to differentiate Oil States' completions offerings.
In our Downhole Technologies segment, we generated revenues of $41 million and segment EBITDA of $5 million in the first quarter.
First quarter revenues and EBITDA were sequentially higher due to improved sales of our perforating products and frac plugs, coupled with sound cost control.
Segment EBITDA margin averaged 13% in the first quarter compared to 9% in the preceding quarter.
We continue to develop, field trial and commercialize new products in our Downhole Technologies segment.
Sales trends for our vapor gun integrated perforating system and addressable switches are gaining customer acceptance following their respective commercializations late in the fourth quarter.
In addition, our premium integrated gun system, named STRATX, was formally launched in the first quarter.
As noted on our last earnings conference call in February, we announced the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.
Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality and increased performance while ensuring the highest level of safety and reliability.
Given the current market weakness, we recognize that revenue uptake of these new technologies will be delayed.
Given rapidly declining spending on U.S. land operations by our customers who are facing dunning challenges, we are not comfortable providing specific revenue or EBITDA guidance for the second quarter of 2020 for either of our Well Site Services or Downhole Technologies segments.
However, we will attempt to do so directionally.
The first quarter 2020 U.S. rig count average was 785 rigs, which was down 4% sequentially.
The U.S. rig count totaled 465 rigs on April 24, 2020, down 41% from the first quarter 2020 average rig count.
Current analyst estimates are calling for a 40% to 70% sequential decline in Completions activity, which will negatively impact all of our segments with short-cycle U.S. shale-driven exposure.
As a result, we expect our U.S. onshore businesses and product lines to feel the dramatic effects of lower well completions consistent with that of our U.S. peers.
Accordingly, we are aggressively reducing our cost in order to stabilize our financial results as we manage through this unprecedented downturn.
In our Offshore/Manufactured Products segment, we are more confident in our ability to forecast revenues, given our backlog position and the relatively low level of short-cycle product sales in the first quarter.
We project our second quarter revenues in this segment to range between $96 million and $104 million with segment EBITDA margins expected to average 10% to 12%, depending on product and service mix, along with absorption levels.
Our margins are expected to be compressed in the near-term due to the closures of our India and Singapore facilities until at least May four and June 1, respectively, as mandated by their governments, along with reduced cost absorption globally as we deal with supply chain issues and other inefficiencies.
Management teams have to make difficult decisions during market downturns such as this to protect the health of their companies.
We wanted to provide a summary of actions that we are taking to mitigate the expected material decline in revenue during 2020.
As Lloyd mentioned, capex will be reduced by approximately 70% year-over-year.
Direct operating cost will be reduced in line with activity declines.
Headcount has already been reduced approximately 30% in our Well Site Services and Downhole Technologies segments since the beginning of this year.
SG&A headcount has been reduced by approximately 15% since the beginning of the year as well.
Short-term incentives have essentially been eliminated for 2020.
Our 401(k) and deferred compensation plan matches have been suspended for the immediate future.
Various salary personnel, including executive management, have taken salary reductions in addition to other reductions in short-term and long-term compensation.
Discretionary spending has been substantially reduced or eliminated.
When we summarize the impact of our actions taken, we estimate that we will reduce 2020 cost by $225 million when compared to 2019.
Of that total, 87% is estimated at cost of goods sold and 13% relates to SG&A.
We believe that 20% to 25% of the cost reductions are fixed in nature.
Now I'd like to offer some concluding comments.
We believe that we are making substantial progress in terms of shoring up our liquidity with the planned amendment and conversion of our cash flow-based revolving credit facility to an asset-based lending arrangement.
With our strong working capital position, we believe that we can manage through this extreme downturn with a safe balance sheet position.
We recognize that cost management has to be a primary focus in this lower activity environment.
To that end, cash flow generation remains a top priority with near-term plans to manage working capital and secure balance sheet stability.
Oil States will continue to conduct safe operations and will remain focused on providing value-added products and services to meet customer demand globally.
That completes our prepared comments.
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q1 loss per share $6.79.
compname says reduced capital spending plans for 2020 by approximately 70%.
compname says expect to receive u.s. income tax refunds of about $41 million in 2020 under provisions of cares act.
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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 and our long-standing commitment to sustainability.
Greg Hill will then discuss our operations and John Rielly will cover our financial results.
Our strategy is to grow our resource base, have a low cost of supply and sustained cash flow growth.
Executing this strategy has positioned our company to deliver industry-leading cash flow growth over the next decade and has made our portfolio increasingly resilient in a low oil price environment.
Our strategy aligns with the world's growing need for affordable reliable and cleaner energy that is necessary for human prosperity and global economic development.
We recognize a climate change is the greatest scientific challenge of the 21st century and support the aim of the Paris Agreement and a global ambition to achieve net zero emissions by 2050.
The world faces the dual challenge of needing 20% more energy by 2040 and reaching net zero carbon emissions by 2050.
In the International Energy Agency's rigorous sustainable development scenario, which assumes that all pledges of the Paris agreement are met, oil and gas will be 46% of the energy mix in 2040 compared with approximately 53% today.
In the IEA's newest net zero scenario, oil and gas will still be 29% of the energy mix in 2040.
In either scenario, oil and gas will be needed for decades to come and will require significantly more global investment over the next 10 years on an annual basis than the $300 billion spent last year.
The key for our company is to have a low cost supply by investing only in high-return low cost opportunities.
The best rocks for the best returns.
We have built a differentiated and focused portfolio that is balanced between short cycle and long cycle assets Guyana is our growth engine and The Bakken, Gulf of Mexico and Southeast Asia are our cash engines.
Guyana is positioned to become a significant cash engine in the coming years, as multiple phases of low-cost oil developments come online, which we expect will drive our portfolio breakeven Brent oil price below $40 per barrel by the middle of the decade.
Based on the most recent third-party estimates, our cash flow is estimated to grow at a compound annual growth rate of 42% between 2020 and 2023, which is 75% above our peers and puts us in the top 5% of the S&P 500.
With a line of sight for up to 10 FPSOs to develop the discovered resources in Guyana, this industry leading cash flow growth rate is expected to continue through the end of the decade.
Investors want durability and growth in cash flow.
We are pleased to announce today that in July, we paid down $500 million of our $1 billion term loan maturing in March 2023.
Depending upon market conditions, we plan to repay the remaining $500 million in 2022.
This debt reduction, combined with the start-up of Liza Phase 2 early next year is expected to drive our debt-to-EBITDAX ratio under 2 times next year.
Once this debt is paid off and our portfolio generates increasing free cash flow, we plan to return the majority to our shareholders.
First, through dividend increases and then opportunistic share repurchases.
We expect to receive approximately $375 million in proceeds and our ownership in Hess Midstream on a consolidated basis, will be approximately 45% compared with 46% prior to the transaction.
On April 30, we completed the sale of our Little Knife and Murphy Creek nonstrategic acreage interest in The Bakken for a total consideration of $312 million effective March 1, 2021.
This acreage, most of which we were not planning to drill before 2026 was located in the Southern most portion of our Bakken position and was not connected to Hess Midstream Infrastructure.
The Midstream transaction and the sale of the Little Knife and Murphy Creek acreage bring material value forward and further strengthen our cash and liquidity position.
The Bakken remains a core part of our portfolio and our largest operated asset.
We have a large inventory of future drilling locations that generate attractive financial returns at $50 per barrel WTI.
In February, when WTI oil prices moved above $50 per barrel, we added a second rig, given the continued strength in oil prices, we are now planning to add a third rig in the Bakken in September, which is expected to strengthen free cash flow generation in the years ahead.
Key to our long-term strategy is Guyana with its low cost of supply and industry-leading financial returns.
We have an active exploration and appraisal program this year on the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator.
We see the potential for at least six FPSOs on the block by 2027 and up to 10 FPSOs to develop the discovered resources on the block, and we continue to see multibillion barrels of future exploration potential remaining.
Earlier today, we announced a significant new oil discovery at Whiptail.
The Whiptail number 1 well encountered 246 feet of net pay and the Whiptail number 2 well, which is located three miles northeast of Whiptail-1 encountered 167 feet of net pay in high quality oil bearing sandstone reservoirs.
Drilling continues at both wells to test deeper targets.
The Whiptail discovery could form the basis for our future oil development in the Southeast area of the Stabroek Block and will add to the previous recoverable resource estimate of approximately 9 billion barrels of oil equivalent.
In June, we also announced the discovery at the Longtail-3 well which encountered approximately 230 feet of net pay including newly identified high quality hydrocarbon bearing reservoirs, below the original Longtail-1 discovery intervals.
In addition, the successful Mako-2 well, together with Uaru-2 well which encountered approximately 120 feet of high quality oil bearing sandstone reservoir will potentially underpin a fifth oil development in the area east of the Liza complex.
In terms of Guyana developments, the Liza Unity FPSO with a gross capacity of 220,000 barrels of oil per day is expected to sail from Singapore to Guyana in late August and the Liza-2 development is on track to achieve first oil in early 2022.
Our third oil development on the Stabroek Block at the Payara field is expected to achieve first oil in 2024, also with a gross capacity of 220,000 barrels of oil per day.
Engineering work for our fourth development on the Stabroek Block at Yellowtail is underway with preliminary plans for a gross capacity in the range of 220,000 to 250,000 barrels of oil per day and anticipated start-up in 2025 pending government approvals and project sanctioning.
Our three sanctioned oil developments have a breakeven Brent oil price of between $25 and $35 per barrel.
And according to a recent data from Wood McKenzie, our Guyana developments are the highest margin, lowest carbon intensity oil and gas assets globally.
Last week we announced publication of our 24th Annual Sustainability Report, which details our Environmental, Social and Governance or ESG strategy and performance.
In 2020 we significantly surpassed our five-year emission reduction targets reducing Scope 1 and 2 operated greenhouse gas emissions intensity by 46% and flaring intensity by 59% compared to 2014 levels.
Our five year operated emission reduction targets for 2025 which are detailed in the sustainability report exceed the 22% reduction in carbon intensity by 2030 in the International Energy Agency sustainable development scenario, which is consistent with the Paris Agreements ambition to hold the rise in global average temperature to well below 2 degrees centigrade.
We are also contributing to groundbreaking research being done by the Salk Institute to develop plants with larger root systems that are capable of absorbing and storing potentially billions of tons of carbon per year from the atmosphere.
We continue to be recognized as an industry leader for the quality of our ESG performance and disclosure.
In May, Hess was named to the 100 Best Corporate Citizens list for the 14th consecutive year, based upon an independent assessment by ISS ESG.
And we were the only oil and gas company to earn a place on the 2021 list.
In summary, oil and gas are going to be needed for decades to come.
By continuing to successfully execute our strategy and achieve strong operational performance, our company is uniquely positioned to deliver industry-leading cash flow growth over the next decade.
As our term loan is paid off and our portfolio generates increasing free cash flow, the majority will be returned to our shareholders, first through dividend increases and then opportunistic share repurchases.
In the second quarter, we continued to deliver strong operational performance.
Companywide net production averaged 307,000 barrels of oil equivalent per day excluding Libya, above our guidance of 290,000 to 295,000 barrels of oil equivalent per day, driven by good performance across the portfolio.
In the third quarter, we expect companywide net production to average approximately 265,000 barrels of oil equivalent per day excluding Libya, which reflects the Tioga Gas Plant turnaround in the Bakken and planned maintenance in the Gulf of Mexico and Southeast Asia.
For full year 2021, we now forecast net production to average approximately 295,000 barrels of oil equivalent per day excluding Libya, compared to our previous forecast of between 290,000 and 295,000 barrels of oil equivalent per day, so we're now forecasting to be at the top of the range.
Turning to the Bakken.
Second quarter net production averaged 159,000 barrels of oil equivalent per day.
This was above our guidance of approximately 155,000 barrels of oil equivalent per day, primarily reflecting increased gas capture which has allowed us to drive flaring to under 5%, well below the state's 9% limit.
For the third quarter we expect Bakken net production to average approximately 145,000 barrels of oil equivalent per day, which reflects the planned 45 day maintenance turnaround and expansion tie-in at the Tioga Gas Plant.
For the full year 2021, we maintain our Bakken net production forecast of 155,000 to 160,000 barrels of oil equivalent per day.
In the second quarter, we drilled 17 wells and brought nine new wells online.
In the third quarter, we expect to drill approximately 15 wells and to bring approximately 20 new wells online.
And for the full year 2021, we now 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 confident that we can offset the increases through technology and lean manufacturing efficiency gains and are therefore maintaining our full year average forecast of $5.8 million per well in 2021.
We've been operating two rigs since February, but given the improvement in oil prices and our robust inventory of high return drilling locations, we plan to add a third rig in September.
Moving to a 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, second quarter net production averaged 52,000 barrels of oil equivalent per day compared to our guidance of approximately 50,000 barrels of oil equivalent per day.
In the third quarter, we forecast Gulf of Mexico net production to average between 35,000 and 40,000 barrels of oil equivalent per day, reflecting planned maintenance downtime as well as some hurricane contingency.
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 second quarter was 66,000 barrels of oil equivalent per day, above our guidance of approximately 60,000 barrels of oil equivalent per day.
Third quarter net production is forecast to average between 50,000 and 55,000 barrels of oil equivalent per day, reflecting planned maintenance at North Malay Basin and the JDA as well as Phase-3 installation work at North Malay Basin.
Full year 2021 net production is forecast to average approximately 60,000 barrels of oil equivalent per day.
Now turning to Guyana, in the second quarter gross production from Liza phase one averaged 101,000 barrels of oil per day or 26,000 barrels of oil per day net to Hess.
The repaired flash gas compression system has been installed on the Liza Destiny FPSO and is under test.
The operator is evaluating the test data to optimize performance and is safely managing production in the range of 120,000 to 125,000 barrels of oil per day.
Replacement of the flash gas compression system with a modified design and production optimization work are planned for the fourth quarter, which will 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 third quarter and for the full year 2021.
The Liza Phase-2 development will utilize the 220,000 barrels of oil per day Unity FPSO which is scheduled to sail away from Singapore at the end of August and first order remains on track for early 2022.
Turning to our third development Payara.
The Prosperity FPSO oil is complete and will enter the Keppel yard in Singapore following sale away of the Liza Unity.
Topsides fabrication has commenced the dynamic and development drilling began in June.
The overall project is approximately 45% completed.
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.
The joint venture anticipate submitting the plan of development to the Government of Guyana in the fourth quarter, with first oil targeted for 2025, pending government approvals and projects sanctioning.
During the second quarter the Mako-2 Appraisal well on the Stabroek Block confirmed the quality, thickness and areal extent of the reservoir.
When integrated with the previously announced discovery at Uaru-2, the data supports a potential fifth development in the area east of the Liza complex.
Drilling continues at both wells to test deeper targets.
In terms of other drilling activity in the second half of 2021 after Whiptail-2, the Noble Don Taylor will drill the Pinktail exploration well, which is located five miles southeast of Yellowtail one, followed by the Tripletail-2 appraisal well, located five miles south of Tripletail-1.
The Noble Tom Madden will spud the Kaieteur Block-1 exploration well located 4.5 miles southeast of the Turbot-1 discovery in early August.
Then in the fourth quarter, we will drill our first dedicated test of the deep potential at the [Indecipherable] prospect located 9 miles northwest of Liza-1.
In the third quarter, The Noble Sam Croft will drill the Turbot-2 appraisal well then transition to development drilling operations for the remainder of the year.
The Stena Carron will conduct a series of appraisal drill stem tests at Uaru-1, Mako-2 and then Longtail-2.
In closing, we continue to deliver strong operational performance across our portfolio.
Our Offshore assets are generating strong free cash flow.
The Bakken is on a capital-efficient growth trajectory and Guyana keeps getting bigger and better, all of which positions us to deliver industry-leading returns, material cash flow generation and significant shareholder value.
In my remarks today, I will compare results from the second quarter of 2021 to the first quarter of 2021.
Adjusted net income was $74 million in the second quarter of 2021, compared to net income of $252 million in the first quarter of 2021.
E&P adjusted net income was $122 million in the second quarter of 2021 compared to net income of $308 million in the previous quarter.
The changes in the after-tax components of adjusted E&P results between the second quarter and first quarter of 2021 were as follows: Lower sales volumes reduced earnings by $126 million; higher cash costs reduced earnings by $48 million; higher exploration expenses reduced earnings by $10 million; all other items reduced earnings by $2 million, for an overall decrease in second quarter earnings of $186 million.
Second quarter sales volumes were lower, primarily due to Guyana having two, 1 million barrel liftings of oil, compared with three, 1 million barrel liftings in the first quarter and first quarter sales volumes included non-recurring sales of two VLCC cargos totaling 4.2 million barrels of Bakken crude oil, which contributed approximately $70 million of net income.
In the second quarter, our E&P sales volumes were under lifted compared with production by approximately 785,000 barrels, which reduced our after-tax results by approximately $18 million.
Cash costs for the second quarter came in at the lower end of guidance and reflect higher planned maintenance and workover activity in the first quarter.
In June, the US Bankruptcy Court approved the bankruptcy plan for Fieldwood Energy, which includes transferring abandonment obligations of Fieldwood to predecessors in title of certain of its assets, who are jointly and severally liable for the obligations.
As a result of the bankruptcy, Hess as one of the predecessors in title in 7 Shallow Water, West Delta 79-86 leases held by Fieldwood is responsible for the abandonment of the facilities on the leases.
Second quarter E&P results include an after tax charge of $147 million representing the estimated gross abandonment obligation for West Delta 79-86 without taking into account potential recoveries from other previous owners.
Within the next nine months, we expect to receive an order from the regulator requiring us along with other predecessors in title to decommission the facilities.
The timing of these decommissioning activities will be discussed and agreed upon with the regulator and we anticipate the cost will be incurred over the next several years.
The Midstream segment had net income of $76 million in the second quarter of 2021 compared to $75 million in the prior quarter.
Midstream EBITDA before noncontrolling interest amounted to $229 million in the second quarter of 2021 compared to $225 million in the previous quarter.
Now turning to our financial position.
At quarter end, excluding Midstream, cash and cash equivalents were $2.42 billion, which includes receipt of net proceeds of $297 million from the sale of our Little Knife and Murphy Creek acreage in the Bakken.
Total liquidity was $6.1 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.6 billion.
Our fully undrawn $3.5 billion revolving credit facility is committed through May 2024 and we have no material near-term debt maturities aside from the $1 billion term loan which matures in March 2023.
In July, we repaid $500 million of the term loan.
Earlier today Hess Midstream announced an agreement to repurchase approximately 31 million Class B units of Hess Midstream held by GIP and us for approximately $750 million.
We expect to receive net proceeds of approximately $375 million from the sale in the third quarter.
In addition, we expect to receive proceeds in the third quarter from the sale of our interest in Denmark for total consideration of $150 million with an effective date of January 1, 2021.
In the second quarter of 2021, net cash provided by operating activities before changes in working capital was $659 million compared with $815 million in the first quarter, primarily due to lower sales volumes.
In the second quarter, net cash provided by operating activities after changes in working capital was $785 million compared with $591 million in the first quarter.
Changes in operating assets and liabilities during the second quarter of 2021 increased cash flow from operating activities by $126 million, primarily driven by an increase in payables that we expect to reverse in the third quarter.
Now turning to guidance.
Our E&P cash costs were $11.63 per barrel of oil equivalent including Libya and $12.16 per barrel of oil equivalent, excluding Libya in the second quarter of 2021.
We project E&P cash costs, excluding Libya to be in the range of $13 to $14 per barrel of oil equivalent for the third quarter, which reflects the impact of lower production volumes resulting from the Tioga Gas Plant turnaround.
Full year cash cost guidance of $11 to $12 per barrel of oil equivalent remains unchanged.
DD&A expense was $11.55 per barrel of oil equivalent including Libya and $12.13 per barrel of oil equivalent excluding Libya in the second quarter.
DD&A expense excluding Libya is forecast to be in the range of $12 to $13 per barrel of oil equivalent for the third quarter and full-year guidance of $12 to $13 per barrel of oil equivalent remains unchanged.
This results in projected total E&P unit operating costs, excluding Libya to be in the range of $25 to $27 per barrel of oil equivalent for the third quarter and $23 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 $40 million to $45 million in the third quarter and full-year guidance is expected to be in the range of $160 million to $170 million, which is down from previous guidance of $170 million to $180 million.
And Midstream tariff is projected to be in the range of $265 million to $275 million for the third quarter and full-year guidance is projected to be in the range of $1,080 million to $1,100 million, which is down from the previous guidance of $1,090 million to $1,115 million.
E&P income tax expense, excluding Libya is expected to be in the range of $35 million to $40 million for the third quarter and full-year guidance is expected to be in the range of $125 million to $135 million, which is updated from the previous guidance of $105 million to $15 million reflecting higher commodity prices.
We expect non-cash option premium amortization will be approximately $65 million for the third quarter and full-year guidance of approximately $245 million remains unchanged.
During the third quarter, we expect to sell three 1 million barrel cargoes of oil from Guyana.
Our E&P capital and exploratory expenditures are expected to be approximately $575 million in the third quarter.
Full-year guidance, which now includes increasing drilling rigs in the Bakken to three from two in September, remains unchanged from prior guidance at approximately $1.9 billion.
We anticipate net income attributable to Hess from the Midstream segment to be in the range of $50 million to $60 million for the third quarter and full-year guidance is projected to be in the range of $275 million to $285 million, which is down from the previous guidance of $280 million to $290 million.
Corporate expenses are estimated to be in the range of $30 million to $35 million for the third quarter and full-year guidance of $130 million to $140 million remains unchanged.
Interest expense is estimated to be in the range of $95 million to $100 million for the third quarter and approximately $380 million for the full year, which is at the lower end of our previous guidance of $380 million to $390 million reflecting the $500 million reduction in the term loan.
This concludes my remarks, we will be happy to answer any questions.
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compname reports q4 earnings per share of $0.45.
q4 earnings per share $0.45.
will not provide fiscal 2021 guidance at this time.
believe ongoing fiscal conservative policies, balance sheet, increased liquidity will permit us to invest in new research, development.
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Joining me on the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer.
I am now moving to Slide 3.
For the fourth quarter, our earnings per share were $0.64 or $2.63 for the year.
Before we discuss our quarterly results, I would like to provide some perspective on our performance for the year.
Importantly, we continue to deliver on our commitments and make progress toward each of our long-term targets.
I'll start with positive operating leverage.
In 2021, we generated positive operating leverage for the eighth time in the past nine years.
Importantly, we expect to generate positive operating leverage again in 2022.
We delivered record revenue, which was up 9% year over year, with growth in both net interest income and noninterest income.
Pre-provision net revenue also achieved record levels last year, up 10% from the prior year.
We raised a record level of capital for our clients this year, over $100 billion, resulting in a record level of investment banking fees.
Our investment banking business has been a consistent, sustainable growth engine for Key, growing at 15% compound annual growth rate over the last decade.
We expect another year of growth in 2022.
Our pipelines remain strong and are higher than at this time last year.
We continue to take share in our seven industry verticals.
We also have leading positions in some very targeted sub verticals, including renewables financing and affordable housing.
In order to enhance our strong competitive position, we have continued to add bankers.
In 2021, we increased our population of senior bankers by 10%.
And we expect further growth in 2022.
We also saw strong momentum in our consumer business.
We grew net new households at a record pace.
And we continue to expand our existing client relationships.
Our strongest growth in 2021 came from the Western part of our franchise, which grew households at over two times the rate of the rest of our footprint.
Consumer loans in our Western franchise were up 17% last year.
We are also seeing very strong growth with younger clients.
Twenty-five percent of our new households are under 30.
We continue to benefit from two consumer growth engines: Laurel Road and consumer mortgage.
Combined, these businesses generated a record 16 billion in originations for the year ending December 31, 2021.
We also continue to invest in order to support future growth.
In addition to growing the number of bankers, we have continued to make meaningful investments in digital and analytics.
These investments have accelerated our growth, improved our efficiency, and enhanced the client experience.
In 2021, we launched our national digital affinity bank, Laurel Road for Doctors, which expanded our consumer footprint nationally for a very targeted, high-quality client segment.
Seventy-five percent of our new business is coming from outside of our traditional 15-state footprint.
We also acquired AQN Strategies, a leading consumer-focused analytics firm.
And most recently, we acquired XUP, a B2B-focused digital payments platform that provides an integrated and seamless onboarding experience.
Foundational to our model is a relentless focus on maintaining our risk discipline.
Credit quality remained strong throughout the year as net charge-offs as a percentage of average loans remained at historically low levels.
We will continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through all business cycles.
Finally, we have maintained our strong capital position while continuing to return capital to our shareholders.
In 2021, we returned 75% of our net income to shareholders in the form of dividends and share repurchases.
We are committed to delivering value for all of our stakeholders.
I am very proud of our accomplishments in 2021.
I am confident in our future.
We are positioned to deliver on our commitments.
I'm now on Slide 5.
For the fourth quarter net income continuing operations was $0.64 per common share, up 14% from last year.
Our results reflect record performance from many of our businesses, as well as continued strong credit metrics.
Importantly, we delivered positive operating leverage for both the fourth quarter and the full year.
We also achieved record revenue for both the fourth quarter and full year.
We had year-over-year growth in both net interest income and noninterest income.
Our return on tangible common equity for the quarter was 18.7%.
Turning to Slide 6.
Average loans for the quarter were $99.4 billion, down 2% from the year-ago period and down less than 1% from the prior quarter.
The driver of the decline from both periods was a decrease in average PPP balances as we help clients take advantage of loan forgiveness.
Forgiveness this quarter was $1.5 billion.
Importantly, we saw a core growth in both our commercial and industrial books, as well as commercial real estate portfolios, versus the prior year and prior quarter.
If we adjust for the sale of the indirect auto portfolio last quarter, as well as the impact of PPP, our core loans were up approximately $4 billion on average, or 4%, and up over $4.8 billion, or 5%, on an ending basis from the prior quarter.
On the consumer side, we continue to see strong momentum driven by Laurel Road and consumer mortgage.
Combined, these businesses originated $4 billion of high-quality loans this quarter.
Continuing on to Slide 7.
Average deposits totaled $151 billion for the fourth quarter of 2021, up $15 billion or 11% compared to the year-ago period and up $4 billion or 3% from the prior quarter.
The linked-quarter and year-ago comparisons reflect growth in both commercial and consumer balances.
The growth was partially offset by continued and expected decline in time deposits.
Our cost of interest-bearing deposits remained unchanged at 6 basis points.
We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60% of the total deposit mix.
Turning to Slide 8.
Taxable equivalent net interest income was $1.038 billion for the fourth quarter of 2021 compared to $1.043 billion a year ago and $1.025 billion for the prior quarter.
Our net interest margin was 2.44% for the fourth quarter of 2021 compared to 2.7% for the same period last year and 2.47% for the prior quarter.
Year over year and quarter over quarter, both net interest income and net interest margin reflect the impact of lower investment fields, as well as the exit of the indirect auto loan portfolio last quarter, which impacted our net interest margin by 3 basis points.
These were largely offset by a favorable earning asset mix.
The net interest margin was also impacted by elevated levels of liquidity as we continue to experience higher levels of deposit inflows in 2021.
A couple of areas of interest in the past have been the impact of the repricing of our interest rate swap portfolio and the potential benefit from investing our excess liquidity position.
Today, the current market rates actually exceed the average received fixed rate of our current swap portfolio.
Also, if we reinvested the $20 billion of liquidity, our benefit to net interest income would be about $350 million a year.
We have also included in the appendix additional detail on our investment portfolio and asset liability position.
Moving on the Slide 9, we reported record of noninterest income for both the quarter and the full year.
Noninterest income was $909 million for the fourth quarter of 2021 compared to $802 million for the year-ago period and $797 million in the third quarter.
Compared to the year-ago period, noninterest income increased 13%.
The increase was largely driven by an all-time high quarter for investment banking debt placement fees which reached $323 million.
Additionally, commercial mortgage servicing fees increased $16 million year over year.
Offsetting this growth was lower consumer mortgage fees reflecting higher balance sheet retention and lower gain on sale margins.
Compared to the third quarter, noninterest income increased by $112 million, again, primarily driven by the record fourth quarter investment banking debt placement fees.
Other notable drivers were other income and commercial mortgage servicing fees, which increased $33 million and $14 million, respectively.
Partially offsetting this was a $25 million decrease in cards and payments income driven by lower prepaid card revenues.
I'm now on Slide 10.
Noninterest expense for the quarter was $1.17 billion compared to $1.128 billion last year and $1.112 billion in the prior quarter.
Our expense levels reflect higher production-related expenses related to our record revenue generation, as well as the investments we've made to drive future growth.
Our expense levels in 2021 reflect a number of direct investments.
As Chris mentioned, we invested in our team, including adding 10% new senior bankers.
We invested in Laurel Road and the rollout of our national digital bank, in the team, and an increased marketing.
And we've strengthened our digital and analytics capability, including the acquisitions of AQN and XUP.
These investments correlated to higher levels of personnel costs from increase in hiring, as well as the production-related incentives.
On the non personnel side, we saw an increase in business services and professional fees, computer processing expense, and marketing.
Now, moving to Slide 11.
Overall credit quality continues to outperform expectations.
For the fourth quarter, net charge-offs remained at historic lows and were $19 million or 8 basis points for the average loans.
Our provision for credit losses was $4 million.
This reflects our continued strong credit measures, as well as our outlook for the overall economy and loan production.
Nonperforming loans or $454 million this quarter or 45 basis points for period-end loans, a decline of $100 million or 22% from the prior quarter.
Now into Slide 12.
We ended the fourth quarter with common equity Tier 1 ratio of 9.4%, with our targeted range of 9% to 9.5%.
This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
The final settlement of our accelerated share repurchase program disclosed last quarter was reflected in our share count this quarter.
No additional open market repurchases were executed.
Additionally, our board of directors approved a fourth quarter dividend increase of 5%, which now places our dividend at $0.195 per common share.
On Slide 13 is our full year 2022 outlook.
The guidance is relative to our full year 2021 results, and ranges are shown on the slide.
Importantly, using the midpoint of our guidance ranges would support Chris' comments by delivering another year of positive operating leverage in 2022.
Average loans will be up low single digits on a reported basis.
Excluding PPP and the impact of the sale of our indirect auto business, average loans will be up low double digits.
We expect continued growth in average deposits, which should be up low single digits.
Net interest income is expected to be relatively stable, reflecting lower fees from PPP forgiveness, offset by growth in average-earning assets, primarily loan balances.
Our guidance assumes three rate increases in 2022, with the last one in December, which would not have a meaningful impact on our results for the year.
On a reported basis, noninterest income would be down low single digits, reflecting lower prepaid card revenue related to the support of government programs.
Excluding prepaid card, our noninterest income would be relatively stable.
We expect noninterest expense to be down low single digits.
Once again, adjusting for the expected reduction in expenses related to prepaid cards, expenses would be relatively stable.
For the year, we expect net charge-offs to be in the range of 20 to 30 basis points.
Given our strong credit trends, we would expect our loss rates to remain below our range early in the year and to move modestly higher later in the year.
And our guidance for the GAAP tax rate is approximately 20%.
Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged.
We expect to continue to make progress on these targets by maintaining a moderate risk profile and improving our productivity and efficiency, which will drive returns.
Overall, it was a strong quarter and a good finish for the year.
And we remain confident in our ability to grow and deliver on our commitments to all of our stakeholders.
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compname reports fourth quarter 2021 net income of $601 million, or $0.64 per diluted common share.
compname reports fourth quarter 2021 net income of $601 million, or $0.64 per diluted common share.
average loans were $99.4 billion for q4 of 2021, a decrease of $2.3 billion compared to q4 of 2020.
taxable-equivalent net interest income was $1.0 billion for q4 of 2021 and net interest margin was 2.44%.
qtrly provision for credit losses was $4 million, compared to $20 million in q4 of 2020.
net loan charge-offs for q4 of 2021 totaled $19 million.
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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 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 the market.
We encourage you to follow along with these slides during our discussion.
We're very pleased to share our results today for the first quarter of 2021 and provide an overall company update starting on Slide number five.
I'm very proud of our strong start of the year despite the components supply headwinds.
With just over $4 billion in sales, our first quarter revenue increased over 18% organically.
This compares to a market being up less than 13%.
So our outgrowth was about 570 basis points for the quarter, which was ahead of our expectation and our guidance for the year.
We saw strong outgrowth in North America and Europe.
Our earnings per share increased year-over-year due to the impact of our higher revenue.
Our incremental margin performance was in line with our expectations, with an even strong free cash flow of $147 million for the quarter, a good strategy toward our full year guidance.
We also secured additional new business awards for electrified vehicles, which I speak about in a moment.
And finally, during the quarter, we announced our planned acquisition of AKASOL.
The key strategic elements of the AKASOL acquisitions are detailed on Slide number six.
Based on the last couple of years of experience we have in this space, we're believers in the prospect of easy bet resistance and are very familiar with the industry players.
As a leader in this space, AKASOL had been on our radar for a long time as a potential partner.
We're confident that AKASOL is an excellent strategic fit for BorgWarner, and we are really excited about adding their capabilities to our portfolio.
In particular, we're attracted to AKASOL's following strength.
Flexible battery technology across multiple cell architectures, proven technology and products with established manufacturing facilities already in serial production today, strong order backlog of about $2.4 billion, primarily from leading OEMs and a focus on bus, CV and off-highway applications.
We're extremely excited and expect to complete the transaction during the second quarter.
Next I would like to highlight a significant new program win for electric vehicles on Slide seven.
BorgWarner's Integrated Drive Module, or as we call it, our IDM, was selected by a major non-Chinese Asian OEM for its upcoming global S segment electric vehicle production planned to start in mid-2023.
This is a significant program for the company as it is our first IDM award combining BorgWarner's and legacy Delphi Technologies portfolio.
It is a validation of the potential we saw in bringing our two companies together.
And there is more to come.
This IDM features our electric motor, our box and our integrated power electronics.
It operates at 400 volts and has exceptional peak power of 135 kilowatts.
The IDM weight and space are reduced by integrating our gearbox, our 400-volt silicon inverter and our motor.
This results in a maximized power density and functionality.
The IDM also offers a scalable and modular inverter design making it easily adaptable to customer requirements.
This is an important step for the company with a great partner.
Next, on Slide eight, let me summarize our new strategical project charging forward that we unveiled at our Investor Day in late March.
With successful execution of this strategy, we expect to deliver over 25% of our revenue from electric vehicles by 2025 and approximately 45% by 2030.
That compares to under three percent of revenue today.
Project charging forward as three pillars: one, we plan to profitably scale ELVs through our continued integration of Delphi and our ability to capture synergies.
The new IDM win is a great example.
We would also pursue other organic and inorganic actions; two, we intend to expand more aggressively into ECVs.
We will do that by leveraging our strong intimacy with CV customers as well as our position in ELVs.
We're building out a go-to-market product portfolio and operation capabilities organically and inorganically.
Our AKASOL acquisition is a key part of this expansion.
And three, we plan to optimize our combustion portfolio, reducing our exposure by disposing parts of the portfolio that we believe are lower growth that don't ever pass to product leadership or that are not expected to deliver strong margins.
We believe we can fund the EV growth underlying project charging forward, primarily from the capital generated by our existing operations.
This is not a certain change in the company's direction.
It is a logical extension to what we've been building since 2015.
We're excited about the acceleration of the market toward electrification and about the momentum that we are building with our customers.
Next, on Slide nine.
I'm proud to announce that BorgWarner achieved The Great Place to Work certified status for the second consecutive year.
Great Place to Work is the global authority on workplace culture.
This certification validates BorgWarner's positive work environment.
I've said before that the BorgWarner secret sauce starts with our people: to lead, develop and attract the best talents.
We strive to be an employer of choice where we operate around the world.
We cultivate a workplace environment that is collaborative, transparent, inclusive and that promotes continuous learning and excellence.
So let me summarize our first quarter results and our outlook.
The first quarter was a good start to the year, particularly considering the supply challenges currently impacting the industry.
We delivered strong top line growth, and we believe we're tracking well toward our full year margin and free cash flow objectives.
Our first quarter performance has led us to increase our full year revenue and adjusted earnings per share guidance despite a lower industry production outlook, as Kevin will detail.
As we look beyond 2021, I'm extremely excited about our long-term positioning.
We are continuing to take significant steps that we believe will help us to secure our profitable growth well into the future.
We are winning, in line with our expectations in the electric world, both from a component standpoint like inverters and heaters, for example, and also from a latest generation system standpoint with our IDMs. We're focusing on a disciplined inorganic investment approach, like the planned acquisition of AKASOL, which adds great technology to our portfolio while supplementing our growth profile.
Before I review the financials in detail, I'd like to provide a quick overview of the two key takeaways from our first quarter results.
First, our revenue came in stronger than we were expecting going into the year.
This was driven by the fact that we delivered solid outgrowth with both the legacy BorgWarner and former Delphi Technologies businesses performing better than expected.
Second, our margin and cash flow performance in the quarter were strong, driven by the top line results as well as our cost-saving measures.
As we look at our year-over-year revenue walk for Q1, we begin with pro forma 2020 revenue of $3.2 billion, which includes $945 million of revenue from Delphi Technologies.
You can see the foreign currencies increased revenue by about six percent from a year ago.
Then our organic growth year-over-year was over 18% compared to a less than 13% increase in weighted average market production.
That translates to 570 basis points of outgrowth in the quarter, which breaks down as follows: in Europe, we outperformed by mid- to high single digits, driven by growth in small gasoline turbochargers and strong performance in multiple former Delphi Technologies businesses, most notably fuel injection.
In North America, we outperformed the market by high single digits as we saw a nice benefit from the ramp-up of the new Ford F-150 and other new business launches.
In China, we underperformed the market by mid-single digits against very strong outperformance in the first quarter of 2020.
Also keep in mind, Q1 was a very unusual quarter last year in the face of COVID-19, primarily in China.
The sum of all this was just over $4 billion of revenue in Q1, which was a new quarterly record for the company.
Now we do believe that some of the strong outgrowth we delivered in Q1 was a result of the production of build and hold vehicles by our customers in multiple regions of the world.
That means it's likely that some level of our reported outgrowth in Q1 is inflated due to a pull forward of production into the quarter.
This will have an offsetting impact on our expected outgrowth later in the year.
However, our outgrowth for the full year is still expected to be above our prior guidance, as I'll discuss further in a moment.
With all that background in mind, we're pleased with the strong start to 2021.
Now let's look at our earnings and cash flow performance on Slide 11.
Our first quarter adjusted operating income was $444 million, compared to the pro forma $274 million in the first quarter of 2020.
This yielded an adjusted operating margin of 11.1%, which was up compared to the 10.3% margin for BorgWarner only in the first quarter of 2020.
On a comparable basis, excluding the impact of foreign exchange, adjusted operating income increased $145 million on $591 million of higher sales.
That translates to an incremental margin of roughly 25%.
This solid performance was driven by conversion on higher volumes, restructuring savings and Delphi Technology synergies in excess of purchase price amortization.
We are particularly pleased with this performance given elevated supplier costs that we experienced during the quarter.
Moving on to free cash flow.
We're proud of the fact that we generated $147 million of positive free cash flow during the first quarter, which was roughly flat year-over-year despite increased investment in working capital.
As a reminder, our market assumptions incorporate our view of both the light vehicle and on-highway commercial vehicle markets.
As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of nine percent to 12%, which is down from our previous assumption of an 11% to 14% increase.
This reduction to our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production.
Looking at this by region, we're planning for North America to be up 17% to 20%.
We see the largest incremental impact of the semiconductor shortage in North America with our market expectations down approximately 500 basis points from our initial assumptions.
In Europe, we expect a blended market increase of nine percent to 12%, with that range being down approximately 200 basis points from our earlier planning assumption.
And in China, we expect the overall market to be roughly flat year-over-year similar to our previous estimate.
Now let's talk about our full year financial outlook on Slide 13.
Starting with our pro forma 2020 sales, which includes $2.6 billion of revenue from the first three quarters of Delphi Technologies in 2020.
As you know, those revenues were not part of our P&L last year.
But to provide year-over-year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.
You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $0.9 billion to $1.3 billion.
Next, we expect to drive market outgrowth for the full year of approximately 300 to 500 basis points, which is a meaningful step up from our previous guidance of 100 to 300 basis points.
Based on these assumptions, we expect our 2021 organic revenue to increase about 12% to 17% relative to 2020 pro forma revenue.
Then adding a $400 million benefit from stronger foreign currencies, we're projecting total 2021 revenue to be in the range of $14.8 billion to $15.4 billion.
That's up from our prior guidance by about $100 million at both ends of the revenue range.
Even with weaker end market outlook, our stronger revenue outgrowth is driving an overall increase in our revenue guidance from the guidance we gave last quarter.
Also, you should note that we're maintaining a wider-than-typical revenue range at this point of the year due to the wide range of potential production scenarios that I discussed on the previous slide, which stems from the volatility and uncertainty in end markets, arising from the industrywide semiconductor issues.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.1% to 10.5% compared to a pro forma 2020 adjusted operating 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 includes $70 million to $80 million of incremental benefit in 2021.
That puts us right on track to achieve 50% of our total expected cost synergies in 2021.
And based on our year-to-date performance, we believe that we're tracking at the high end of this range.
Based on this revenue and margin outlook, we're expecting full year adjusted earnings per share of $4 to $4.35 per diluted share, which is an increase from our prior guidance of $3.85 to $4.25 per diluted share.
I would point out that this guidance now assumes a 31% tax rate versus our prior guidance of 32% as a result of the successful execution of certain international tax planning initiatives.
And finally, we continue to expect that we'll deliver free cash flow in the $800 million to $900 million range for the full year.
This is flat with our prior guidance as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income.
This would still represent a record annual free cash flow generation for the company.
That's our 2021 outlook.
On the acquisition front, we believe we remain on track to complete the AKASOL acquisition in the second quarter.
We've now received regulatory approvals in all required jurisdictions.
The tender offer is in progress with the final acceptance period expected to be completed later this month and then with the closing shortly thereafter.
AKASOL represents an important part of Project CHARGING FORWARD as it represents approximately 20% to 25% of the estimated 2025 revenue from acquisitions underlying our plan and it significantly increases our exposure to the ECV space.
As it relates to portfolio optimization, we continue to target combustion-related dispositions with annual revenue of approximately $1 billion to be executed over the next 12 to 18 months.
The process for these dispositions is under way.
We would expect to update you on our progress there as we get closer to executing those transactions.
So let me summarize my financial remarks.
Overall, we had a really solid start to the year despite the industry supply headwinds.
We delivered 570 basis points of market outgrowth, an 11.1% adjusted operating margin and $147 million of free cash flow.
And we increased our full year revenue and earnings guidance despite moderating our industry production assumptions.
Looking beyond our near-term results, we're taking the necessary steps to accelerate the company's progression toward electrification.
The AKASOL acquisition and today's IDM announcement are great examples of our progression.
And importantly, we're executing our strategy from a position of financial strength.
Ultimately, we expect that the successful execution of our strategy will drive value creation for our shareholders.
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sees net sales growth for 2021 to be about 19% to 20% on organic basis (adds source).
q2 sales $3.077 billion versus refinitiv ibes estimate of $2.94 billion.
q2 adjusted earnings per share $0.40.
sees net sales growth for 2021 to be about 21%-22% on a reported basis.
boston scientific-sees q3 earnings per share on a gaap basis in a range of $0.20 to $0.22 and adjusted eps, excluding certain charges (credits), of $0.39 to $0.41.
boston scientific - co sees net sales growth for fy 2021 to be in range of 21-22 percent on a reported basis & 19 - 20 percent on an organic basis.
sees net sales growth for q3 to be about 12% to 14% on both a reported and organic basis.
sees 2021 estimates earnings per share on a gaap basis of $0.79-$0.83, adjusted earnings per share excluding certain charges (credits) of $1.58-$1.62.
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First, I'd like for Brian to give the safe harbor statement.
Next, I will have some preliminary comments on our quarter results, and then Brian will review the details.
I'll end with some additional comments, and then we'll take questions.
During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits.
We'd refer you to our Form 10-K and other SEC filings for more information on those risks.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.
Our first quarter results exceeded our expectations, providing an exceptional start to 2021.
Recurring revenues, which comprised 75% of our first quarter revenues, were strong, led by a 25% growth in subscription revenues.
However, software licenses and services revenues continue to be pressured by longer sales cycles and delays in projects as clients deal with the ongoing effects of the pandemic.
A favorable revenue mix with strong subscription growth, coupled with cost efficiencies, drove a 270 basis point expansion of our non-GAAP operating margin to 26.8%.
Cash flow continued to be very robust as cash from operations grew 26% and free cash flow grew almost 34%.
We're pleased to see signs of growing activity in our public sector markets and expect that federal stimulus under the American Rescue Plan Act will have a positive impact on government technology spending going forward.
Bookings in the first quarter were solid at approximately $247 million, but were down 22.8% against a very challenging comparison with the first quarter of 2020.
Our largest deal in the quarter was a SaaS arrangement for our Munis ERP solution with the City of Fresno, California valued at approximately $10 million.
Other significant SaaS contracts included ERP deals with Hall County, Georgia and Fort Smith, Arkansas and Odyssey Courts deal with Val Verde County, Texas.
Our largest on-premises contracts include an ExecuTime time contract with the U.S. Virgin Islands, public safety and Brazos citations contracts with Montgomery County, New York and Cicero, Illinois and an EnerGov contract with the Commonwealth of the Bahamas.
So far this year, we've been busy on the M&A front.
On March 31, we completed two tuck-in acquisitions, DataSpec and ReadySub, for a total purchase price of $12 million in cash.
DataSpec is a market-leading provider of software for the electronic management of veterans claims.
DataSpec's web-based Software-as-a-Service system called VetraSpec allows for secure electronic claims submission to the Federal Department of Veterans Affairs and reporting capabilities in addition to scheduling, calendaring and payments.
DataSpec offers county, state and national versions of VetraSpec, with state solutions making a majority of its implementations.
The solution allows state departments to execute and analyze reports on the entire state, individual offices, regions and districts and individual users.
ReadySub is a cloud-based platform that delivers comprehensive absence and substitute teacher management solutions, serving approximately 1,000 school districts across the United States, with only approximately 20 of which overlapping with Tyler's 2,000 school district clients.
The solution helps districts with the labor-intensive and demanding task of filling both planned and unplanned staff absences with the most highly qualified substitute resources.
With continuous pressure due to substitute teacher shortages, exacerbated by the COVID-19 pandemic, districts can more easily retain a pool of qualified substitutes and automate the searching and filing of needed substitute spots.
Additionally, ReadySub can integrate districts' payroll processes, eliminating duplicate work and streamlining related payroll tasks.
Most importantly, last week, we completed the $2.3 billion cash acquisition of NIC, a leading digital government solutions and payments company that serves more than 7,100 federal, state and local government agencies across the nation.
NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government, providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office.
In addition, NIC has extensive experience and expertise and scale in the government payments area, processing more than $24 billion in payments on behalf of citizens and governments last year, which will accelerate Tyler's strategic payments initiative.
With the addition of NIC's highly complementary industry-leading digital government solutions and payment services to Tyler's broad client base and multiple sales channels, the combined company will be well equipped to address the tremendous demand at the federal, state and local levels for innovative platform services.
Together, Tyler and NIC will connect data and processes across disparate systems and deliver essential products and services to all public sector stakeholders.
NIC had revenues of $460.5 million and net income of $68.6 million in 2020.
NIC's core first quarter revenues, excluding the TourHealth and COVID initiatives that are expected to wind down after the second quarter, grew more than 10% over last year.
In addition, NIC's operating income, again excluding the TourHealth and COVID initiatives as well as acquisition costs, rose more than 20%.
Now I'd like for Brian to provide more detail on the results for the quarter.
Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2021.
Both GAAP and non-GAAP revenues for the quarter were $294.8 million, up 6.6% on a GAAP basis and 6.5% on a non-GAAP basis.
As you may recall, we were off to a very strong start in the first two months of 2020 before the COVID-19 pandemic began to significantly affect our business in March.
So we're generally pleased with our growth this quarter against that comparison.
Software license revenues declined 20.3%, reflecting both extended sales cycles and a high mix of subscription deals at 66% of new software contract value.
Software services revenue declined 8.6% as a result of the continued impact of the COVID-19 pandemic, and our shift to remote delivery of most services resulted in a decline in billable travel revenue.
On the positive side, subscription revenues rose 25.4%.
We added 84 new subscription-based arrangements and converted 39 existing on-premises clients, representing approximately $52 million in total contract value.
In Q1 of last year, we added 131 new subscription-based arrangements and had 19 on-premises conversions, representing approximately $98 million in total contract value.
Subscription contract value comprised approximately 66% of total new software contract value signed this quarter, compared to 73% in Q1 of last year.
The value weighted average term of new SaaS contracts this quarter was 4.0 years, compared to 5.9 years last year.
Revenues from e-filing and online payments, which are included in subscriptions, were $26.9 million, up 22.4%.
That amount includes e-filing revenue of $15.6 million, up 4.8%, and e-payments revenue of $11.3 million, up 59.3%.
For the first quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $886 million, up 12.9%.
Non-GAAP ARR for SaaS arrangements for Q1 was approximately $302 million, up 26.3%.
Transaction-based ARR was approximately $108 million, up 22.4%, and non-GAAP maintenance ARR was approximately $476 million, up 4.1%.
Our backlog at the end of the quarter was $1.55 billion, up 3%.
As Lynn noted, our bookings in the quarter were solid at $247 million.
However, this was down 22.8% compared to a difficult comparison to Q1 of last year.
Last year's first quarter bookings included several large contracts, including two significant follow-on SaaS deals with the North Carolina courts, with a combined contract value of approximately $38 million.
For the trailing 12 months, bookings were approximately $1.2 billion, down 13.3%, although they do not include the majority of the $98 million extension of our Texas e-filing contract signed in Q4 of 2020 because of certain termination provisions in that contract.
If the Texas e-filing renewal was fully included, trailing 12-month bookings would have been down only 6.4%.
The prior trailing 12-month bookings also included four significant SaaS deals with the North Carolina courts, with a combined contract value of approximately $123 million.
The bookings growth rate in Q1 was also affected by a shorter average term for new subscription contracts.
Our subscription -- software subscription booking in the first quarter added $10.2 million in new annual recurring revenue.
Cash flow was once again very strong in the first quarter as cash from operations increased 26.4% to $71.7 million and free cash flow grew 33.9% to $61.7 million, representing an all-time high for first quarter free cash flow.
We financed the NIC acquisition with a mixture of debt at very attractive rates that gives us a flexible capital structure.
In March, we completed a $600 million offering of 0.25% convertible senior notes due 2026.
The notes are convertible into Tyler common stock at a conversion price of $493.44, which represents a 30% premium over our closing price on March 4.
On April 21, concurrent with the closing of the NIC acquisition, we entered into a new $1.4 billion senior unsecured credit facility with a group of eight banks.
The facility includes a $300 million term note due in 2024 and a $600 million term note due in 2026, both of which can be prepaid without penalty.
The facility also includes a new five-year $500 million revolving credit agreement that replaces our prior $400 million revolver.
The combination of the convertible debt, term notes and revolver provide us with a great deal of flexibility.
Our balance sheet remains very strong and its pro forma net leverage at the NIC closing was approximately 3.2 times trailing 12-month adjusted EBITDA.
And we expect to end the year with net leverage under 2.5 times.
The current blended interest rate on the $1.75 billion of debt we have outstanding today is 1.1%.
We remain on track to achieve or exceed the annual revenue and earnings per share guidance that we communicated in February for Tyler, excluding the impact of the NIC acquisition.
As Lynn mentioned, NIC also had a very strong first quarter results that exceeded their plans.
We expect the NIC acquisition will be accretive to our non-GAAP earnings and EBITDA as well as to our recurring revenue mix and free cash flow per share in 2021.
Because of antitrust restrictions, we took a conservative approach to our integration and strategic planning for NIC prior to closing the transaction last week.
We are currently working closely with NIC's leadership to evaluate strategic growth opportunities that take advantage of the combined strength of the two businesses and determine the impact on our 2021 plan.
We expect to complete the fine-tuning of our joint operating and financial plans for the remainder of the year and issue 2021 guidance for the combined company during the second quarter.
Our team of professionals, including our new NIC team members, executed at a high level in the first quarter, driving results that surpassed expectations for both Tyler and NIC and provided a great start to 2021.
Exiting 2020, our financial position was stronger than ever, allowing us to continue to pursue strategic acquisitions, including NIC, the largest acquisition in our history with a purchase price of $2.3 billion in cash.
We've also been able to continue to invest in and, in some cases, accelerate all of our long-term strategic initiatives, in particular, our shift to a cloud-first approach.
As a result, our competitive position has also continued to strengthen.
We believe we will continue to see an acceleration of the public sector's move to the cloud, and we are in a great position to support that move.
I'm happy to say that we are on track with the strategic investments in optimizing our products for the cloud that we discussed on our fourth quarter call.
This quarter, we saw early indicators that our market is beginning to recover as some delayed procurement processes are moving forward and RFP activity is growing from the levels of the second half of 2020.
We also expect that the $350 billion of aid to state and local governments under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and have a positive impact on recovery of our markets.
One topic I've not discussed on these calls before pertains to our efforts regarding environmental and social initiatives.
Tyler's culture guides our commitment to being a responsible partner in the communities where we live, work and serve our clients.
This year marks the 50th anniversary of the Tyler Foundation, which since its creation has provided millions of dollars to charities and causes that positively impact our communities.
Our culture is also the foundation for our belief in the importance of providing an inclusive and diverse workplace.
We are proud to have been included in the Forbes America's Best Employers for Diversity List for the past two consecutive years.
The pause in normal office occupancy and business travel due to the pandemic provided an opportunity for us to evaluate our environmental impact across our major office locations and identify opportunities to make our practices more consistent and effective.
Last year, we formed an environmental task force to strengthen our sustainability efforts across our office locations and the communities we impact.
We achieved a significant milestone last year by responding to Tyler's first invitation to the Dow Jones Sustainability Index survey.
More than 3,500 of the world's largest publicly listed companies provide detailed data and background to this global survey for evaluation by its independent sustainability ranking body.
Completing the survey was an important opportunity for Tyler to uncover opportunities to strengthen our core responsibility strategy.
We recently published our second annual corporate responsibility report, which is available on our website.
This report represents a significant expansion of our reporting on our ESG efforts, and we look forward to continuing our journey and sharing our progress in this area.
Finally, this week, we are virtually hosting more than 5,000 clients at Connect 2021, our annual user conference with a theme called Virtually Possible.
Team members from across Tyler are providing nearly 700 hours of valuable content for our clients using our advanced virtual event platform.
We are excited to be able to connect with so many clients at our virtual event, and we look forward to connecting with them in person at Connect 2022.
With that, we'd like to open up the line for Q&A.
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q1 revenue rose 6.6 percent to $294.8 million.
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Joining today's call, our Bob Blue, chair, president, and chief executive officer; Jim Chapman, executive vice president, chief financial officer, and treasurer; and other members of the executive management team.
I'll start by outlining Dominion Energy's compelling shareholder return proposition.
We expect to grow our earnings per share by 6.5% per year through at least 2026, supported by our updated $37 billion five-year growth capital program, resulting in an approximately 10% total return.
Our strategy is anchored on a pure play, state-regulated utility operating profile that centers around five premier states, as shown on Slide 4.
All share the philosophy that a common sense approach to energy policy and regulation puts a priority on safety, reliability, affordability, and sustainability.
Next, I want to highlight what a successful year 2021 was in the continuing execution of our strategy.
For example, we continue to provide safe, reliable service to our customers, ensuring that safety remains our top priority when it comes to our employees, our customers, and our communities.
We reported our 24th consecutive quarterly financial result that normalized for weather meets or exceeds the midpoint of our guidance range, a reflection of our focus on continuing to provide consistent and predictable financial results.
We successfully concluded substantial rate cases in Virginia, South Carolina, and North Carolina, in each case, demonstrating our ability to deliver constructive regulatory results for both our customers and our shareholders in these fast-growing premiere and business friendly states.
And we significantly advanced our clean energy growth plans on a number of fronts.
For instance, we received our Notice of Intent from BOEM for our regulated offshore wind project in July as planned and filed our rider application with the Virginia State Corporation Commission on schedule in November.
And we propose new solar and energy storage projects in our second annual clean energy filing in Virginia, the largest such group ever proposed.
Looking ahead, we've rolled forward our five-year growth capital plan to capture the years 2022 through 2026.
We now expect to invest $37 billion on behalf of our customers.
The investment programs are highlighted on Slide 5, with over 85% focus on decarbonization.
As meaningful as these near-term plans are, consider, on Slide 6, how they compare to the long-term scope and duration of our overall decarbonization opportunity.
Our initiatives extend well beyond our five-year plan.
We now project $73 billion of green investment opportunity through 2035, nearly all of which will qualify for regulated cost of service recovery.
This is as far as we can tell, the largest regulated decarbonization investment opportunity in the industry.
Our fourth quarter 2021 operating earnings, as shown on Slide 7, were $0.90 per share, which included a $0.03 hurt from worse-than-normal weather in our utility service territories for the quarter.
Weather-normalized results were again above the midpoint of our quarterly guidance range.
Positive factors as compared to last year include growth from regulated investment across electric and gas utility programs, higher electric sales due to increased usage from commercial and industrial segments, and higher margins that contracted assets.
Other factors as compared to the prior year include a slight catch-up in COVID-deferred O&M and weather.
As Bob mentioned, this is our 24th consecutive quarter.
So six years now of delivering weather-normal quarterly results that meet or exceed the midpoint of our guidance ranges.
We believe this historic consistency across our results is worth highlighting and is a track record we're proud of and one which we're absolutely focused on extending.
Full year 2021 operating earnings per share were $3.86 above the midpoint of our guidance range even in the face of a $0.05 from weather for the year.
Turning now to guidance on Slide 9.
As usual, we're providing an annual guidance range, which is designed primarily to account for variations from normal weather.
We're initiating 2022 operating earnings per share guidance of $3.95 to $4.25 per share.
The midpoint of this range is in line with prior annual earnings per share growth guidance of 6.5% in 2022, when measured midpoint to midpoint.
As I think it's been expected as part of our roll forward to a new five-year forecast period, we are once again extending our long-term growth rate by one more year.
We now expect operating earnings per share to grow at 6.5% per year through at least 2026.
Finally, we expect first quarter 2022 operating earnings per share to be between $1.10 and $1.25.
Positive drivers for the quarter as compared to last year are expected to be normal course regulated rider growth continued, modest strengthening of sales, and return to normal weather.
Other drivers, as compared to last year, are expected to be O&M and tax timing.
We expect our 2020 full year dividend to be $2.67, reflecting our target payout ratio of approximately 65%.
We're also extending the long-term dividend per share growth rate of 6% per year through 2026.
Slide 10 provides a breakdown of five-year growth capital plan, which Bob introduced.
For more detail on all of this, I would point to the very comprehensive appendix materials, but just a couple of items I'll note here.
We continue to forecast a total five-year rate base CAGR 9% broken out here by segment, a major driver; and over 75% of its planned growth capex is eligible for rider recovery.
Of course, capital invested in underwriters allows for timely recovery of prudently incurred investment and costs.
Turning to Slide 11, we've updated our financing plan, which reflects a combination of internally generated cash flow and debt issuances to fund the majority of our growth and maintenance capex.
Our plan assumes we issue programmatic equity of just 1% to 1.5% of our current market cap annually through our existing DRIP and ATM equity programs in line with prior guidance.
No change to our 2022 equity issuance plans and no block or marketed equity is contemplated.
We view this level of steady equity issuance under existing programs as prudent, earnings per share accretive, and in the context of our sizable growth capital spending program, appropriate to keep our consolidated credit metrics within the guidelines for our strong credit ratings category.
To that point, as shown on Slide 12, our consolidated credit metrics have remained steady and our pension plans have increased their funded status.
We're very proud of these results.
We continue to target high BBB range credit ratings for our parent company and A range ratings for our regulated operating company.
Our long-standing focus on achieving and maintaining these ratings is important for our ability to continue to secure low-cost capital for our customers.
As is the norm, our financing plan reflects our ongoing efforts to efficiently redeploy capital toward our robust, regulated growth programs.
As I've mentioned in the past, as part of our capital allocation process, we undertake constant analysis to find the most efficient sources of capital to fund our attractive utility growth programs in our key states, all while maintaining our operating earnings per share growth and credit profiles.
The transaction is expected to close late this year, subject to customary closing conditions, including clearance under HSR, and approval from the West Virginia Public Service Commission.
Proceeds will be used to reduce parent-level debt.
The transaction value achieved through a competitive sale process represents approximately 26 times 2021 net income and two times rate based.
As a reminder, Hope Gas operates only in West Virginia and serves about 110,000 customers.
Bob will address this transaction a bit more in a moment.
Turning now to electric sales trends, fourth quarter weather-normalized sales increased 1.4% year over year in Virginia and 2.3% in South Carolina.
In both states, consistent with the trends seen last quarter, we've observed increased usage from commercial and industrial segments, overcoming declines among residential users as the stay-at-home impact of COVID wanes.
Full year 2021 weather-normalized sales increased 1.4% year over year in Virginia and 1.6% year over year in South Carolina.
Looking ahead, we expect electric sales growth in our Virginia and South Carolina service territories to continue at a run rate of 1% to 1.5% per year.
No changes from our prior communications.
Next, let me discuss what we're seeing around input prices.
As discussed on prior calls, we're continuing to monitor raw material costs, and it seems to be the case across a number of industries right now.
We're observing higher prices, although we've seen a moderation in the upward pressure over the last few quarters.
As it relates to our regulated offshore wind project, we remain confident in our ability to deliver the project in line with our budget, as outlined in our filing to the SEC in November.
Also, no changes here from prior communications.
As was disclosed at that time in November, we've entered into five major fixed cost agreements, which collectively represent around $7 billion of the total capital budget.
Within those contracts, only about $800 million remain subject to commodity indexing, most of it steel.
And this component of the budget already reflects commodity cost increases we all observed in 2021 leading up to our filing date in November.
And our capital budget, of course, includes contingency.
On the solar side, we're seeing what others seem to be seeing.
Supplies tight, prices for certain components are up, but our 2021 projects were completed with no material impacts to cost or schedule, and our '22 projects remain on track.
Beyond '22, we've been generally successful in contracting, etc.
, but it's still early.
So again, we're watching but no material financial impacts to share at this time.
So to summarize, we reported fourth quarter and full year 2021 operating EPS, which is above the midpoint of our guidance ranges, extending our track record to six years of meeting or exceeding the quarterly midpoint on a weather-normal basis.
We initiated 2022 full year operating earnings per share guidance that represents a 6.5% annual increase midpoint to midpoint.
We affirmed the same 6.5% operating earnings per share growth guidance through 2026.
We introduced a $37 billion high quality decarbonization-focused, five-year growth capex plan that drives an approximately 9% rate based growth.
We continue to expect the vast majority of our spending across our segments to be in rider form.
And finally, our balance sheet and credit profile remain in very good health.
Starting with safety, Dominion Energy finished 2021 with its second best performance ever.
Additionally, the company was the top performer in the 2021 Southeastern Electric Exchange ranking.
We take pride in our relentless focus on safety, and it's the first of our company's core values.
While our safety performance relative to industry is very good, our goal has been and continues to be that none of our colleagues get hurt ever.
Our customers highest priority is reliability.
They expect their power will come on when they need it, period.
In the past year, our customers in our electric service areas in Virginia, South Carolina, and North Carolina had power 99.9% of the time, excluding major storms.
Where major storms approach, we stage equipment and people to be ready so crews can spring into action as soon as it is safe to do so.
As we did for the first winter storm of 2022, the damp, wet, heavy snow on most of the northern, central and western regions of Virginia, interrupting service to over 400,000 customers.
Over 87% of those customers had service restored after two days of restoration and 96% within four days.
Our crews worked around the clock in frigid temperatures and treacherous icy travel conditions to safely restore service to our communities.
Our gas distribution business knows that safe and reliable service is the priority, especially when exigent circumstances exist.
When an emergency notification is received, we typically have a crew on site twice as quickly as the industry expected response time.
Last month, we had the highest ever flow of gas at our Utah system and the highest ever daily throughput across our Ohio system, higher even than the polar vortex in 2019.
And in both cases, our service never missed a beat and our customers would never have known we were setting all time records.
I'm proud they're not surprised at the way in which our Dominion Energy team members have responded on behalf of our customers.
Now, I'll turn to updates around the execution of our growth plan.
In Virginia, the SEC approved the Comprehensive Settlement Agreement for our first triennial review in November.
We're very pleased to be extending our track record of constructive regulatory outcomes.
On top of that, we are incredibly excited about what Dominion Energy is working to accomplish, specifically our green capital investment programs on behalf of our customers in Virginia, which I will touch on in a few minutes, nearly all of which will grow earnings under regulated rider mechanisms.
Since the Virginia rider investment programs are reviewed and trued up annually, they are not included in the Virginia Triennial review process.
Based on these trends, the Virginia-based investment balance as a percentage of total Dominion Energy declined to about 13% by 2026 and is expected to continue to decline as a percentage in the future.
Turning to offshore wind, the country's only fully regulated offshore wind project is very much on track.
As it relates to the SEC rider application, we're currently in the discovery phase.
And to date, this process very much conforms with what we typically expect during a rider proceeding of this type.
Major project milestones are listed on Slide 15.
We expect to receive a final order from the SEC in August this year.
A few items to reiterate here.
First, this project will provide a boost to Virginia's growing green economy by creating hundreds of jobs, hundreds of millions of dollars of economic output, and millions of dollars of tax revenue for the state and localities.
It will also propel Virginia closer to achieving its goal to become a major hub for the burgeoning offshore wind value chain up and down the country's East Coast.
Second, unlike any other such project in North America, this investment is 100% regulated and eligible for rider recovery in Virginia.
Finally, the VCA provides very specific requirements on the presumption of prudency for investment in the project, which we are confident that we have already met.
Our Jones Act compliant wind turbine installation vessel is being constructed and is on track for delivery in late 2023 as originally scheduled.
The project is currently about 43% complete.
We expect the vessel will be in a central resource city EV, as well as to the overall domestic offshore wind industry, and will be entering service with plenty of time to support the 2024 turbine installation season.
Our other clean energy filings in Virginia are also progressing well.
Last month, we were very pleased to see the SEC approve phase two of our grid transformation plan for projects that we plan to deploy in 2022 and 2023.
These projects will facilitate the expected increase in distributed energy resources like small scale solar and expand electric vehicle infrastructure, as well as enhance grid resiliency and security.
Our clean energy and nuclear or rider filings remain on track.
Final orders are expected later this year, as outlined on Page 18.
Through 2020, we have successfully reduced our enterprisewide CO2 equivalent emissions by 42%.
That's great progress, but it's not enough.
By 2035, we expect to improve that reduction to between 70% and 80% versus baseline on our way to meet net zero by 2050.
As shown on the right side of Slide 19, the transition to a clean energy future means reduced reliance on coal-fired generation.
Back in 2005, more than half of our company's power production was from coal-fired generation.
By 2035, we project that to be less than 1%.
We show our timeline for transitioning out of coal on Slide 20.
By the end of the decade as part of our ongoing resource planning, we expect to be coal free in South Carolina and have only two remaining facilities at Dominion Energy Virginia for reliability and energy security considerations.
While our IRP is our informational filings and do not provide approval or disapproval for any specific capital project, we look forward to continuing to work with stakeholders, including the Commission, to drive toward an increasingly low-carbon future.
From an investment from an investment-based perspective, which is a rough approximation of earnings contribution, you can see on Slide 21 the diminished role coal-fired generation plays in our financial performance, driven by facility retirements and non-coal investment.
We're mindful that this shift has the potential to be disruptive to employees and communities, and we were being purposeful in our efforts to ameliorate any such negative consequences.
We believe in a just transition.
We have and will continue to consider the needs of impacted communities and our entire workforce during this clean energy transition.
You'll also note that zero carbon generation grows significantly, such that by 2026, over 65% of our investment base will consist of electric wires and zero carbon generation.
Moving on to South Carolina.
As part of our ongoing resource planning, Dominion Energy South Carolina is planning to replace several of our older generation peaking turbines with modern, more efficient units.
These peaking units, which often operate seasonally during certain times of day when the demand for energy is at its highest, play an important role in our generation fleet with their ability to go from idle to producing energy quickly.
Modernizing this equipment will lower fuel cost to customers, improve environmental performance, and provide reliability and efficiency benefits.
These will become even more important as additional intermittent fluctuating resources, such as solar, are added to our system.
Last quarter, the Public Service Commission of South Carolina approved a settlement, allowing the company to move forward with two of the proposed sites, and we'll hold an RFP for a third.
Turning to gas distribution.
In North Carolina, the commission approved a comprehensive settlement last month for our gas operations with rates based on a 9.6% ROE.
As a reminder, the agreement included three new clean energy programs, a new hydrogen blending pilot, a new option to allow our customers to purchase RNG attributes, and a new and expanded energy efficiency programs.
This is a prime example of the role that supportive regulation can play in meeting our decarbonization objectives.
Hope Gas is a valuable business with tremendous people.
At the same time, compared to the other larger state-regulated utilities across our five premier states, Hope Gas is relatively a small stand-alone operation.
Our talented employees have consistently delivered safe, reliable, and affordable energy to Hope's customers.
We're pleased that these best-in-class employees are now joining another excellent organization in the form of Ullico, who has agreed to provide significant protections for employees and honor existing union commitments.
Ullico is operating expertise and financial resources will also ensure that Hope's customers will continue to receive the high level of service to which they have grown accustomed.
Slide 24 provides a summary of several important steps we took in 2021 that enhanced our industry leading ESG profile.
Just a couple of items I'll highlight here.
In July, we published our updated climate report, which included disclosure of scope one, two, and three emissions, an important step as it relates to our net zero commitment as I will expand on in a minute.
In November, we issued our inaugural Diversity Equity and Inclusion Report, which highlights our progress toward building a more diverse and inclusive workforce.
As part of that report, we also published our EEO 1 data.
This enhanced external reporting builds upon our commitment to increase our total workforce diversity by 1% each year with the goal of reaching at least 40% by year end 2026.
We're very much on track to meet that goal.
These and other ESG-oriented efforts have been recognized by leading third-party assessment services, as shown on Slide 25.
By each measure, our performance exceeds the sector average.
We've been recognized as part of the leadership band by CDP for our climate and water disclosure for the second year in a row as Trendsetters, the highest categorization for the fourth consecutive year by the CPA-Zicklin report on political accountability and transparency.
And most recently, MSCI increased our rating from A to AA, which designates us a leader in the field.
Turning to Slide 26, I'm pleased to announce an expansion of our net zero commitments.
In addition to our current commitment to achieve enterprisewide net zero scope one carbon and methane emissions by 2050, we now aim to achieve net zero by 2050 for all Scope 2 emissions and for Scope 3 emissions associated with three major sources, LDC customer end-use emissions, upstream fuel, and purchase power.
These new commitments formalize our continued focus on helping our customers and suppliers decarbonize.
Reducing emissions as fast as possible and achieving net zero emissions companywide requires immediate and direct action.
That's why the company continues to take meaningful steps to address Scope 3 emissions.
We formalized our support for federal methane regulation, and we're working toward procurement practices that encourage enhanced disclosures by upstream counterparties on their emissions and methane reduction programs.
Further, we encourage suppliers to adopt a net zero commitment, and we were started to receive quotes for responsibly sourced gas, which are evaluated consistent with our reliability, service, and cost criteria for natural gas supply.
For downstream emissions, we expect to increase our annual spend on energy efficiency over the next five years at our LDCs by nearly 50%, and to provide our customers with access to a carbon calculator and carbon offsets.
For example, in both Utah and North Carolina, we offer GreenTherm, a voluntary program that provides customers with access to renewable natural gas.
While initially being offered on a voluntary basis, we are working with policymakers and regulators to increase access to RNG for our customers.
And finally, we continue to pursue innovative hydrogen use cases, including our blending pilot in Utah, which based on early assessment, confirms the ability to blend at least 5% and potentially up to 10% without adverse impacts to appliance performance, leak survey, system safety, or secondary emissions.
Over the long term, achieving these goals will require supportive legislative and regulatory policies and broader investments across the economy.
This includes support for the testing and deployment of technologies.
For example, we support efforts to research and develop new technologies through collaborations such as the Low Carbon Resource Initiative, of which we're a founding sponsor.
And we will never lose sight of our fundamental responsibility to the customers providing safe, reliable, affordable, and sustainable energy.
With that, let me summarize our remarks on Slide 27.
Our safety performance was our second best ever.
We reported our 24th consecutive quarterly result that normalized for weather meets or exceeds the midpoint of our guidance range.
We affirm the same 6.5% operating earnings per share growth guidance through 2026 and affirmed our existing dividend growth guidance through 2026.
We're focused on executing project construction and achieving regulatory outcomes that serve our customers well, and we're aggressively pursuing our vision to be the most sustainable, regulated energy company in the country.
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sees q1 operating earnings per share $1.10 to $1.25.
q4 operating earnings per share $0.90.
initiates 2022 operating earnings guidance of $3.95 to $4.25 per share.
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We are pleased to be here today to provide an update on our progress after the second quarter of 2020.
Hopefully, everyone has had a chance to review the news release we issued earlier today.
These risks include those related to the impact of the COVID-19 pandemic and measures by governmental or regulatory authorities to combat the pandemic on our business and operations as well as the business and operations of the consumer, our customers, suppliers, business partners and labor force.
These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases.
The use of the term PPE relates to our personal protection garment business, including face masks, face coverings and gowns.
Also, please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the exited C9 Champion program at Target and the DKNY intimates license.
With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer.
This quarter, I have never been more proud of this organization and our employees' ability to rise to the occasion and meet challenges to deliver exceptional performance, even in the midst of a devastating pandemic.
Despite the economic disruption of COVID-19 around the globe, Hanesbrands delivered strong second quarter results, driven by better-than-expected performance in both our apparel and our new PPE businesses.
For the quarter, revenue increased 6%, operating profit increased 41%, earnings per share increased 58%, and we generated $65 million of operating cash flow.
Our strong second quarter performance in one of the most challenging retail and consumer environments in decades underscores the strength of our brand portfolio, the agility of our organization, the scale of our company-owned supply chain and the cash-generating power of our business model.
In my view, there are four key highlights in the quarter that speak to the strength of our underlying model.
And our ability to grow this business going forward.
First, our apparel business outperformed; second, the organization quickly pivoted to create a new PPE business; third, we generated positive cash flow; and fourth, we ended the quarter with $1.8 billion of liquidity.
Touching on our apparel business performance, which excludes PPE, our strong second quarter results were meaningfully ahead of our base case scenario in each of our three main segments: U.S. Innerwear, U.S. Activewear and international.
Point-of-sale trends improved sequentially through the second quarter in all of our key geographies, with the positive momentum carrying into July, as consumers settled into new routines, stimulus initiatives were rolled out, and retail doors reopened around the world.
In fact, point-of-sale in our U.S. Basics and Champion businesses in May and June exceeded pre-COVID levels.
In U.S. Innerwear, point-of-sale trends accelerated through the quarter.
Moving from down 29% in April to up 8% in May and up 11% in June.
We experienced strong momentum in our Basics business with mid-teens point-of-sale growth, yielding more than 300 basis points of market share gains in the quarter.
Within our Intimates business, point-of-sale returned to essentially flat in June and improved to up 3% in July, regaining its pre-COVID momentum as the mid-tier and department store channels reopened.
We experienced a similar trend in our Champion business within the U.S. Activewear segment.
In the quarter, Champion point-of-sale accelerated from down 14% in April to up nearly 40% in May and up more than 70% in June as consumers continued to actively seek out the brand, particularly within the online channel.
With store reopenings under way in our International business, we saw monthly progression within our Innerwear businesses in Europe and Australia as well as within our Champion businesses in Europe and Asia.
Strength in our Online business continued globally in the second quarter, with sales up more than 70% over prior year.
We experienced strong growth across our key regions in the quarter, with triple-digit online growth at some of our largest customers and nearly 200% growth on our newly enhanced champion.com website.
Within our Apparel business, which excludes PPE, online represented over 30% of total sales in the quarter.
We are encouraged by the strong POS trends, which we believe points to the improving shipment and revenue trend in our Apparel business as we move through the second half and into next year.
Turning to the second highlight of the quarter.
Our newly created PPE business generated over $750 million of revenue.
This was well ahead of our initial expectation as we benefited from additional government contracts for both mask and reusable gowns, and we were able to fulfill demand for a number of businesses.
We recently launched our consumer PPE facemask business at retail.
We expect to generate more than $150 million of additional PPE revenue in the second half of the year.
Looking forward, we continue to believe this consumer product line represents a meaningful ongoing business opportunity.
The third highlight of the quarter was cash flow, as we generated $65 million of cash flow from operations.
Year-to-date, operating cash flow was $40 million better than last year.
With the majority of retail doors closed for half the quarter, this performance speaks to the cash-generating power of our model and the discipline of the organization to aggressively manage operating cost and working capital.
We continue to expect to generate positive operating cash flow for the second half of the year.
And finally, in terms of liquidity, we said on our last call that our focus in this environment was on managing cash while positioning the company to be able to take advantage of opportunities.
This focus allowed us to capture stronger-than-expected demand for our products in the quarter as well as maintain our dividend.
We ended the quarter with $1.8 billion of liquidity, which we believe provides us ample capital to maximize our operating flexibility and positions us to grow the business going forward.
Looking ahead, there remains uncertainty about the extent and pace of reopening economies in the midst of COVID-19, and we are planning accordingly.
Absent any rollbacks of store reopenings, we expect year-over-year revenue trends in our Apparel business to improve sequentially in the second half.
Our core brands are healthy.
We are gaining market share.
Point-of-sale trends remain strong.
Our back-to-school and holiday plans are set and initial spring 2021 bookings of Global Champion are up meaningfully over prior year in each region.
We believe the positive underlying trends in our business, both prior to and during the pandemic, positions us for growth in a post pandemic environment.
So in closing, we delivered a strong quarter in a very challenging global environment.
Momentum is building in our Apparel business, and we believe we have ample liquidity.
We believe our diversified global business model continues to position us to drive growth and take advantage of opportunities over the next several years.
I've enjoyed getting to know you and exchanging points of view over the years.
To the Hanesbrands team, it's been an honor to be part of the HBI family for so many years.
Together, we built a company and successfully expanded it to be a global leader in our categories.
These are things that could only be achieved by the determined efforts of 60,000 team members around the world pulling together.
I look forward to watching Hanesbrands continue to prosper under the leadership of Steve Bratspies in the years ahead.
Our strong second quarter results, including double-digit growth and adjusted and GAAP EPS, underscore the earnings and cash flow leverage, our vertically integrated business model can generate.
Sales for the quarter were $1.74 billion, which includes $752 million of PPE revenue.
As compared to last year, sales increased 6% on a reported basis and 7% on a constant currency basis.
Excluding PPE, Apparel revenue declined approximately 40% over prior year.
This is well ahead of our expectation and accounted for more than half of the upside in the quarter relative to our base case scenario.
Adjusted gross margin of 37.9% decreased approximately 180 basis points over the last year.
Approximately 50 basis points of the decline was the result of deleverage from minimum royalty payments in our sports license business.
The remainder of the decline was driven by COVID related door closings, which had a greater sales impact on our core international and our Champion and U.S. Activewear businesses.
As a reminder, these businesses carry higher gross margins, but they also carry higher SG&A expense.
Adjusted operating margin for the quarter increased approximately 430 basis points over prior year to 17.5%.
Higher sales drove meaningful SG&A leverage, which was further benefited by our temporary cost savings initiatives.
Interest and other expense declined $8 million over prior year to approximately $47 million due primarily to lower average rates in the quarter.
Restructuring and other related charges were approximately $63 million in the quarter.
Our planned supply chain restructuring actions and program exit costs, which remain unchanged, accounted for $11 million of these costs.
The remaining approximately $52 million are nonrecurring COVID related costs in the quarter, which are noncash.
These include a $20 million intangible asset write down, $11 million of bad debt expense and approximately $21 million of inventory adjustments primarily related to canceled orders from retailers for seasonal product we already made.
The tax rate of 17.8% was higher than our expectation as better-than-expected performance in U.S. Innerwear and PPE resulted in a higher mix of U.S. profit in the quarter.
And adjusted and GAAP earnings per share increased 58% and 12% over prior year to $0.60 and $0.46, respectively.
Now let me take you through our segment performance.
From a high level, all of our segments experienced a similar progression through the quarter.
We saw significant year-over-year pressure in April, as regions sheltered in place.
This was followed by sequential improvement in May and June as consumers shifted to open channels, including online and closed stores began to reopen.
For the quarter, U.S. Innerwear sales increased approximately 67% over the prior year, while the operating margin expanded nearly 550 basis points to 27.8%.
Both revenue and operating profit exceeded our base case scenario, driven by better-than-expected sales in both our core Innerwear and new PPE businesses, our significant fixed cost leverage from higher sales and by lower SG&A expense due to our temporary cost reduction initiatives.
Adjusting for sales from our PPE business, core U.S. Innerwear performed significantly better than our base case scenario.
Core revenue declined approximately 27% over prior year, with Basics down 18% and Intimates down 52%.
These better than base case results were driven by the strong performance of our Basics and Intimates businesses, within the channels that remain open as well as the reopening of mid-tier and department store channels late in the quarter.
On the back of improved point-of-sale during the quarter, we have seen booking trends in both Basics and Intimates strengthen through July.
Turning to U.S. Activewear.
Revenue declined 52% over prior year, which was better than our base case scenario.
The year-over-year decline was due to COVID related door closures as well as school closings and fewer group events that significantly impacted our Sports Apparel and Printwear businesses.
As expected, Activewear's operating margin declined over prior year.
Deleveraged from lower sales, deleveraged from minimum royalty payments in our Sports License business.
And our decision to hold Champion marketing investment flat over prior year more than offset our temporary cost savings initiatives.
While Champion experienced headwinds due to COVID related channel closures, we were encouraged by the accelerating point-of-sale trends through the quarter and a continued POS strength in July.
We believe this underscores the consumers' ongoing desire for the brand and points to improving revenue trends going forward.
Switching to our International segment.
Revenue is well ahead of our base case scenario.
As compared to last year, revenue declined approximately 20% on a reported basis and 17% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 44% as compared to the prior year.
The better than base case performance in our core International business was driven by online as well as the performance of our company-owned stores as they reopened.
The International segment's operating margin of 17.3% increased 310 basis points over prior year, driven by lower SG&A costs as we benefited from various temporary cost savings initiatives.
Touching briefly on our Global Champion business.
Excluding C9, revenue declined 46% over prior year with declines in both our domestic and international businesses.
Like other parts of our business, Global Champion was hindered by closures of our company-owned stores and channel partner doors early in the quarter.
As doors reopened, Global Champion trends improved through the quarter with momentum continuing through July, reinforcing our expectation for sequential improvement in Champion sales through the balance of the year.
Turning to cash flow and the balance sheet.
We delivered a strong cash flow performance in the quarter, generating $65 million of cash flow from operations.
Year-to-date, operating cash flow was approximately $40 million above last year.
The strong performance was driven by previously planned inventory reduction efforts, temporary cost savings initiatives, continued working capital discipline and timely actions taken within our manufacturing network.
With respect to our balance sheet, inventory declined approximately $265 million or 12% compared to last year.
Leverage was 3.4 times on a net debt to adjusted EBITDA basis, down from 3.5 times last year.
And we ended the quarter with approximately $1.8 billion of liquidity, which we believe provides us with significant cash capital cushion in this uncertain environment.
Due to the uncertainty and unpredictability of the COVID-19 pandemic as well as the current lack of visibility in our business environment, we are not providing third quarter or full year 2020 guidance at this time.
However, I will like to share a few thoughts to help frame some of the key levers within our business model.
Looking at our Apparel business, which excludes PPE, revenue declined approximately 40% over prior year in the second quarter.
Absent any rollbacks of store reopenings, we currently foresee an environment for the year-over-year decline in our Apparel business to improve sequentially in both this third and fourth quarter.
With respect to our PPE business, we currently expect more than a $150 million of PPE revenue in the second half, the vast majority of which is expected in the third quarter.
While we continue to tightly manage SG&A expenses, the amount of temporary cost savings from the second quarter are currently not expected to repeat in the second half.
Combined with a lower overall unit and sales volume, we believe it is reasonable to assume year-over-year pressure on margins in both this third and fourth quarters.
Now with respect to our tax rate, we currently expect a rate of approximately 17.5% for the second half.
And in terms of cash flow, we continue to expect to generate positive cash flow in the second half of the year.
So in closing, we delivered strong second quarter results.
Our balance sheet is healthy, and we believe we have ample liquidity.
While there remains a significant amount of uncertainty, we are encouraged by the positive underlying momentum in our Apparel business, which we believe points to a return to pre-COVID levels in our business once the pandemic has passed.
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q4 revenue $4.3 billion.
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Joining you today from First BanCorp.
are Aurelio Aleman, president and chief executive officer; and Orlando Berges, executive vice president and chief financial officer.
Let's start by moving to Slide 4.
We closed 2021 with another record quarter for the company, clearly reflecting the strength of the franchise and also combined with the improved economic backdrop in our operating markets.
During the quarter, we generated $73.6 million in net income or $0.35 per diluted share and importantly, I think a record $104.9 million in adjusted pre-tax pre-provision income.
Asset quality continued to trend the improvement trend that we had during the year, now non-performing assets reaching a decade low of 0.76% as a percent of total assets, driven by repayment of several non-accrual loans and REO sales and obviously less migration.
The ratio of the ACL for loans and finance leases to total loans decreased to 2.43% during the quarter driven by combined factors such as reduction in the residential mortgages as well as reductions associated with improvement in macroeconomic factors and their impact on qualitative reserves.
In terms of expenses, the efficiency ratio continued to trend down now to 52%.
I have to say this is a historical low compared to 53% registered during the third quarter.
On the capital front, we continued executing our capital plan, returning capital to shareholders.
During the fourth quarter, we raised the common dividend by 43% to $0.10 per share.
We repurchased 4.6 million common shares amounting to $63.9 million.
And we also executed the announced redemption of $36.1 million of outstanding preferred shares.
Happy to say that we ended the year with a very strong capital position, 17.8% common equity Tier-1, leaving ample room for further capital deployment initiatives during 2022.
Let's move to Slide 5 to provide some detail on the deposit and loan performance.
The loan portfolio slightly decreased in the quarter by $75 million, mostly driven by $73 million reduction in SBA PPP loans.
Also, we have four -- we experienced four large commercial repayments of relationships from Florida and Virgin Islands, which amounted to $125 million.
And we also experienced a reduction of $112 million in the residential mortgage loans that sit in the portfolio.
These reductions were partially offset by, I would have to say, quite strong auto and commercial origination both in Puerto Rico and Florida.
And despite this slight repayment, the commercial portfolio grew by $59 million, turning the corner, hopefully, as we continue to move on into 2022.
Loan originations for the fourth quarter were also quite strong with $1.4 billion, including credit card utilization activity.
It's really the best quarter we have had this year, again with strong originations in Puerto Rico and Florida.
And to say that we closed the year with a very strong pipeline, actually the stronger pipeline coming into the first quarter of the year.
Definitely, loan portfolio balances remain impacted by excess liquidity and these pay downs.
I think with rate markets moving up, this should diminish.
On the other hand, loan originations continue to be strong.
And we're very focused on our strategy for growing the portfolios centered around increasing consumer and commercial books while continue to focus in the conforming residential mortgages that as we have done over the past year.
In terms of deposits, core deposits continued to grow, but as expected, at a slower pace compared to prior quarters.
Over the next few quarters, we expect a reduction of approximately $150 million of government deposits from the recent bankruptcy settlement.
That should happen probably second quarter, I will say.
Excluding brokered and government deposit, core deposit did register an increase of $64 million during the quarter.
I'd like to take an opportunity, before handing the court to Orlando to provide a summary of the year, so let's move to Slide 6.
Definitely, the core results for the company reflect the transformational progress that we have in multiple fronts in 2021.
We generated $281 million of net income or $1.31 per diluted share compared to 102.3 in prior year.
We registered a 30% increase in adjusted pre-tax pre-provision income.
And we grew total loan originations and renewals by 20%, excluding PPP and credit card activity when compared to 2020.
I think moreover, new money, commercial and originations, including closed and unfunded commercial and construction loans grew by 50% when compared to prior year.
I think it's important to comment that over 75% of the construction loans that we already made in 2021 are expected to partially fall in 2022.
So they did not fund it in 2021.
And importantly, during the year, we returned capital equivalent to 112% of earnings, again in the form of repurchase of common, redemption of preferred and dividends.
Key to the efficiency ratio, we completed the timely integration of the acquired operations during the year.
We executed on all the operational efficiencies that were planned as part of the transaction and did achieve the established financial targets of the transaction.
Again, the transaction allowed us to expand our footprint, strengthen our leadership position in the market in Puerto Rico.
Importantly, we have invested significantly in our digital capabilities.
The pandemic triggered an accelerated adoption of digital channels, which did continue to grow significantly, digital engagement improving across all our digital functionalities.
We also, during the year, reengineered the auto lending origination process by deploying a fully digital platform to our dealer network, allowing us to offer a complete digital experience.
I have to say that additional investments in technology and digital operations are planned for 2022 in order to continue improving our competitive position in an increasingly digital environment, which we have great progress in 2021.
On the macro front, we are in the initial stages of a growth cycle in Puerto Rico.
The recent announcement of the resolution of the debt restructuring process should allow for the government to focus their efforts toward supporting economic growth initiatives and capitalizing on a large amount of obligated disaster relief funds that need to be deployed.
Like other jurisdiction, COVID cases increased recently, driven by the Omicron variant.
However, our quite high vaccination rate provides for an important safety net to withstand any impact in the healthcare infrastructure and economic activity.
We are confident that the positive backdrop in our operated that should result in increased loan demand in 2022.
Aurelio mentioned, we had very strong 2021 results.
Net income was $281 million, $1.31 a share.
That good results included improvements of $130 million in net interest income and $10 million increase in other non-interest income.
Remember that the Santander operation, the acquisition was completed on September 1, 2020.
So we had four months of Santander versus this year we had the full year.
And as he also mentioned, it reflected on pre-tax pre-provision improvement, significant improvements.
We went from about $300 million in 2020 to $392 million in 2021, so a significant pickup.
Fourth quarter results were also very strong.
We also made reference to $73.6 million in net income, $0.35 a share.
The provision for the quarter was in fact the net benefit.
We had a $12.2 million benefit, very similar to the $12.1 million we had in the third quarter.
And again, it's overall driven by improvements in macroeconomic variables, which is both the actual and the expected and I'll touch a little bit more on the reserve later on.
The expenses for the quarter were $2.6 million lower than in the third quarter.
However, we had an increase in income tax expense, with a higher level of income resulted in a change in or an increase in the mix of taxable to exempt income.
And effective tax rates went up by 7 basis points for the full year, resulting in an increase in taxes on the -- throughout the year.
Net interest income for the quarter was $184.1 million.
It's slightly lower than last quarter, but margin improved 1 basis point to 3.61%.
The yield on the portfolio, the GAAP yield on the portfolio was 6.34% for the quarter, very similar to the 6.33% we had last quarter.
And loans, if we look at the mix of earning assets, loans continue to represent approximately 55% of average interest-earning assets.
The overall cost or the cost of interest-bearing deposits, excluding broker, it's now 30 basis points, which is 3 basis points lower than last quarter.
We look at what's happening now, the recent increase in market rates will provide us an increase in yields for variable rate loans.
Approximately 40% of our commercial portfolio is tied to LIBOR and another 19% is tied to prime.
And we have already seen a little bit of pickup on three-month LIBOR, which is the main variable that is used.
The other factor, significant factor, is the reinvestment of maturing securities should also provide some pickup.
If we look at current rates versus what we were reinvesting, we foresee an increase of somewhere between 40 and 50 basis points on reinvested money as compared to the fourth quarter.
Clearly, this doesn't mean that the whole portfolio will go up by this amount, but will help in start getting that overall yield of the portfolio up.
If we assume the mix of interest-earning assets remaining at these levels and the trend -- the expected trend on interest rates, we do foresee some increases in margin in the next few quarters.
However, as Aurelio mentioned, we had the reduction in the mortgage portfolio as we continue to originate much higher percentage of conforming paper.
Therefore, margin mix gets a little bit affected.
Non-interest income for the quarter was fairly similar, slight increase as compared to the third quarter.
We had increases in fee income and service charges on the assets, which was offset by some decreases in the revenue of mortgage banking activities.
We ended up selling less of the conforming portfolio based on the level of originations that we had done in the prior quarter.
On the expense side, expenses for the quarter were $111 million -- $100.5 million, which compares to $114 million in the third quarter.
In the fourth quarter, merger expenses were $1.9 million.
Our costs what remains, which is mostly related to four additional branch consolidations that we'll be completing during the first half of 2022.
Last quarter, merger and restructuring expenses were $2.3 million.
And at this point, we basically have completed everything related to merger expenses.
There shouldn't be any component of this going forward.
Overall, as you all know, expense levels have been decreasing in the last couple of quarters as conversion- and integration-related expenses have been eliminated and we have continued to achieve or implement the savings from the integration of the acquired operation that we have discussed in the past.
However, in reality, expense levels have been running at a lower clip than what we expected to be a normalized level.
And two main factors, one of the main one has been the level of personnel vacancies that we have had throughout the last few quarters.
At this point, we're running twice as high in vacancies from a normal level, in part related to the funding support the government has provided and has created some market shortage.
To compensate, we have -- at the end of 2021, we started raising the minimum salary to branch and call center personnel.
The impact of that increase will be approximately $1.4 million per quarter starting now in this first quarter of 2022.
And we expect that this increase in minimum salary, combined with some of the other ongoing recruiting efforts, should help bring some back normality due to the vacancy levels.
Once vacancy levels are normalized, compensation expense should increase somewhere in the neighborhood of $1.5 million per quarter.
Obviously, we don't expect to achieve these levels until later in the year, most likely toward the end of 2022.
The expense levels also, we have had the benefit of the increase in property prices in the Puerto Rico market, which has provided us the opportunity to improve the disposition value of the OREO properties.
That has been offsetting OREO operating expenses.
In fact, we achieved $2.3 million net gain in OREO in the third quarter and additional $1.6 million net gain this quarter.
Traditionally, this is not what happens.
There is always the operating cost of handling and disposing reprocessed properties, but the market has provided some opportunity.
This will be -- realistically this will eventually go back to more normalized levels.
The other component in expenses that we are currently in the process of completing -- the reconfiguring centralized facilities to complete the physical integration of all the operating units, that's ongoing, but not completed yet and it's going to take a few months before it's completed.
And also, as we have mentioned in the past, we continue with several technology projects that are underway.
Most of these costs are not yet reflected in the quarterly expenses.
That's why we still believe that on a normalized basis, expenses will be in that $117 million to $119 million range.
But clearly, we won't see that until later in the year.
The first couple of quarters of 2022 should run at a lower clip.
Efficiency ratio in the quarter as a result -- that Aurelio made reference was 52%, which is lower than anticipated.
However, even normalized expense levels will take us to our target ratio of 55%.
So we feel comfortable on the expense levels and efficiencies achieved, not considering any further improvements in -- on the income side that should also help the ranges.
On asset quality, just to touch up on Aurelio made reference to, the non-performing asset decreased by $14 million, as you saw, continued the trend.
On NPA, the non-performing assets in total, that stand below 1% at 76 basis points of assets.
And then $6.8 million of that reduction was in nonaccrual commercial construction loans.
We ended up selling a $3.1 million non-performing construction loan in Puerto Rico.
Inflows continued to be low.
They were $2 million lower than last quarter, $15 million this quarter as compared to $17 million last quarter.
On the allowance, Aurelio also made reference to the allowance, at the end of the quarter was $180 million.
It's $20 million down from the third quarter.
Looking at allowance just on loans and finance leases was $269 million, which is $19 million down.
Basically, the allowance reduction reflects improvement and continue to be projected on macroeconomic variables that are on all the variables that are used to calculate ACL.
However, we are monitoring closely the impact of the Omicron variant.
The number of cases have increased significantly, especially that impact on customers in the hotel, transportation and entertainment industry.
And we are considering those as part of the qualitative assessment that we do on the establishment of the reserves.
The ratio of the reserve continues to be strong.
Aurelio mentioned that we stand at 2.43% in the last quarter.
On the capital front, just to touch it again, we continue with the execution of the capital plan.
For the fourth quarter, common stock repurchases and the redemption of the preferred shares were $100 million.
Throughout 2021, we have repurchased 16.7 million common shares and redeemed the $36 million in preferred, totaling $150 million in capital actions for the year on top of the $65 million that were paid in dividends.
However, even with the execution of the capital strategies, the strong earnings are maintaining our capital ratio significantly well capitalized.
As you saw in the chart, Tier-1 common equity moved slightly up from 17.7 at the end of the first quarter, which is just before we started with the capital repurchase to 17.8 at the end of the year.
And Tier-1 capital just decreased 2 basis points from 18% to 17.8%.
So we continue to have ample space for capital action, as Aurelio mentioned before.
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q4 earnings per share $0.35.
net interest income decreased slightly to $184.1 million for q4 of 2021, compared to $184.7 million for q3 of 2021.
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What we will say today is based upon the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are happy to report an excellent second quarter.
We earned $0.90 per share despite some revenue headwinds arising from pandemic-related delays in some areas and projects.
Our sequential backlog increased by $180 million this quarter on a same-store basis, and our year-over-year same-store backlog also increased by $200 million.
And this is the first time since the pandemic decline that we have seen a same-store increase in our backlog from the prior year.
These increases support our belief that direct pandemic effects are abating.
Our free cash flow continues to be strong and yesterday we increased our dividend.
Our essential workforce proved its mettle during the recent challenges and they continue to excel as circumstances improve.
We are grateful for their strength and perseverance.
We are optimistic about our prospects for the next several quarters.
We recently announced that Amteck will be joining Comfort Systems USA and that acquisition is expected to close in the third quarter.
Amteck provides electrical contracting solutions and services, including core electric and low voltage systems as well as services for plans of maintenance, retrofit and emergency work.
Amteck is headquartered in Kentucky and focuses on the Southeastern United States, including Kentucky, Tennessee and the Carolinas.
Amteck brings experienced professionals and a fantastic reputation for electrical contracting and services in industrial markets such as food processing.
Amteck will add world-class capabilities in complex projects, deep customer relationships, design build confidence and opportunities for synergy.
Before I review second quarter details, I want to discuss the impact of COVID and how that has affected the composition and timing of earnings and revenues so far this year and in the comparable period last year.
Our first quarter results in 2020 were lowered by COVID.
As we closed that quarter last year in the midst of governmental orders in building and job shutdowns, we were very concerned about how the pandemic and work precautions would affect our productivity.
Accordingly, the judgments we made to close the first quarter last year led us to expect higher cost on jobs and reduced margins and we also reserve certain receivables.
Three months later, by the time we were closing our second quarter, it had become clear that our activities were deemed essential and that we could work at good productivity levels, or would be paid for lost productivity in most cases.
As a result, we reassess some cautious estimates and partially as a result of those judgments the second quarter of 2020 was particularly robust.
We continue to benefit from those factors in last year's order as well and the third quarter of 2020 also benefited from a very discrete gain relating to the settlement of open issues with the IRS for our 2014 and 2015 tax years.
As a result, although underlying trends are strengthening, we continue to face tough comparables in the third quarter.
Now during the first half of this year and a year later, we have good execution and productivity.
However, we have had some revenue softness due to delays in work preparation and pre-construction due to the pandemic.
We are also toward the end of closing out some work that was performed under the worst conditions of the pandemic and so the margins we achieved this quarter reflect a little of that headwind.
Fortunately, those effects are subsiding, and our research and backlog and active pipeline is a sign of good demand and prospects.
And so with that background and context, let me review the numbers in more detail.
Revenue for the 2021 second quarter was $714 million, a decrease of $30 million compared to last year and our same-store revenue declined by $46 million.
Gross profit this quarter was $126 million, lower by $19 million.
And gross profit as a percentage of revenue declined to 17.7% this quarter compared to 19.6% for the second quarter of 2020.
Our gross profit this quarter reflected the headwinds that we are experiencing in construction, particularly in our Mechanical segment.
If you compare the six months period this year to the same period in 2020, gross profit was 18.1% for the first six months of 2021, which is roughly equivalent to 18.2% for the first half of 2020.
SG&A expense for the quarter was $88 million, or 12.3% of revenue compared to $85 million, or 11.4% of revenue for the same quarter in 2020.
On a same-store basis, SG&A was similar to last year with a same-store increase of $1 million.
Our 2021 tax rate was 23.8% compared to 27.6% in 2020.
Our quarterly tax rate benefited from permanent differences related to stock-based compensation, and we expect a more normal rates in the second half of the year.
Net income for the second quarter of 2021 was $33 million, or $0.90 per share.
And that resulted -- that result included $0.10 of income related to the revaluation of our contingent earn-out obligations.
We have four large earn-outs active in 2021 and so we expect more variability than usual in earn-out valuation this year.
Our net income for the second quarter of 2020 was $39 million, or $1.08 per share.
For our second quarter, EBITDA was $55 million and year-to-date we have $106 million of EBITDA.
Free cash flow in the first six months was $101 million as compared to $151 million for the first half of 2020.
The slowdown and some temporary tax benefits created unprecedented cash flow last year.
Our cash flow is very strong through six months.
But as activity levels improve, we are likely to continue deploying some working capital to start new projects in many of our geographies.
Ongoing strong cash flow has allowed us to reduce our debt faster than expected, and also to remain active in repurchasing our stock, and we have reduced our outstanding share count for five consecutive years.
Brian mentioned that we recently entered into an agreement to acquire Amteck, and that transaction is expected to close shortly and during the third quarter.
We have not yet closed Amteck, so no revenue or backlog is yet included.
Amteck will be included in our Electrical segment, and it is expected to contribute annualized revenues of approximately $175 million to $200 million and EBITDA of $14 million to $17 million.
In light of the required amortization expense related to intangibles and other costs associated with that transaction, the acquisition is expected to make a neutral to slightly accretive contribution to earnings per share for the first 12 months to 18 months.
So that's all I have on financials, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021.
New bookings significantly exceeded backlog performed during the second quarter.
Backlog at the end of the second quarter of 2021 was $1.84 billion.
We believe that the business impacts relating to COVID-19 have now stabilized, and as a result same-store backlog increased sequentially by 11% or $180 million.
That is a strong increase, particularly for the second quarter.
The increase is broad based with strength across our markets, most notably, in industrial projects.
Although delays might modestly impact activity levels for the third quarter, we see strong underlying trends in the coming quarters, and we are comfortable with the backlog we have across our operating locations.
Our industrial activities were 42% of total revenue in the first half of 2021.
We think this sector will continue growing as the majority of the revenues at our new companies of TAS and TEC are industrial, and because industrial is heavily represented in new backlog.
Institutional markets, which include education, healthcare and the government, are strong and with 33% of our revenue.
The commercial sector is also solid.
But with our changing mix it is now about 25% of our revenue.
For the first six months of 2021, construction was 77% of our revenue with 46% from construction projects for new buildings, and 31% from construction projects in existing buildings.
Service was a great story this quarter, and service revenue was 23% of year-to-date revenue with service projects providing 9% of revenue, and pure service, including hourly work, providing 14% of revenue.
Year-to-date service revenue is up approximately 12% with improved profitability.
Service is now rebounded to full activity levels.
Profitable small project activity is back and we continue to help customers with their indoor air quality.
Overall, Service was a major source of profit for us this quarter and really help to offset the temporary air pockets in construction.
Our Mechanical segment continues to perform well, despite being most impacted by the pandemic-related air pockets.
Our Electrical gross margins improved from 6.5% in the first six months of 2020 to 14.3% this year.
Our backlog grew this quarter and strength is returning.
Project development and planning activities continue to be strong with our customers.
We are confident in recent acquisitions and are excited about the pending addition of Amteck.
We also continue to invest in our workforce and businesses in order to grow earnings and cash flow.
For the balance of 2021 the pandemic recovery will continue to affect revenue timing and work, and we also faced a tough third quarter comparison as Bill mentioned.
As work picks up, we will be impacted by timing, and we will invest some working capital in order to ramp up.
For the next few quarters, we will have relatively fewer closeouts also.
We are paying more for materials, but so far material availability and increases have been manageable.
We are closely monitoring material shortages and costs, and are taking steps to add additional protections on new work.
All of these considerations make it hard to predict exactly how the next quarter or two will unfold, but the underlying trends and opportunities are very positive.
Despite some moving pieces in carryover effects in the near term, we look forward to continued profitability and our increased backlog and strong pipeline indicate that we can expect stronger activity levels later this year and into 2022.
We are optimistic about finishing 2021 on a strong note, and we are even more optimistic about 2022.
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q1 earnings per share $0.73.
backlog as of march 31, 2021 was $1.66 billion as compared to $1.51 billion as of december 31.
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Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.
Pretty standard structure for today's call, with Todd running down the financial results for the quarter ended June 30th; Craig will add some commentary on current market conditions and our product portfolio; we will then open the call to questions, and Jon will close with some final thoughts.
Yesterday, we reported second quarter operating earnings of $1.09 per share.
Results reflect positive current year underwriting profit, supplemented by favorable benefits from prior year's loss reserves.
All in, we experienced 25% top-line growth and posted an 84.8 combined ratio.
Additionally, our core business was complemented by a strong quarter from Maui Jim and Prime.
While investment income was down modestly in the quarter, year-to-date operating cash flow of $165 million has supported growth in our invested asset base.
Realized gains for the quarter were elevated as we rebalanced our equity position, leaving a modest $4 million change in unrealized gains on equity securities.
As you know, large movements in equity prices in comparable periods can have a significant impact on net earnings, which you can see in both the quarterly and year-to-date comparisons to 2020.
Aggregate underwriting and investment results push book value per share to $27.46, up 11% from year end, inclusive of dividends.
Craig will talk more about market conditions in a minute, but from a high level, all three segments experienced growth.
Property led the way, up 33% as rates and market disruption continue to support growth.
Casualty gross writings improved 24%, with all major product lines contributing.
For Surety, premium was up 11% as our contract and transactional business grew nicely in the quarter.
From an underwriting income perspective, the quarter's combined ratio was 84.8 compared to 88.4 a year ago.
Our loss ratio declined 4.1 points to 44.4.
Storm losses booked in the quarter totaled $8 million, with $7 million impacting the Property segment and $1 million the Casualty segment.
On an overall basis, prior year's reserves continue to develop favorably, enhancing both the Casualty and Property loss ratios.
Surety, however, experienced adverse loss development in the quarter, as we further strengthen incurred, but not reported reserves, on the 2020 accident year for the energy portion of our commercial surety business.
Lastly, on the loss front, our current accident year loss ratio for Casualty continued to improve.
On an underlying basis, if you exclude prior year's reserve benefits and catastrophes, our Casualty loss ratio was down 7 points.
COVID-related impacts in 2020 account for about 4 points of that decline.
Excluding that, however, the loss ratio was still down 3 points.
An improving mix and modest reductions in loss booking ratios, similar to what we discussed on the last few calls, have driven the positive results.
With respect to COVID-specific reserves, amounts are largely unchanged from year end.
Our quarterly expense ratio increased 0.5 point to 40.4.
Similar to last quarter, the increase and the increase in general corporate expenses are largely driven by amounts accrued for performance-related incentive plans.
The combination of significantly higher operating earnings and improved combined ratio and growth in book value drove these metrics higher.
Apart from elevated incentive amounts and continued technology-related investments, other operating expenses were relatively flat.
On the asset side of the balance sheet, our investment portfolio had the major components pulling the same direction, with positive results from equities and fixed income.
Higher bond returns have come alongside lower reinvestment rates, as treasury yields have declined from the highs we saw earlier in the year.
Despite the return of lower yields, strong operating cash flow is accruing to the benefit of total invested assets.
A growing portfolio helped to flatten the curve of investment income, which was down just over 1% in the quarter.
Total return was 2.8% for the quarter, and we continue to put money to work in nearly all environments to stay fully invested.
Apart from the capital markets exposure, investee earnings were significant compared to 2020.
Maui Jim and Prime contributed $10.6 million and $3.6 million, respectively, both benefiting from robust markets and an improving macro economic environment.
All in all, a very good quarter and a strong first half of the year.
A very good quarter, as Todd mentioned, with 25% top-line growth and an outstanding 85 combined ratio.
We are very pleased with our results and our position in the marketplace.
We're seeing widespread growth across almost every product in our portfolio as a result of an improving economy, higher retention rates on renewal business, increased submission flow on new business and rising rate levels.
Although frequency of claims slowed during the pandemic, they have begun climbing back to previous levels, and we remain watchful of the long-term impact of social inflation.
We also continue to keep an eye on loss cost inflation associated with rising building, material and labor costs.
This could prove challenging as we enter the hurricane season, which will likely increase the cost of rebuilding, but also lengthen related business interruption claims.
We think there is more opportunity to get rate as the industry is still underperforming overall.
The industry much more broadly recognize the rising risk levels associated with inflation, the uncertain impact of the pandemic, the possibility of a rising number of severe weather catastrophes, and more unique exposures like the recent building collapse.
We anticipate that these factors will drive and sustain current rate levels and momentum.
We have the benefit of underwriting discipline and product diversification.
This permits us to navigate all market conditions, pushing for rate adequacy where needed, shrinking our position if necessary to maintain underwriting margins while growing shareholder value.
Now for some more detail by segment.
In Casualty, we grew top line 24% and reported an 83 combined ratio, as we benefited from significant favorable reserve development.
Rates, overall, are at or above loss cost, as we achieved 6% for the quarter and 7% year-to-date.
Rates are still up significantly in excess liability products and select auto markets where we compete.
Rates remained relatively flat in primary liability, small package business, and even in several auto niches where competition remains fierce.
We achieved growth in underwriting profit across all major products in our Casualty portfolio.
We have benefited from a quicker recovery in the public auto space as buses are coming back online faster, and we are also realizing goodwill earned with our customers and our producers last year when we reduced premium in recognition of exposure changes during the pandemic.
Casualty growth excluding our transportation unit was still up 18% for the quarter and 12% year-to-date.
In Property, we achieved top-line growth of 33% while reporting an 84 combined ratio.
All of our major products in this segment grew top line and reported underwriting profits.
The pace of rate changes flattening, but still positive across the board.
Overall, rates were up in Property 8% for the quarter and 9% year-to-date, with catastrophe win continuing to lead the way at plus 17% for the quarter and plus 21% year-to-date.
PMLs for wind are up about 15% for the year, but are still well contained at the 250-year level with reinsurance protection.
I don't want to move on from this segment without commenting on the recent collapse of the Champlain Tower in Surfside, Florida.
It was a very tragic event and our thoughts continue to be with the families of all those impacted.
We do write contractors, architects and engineers and properties in the area, but we do not target multi-unit high rises or condo associations in any of our businesses.
Although our loss exposures appear minimal at this time, we will continue to do our part by tightening our underwriting guidelines, and as a result, improve the risk management posture of contractors and those responsible for building maintenance in our chosen markets.
In Surety, we reported 11% top-line growth and a 96 combined ratio.
We were able to achieve an underwriting profit in this segment despite an elevated risk environment related to the number of bankruptcy filings in the energy sector of our commercial surety business.
We maintained significant reinsurance protection against large losses.
We also have strong partners who value our underwriting discipline and have mutually benefited from our relationship for over two decades.
Our underwriting team remains disciplined and continues to underwrite more profit in this space.
We have further tightened our restrictive standards, targeting the highest credit quality principles, insisted on more structured protection in collateral, raised rate levels and lowered tolerances for any delayed commissioning work by the principle.
Our commercial, contract and miscellaneous surety markets are growing and remain profitable year-to-date with an 87 combined ratio.
Overall, an excellent quarter and a very nice first half of the year.
Our disciplined underwriting, diversified portfolio of niche products, talent -- and talented team have delivered once again.
They enable us to provide a consistent underwriting appetite to our customers and producers and strong stable returns to our shareholders.
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qtrly book value per share of $25.55, an increase of 2% (inclusive of dividends) from year-end 2020.
rli achieved $29.9 million of underwriting income in q1 of 2021 on an 86.9 combined ratio.
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We have just come from the historic opening of what I consider New York's most thrilling and unique destination, Summit One Vanderbilt, opened to the public earlier today.
At 11 a.m., we cut the ribbon in the transcendence room, high above One Vanderbilt with the most incredible and amplified views of New York City.
The room is aptly named because everything we've done with this building has been about transcending limits and pushing boundaries.
We're doing it again today, but this time, we're taking it to a much higher level literally.
At the ribbon-cutting ceremony, I spoke about how One Vanderbilt is representative of what the true 21st century office tower can be.
It redefines what it means to integrate excellence in design, efficiency, sustainability, amenity, health, wellness and commutability.
By putting it all together, we've established a new category of building, a new icon on the skyline and a new model for the workplace.
As a result, we are now more than 90% leased despite COVID, and despite every dire prediction of the city's demise.
Several months after we opened this building, we introduced Daniel Boulud's Le Pavillon to the Midtown restaurant scene, and that too was an important milestone for New York, marking the reopening of indoor dining.
Every available table has been booked every single night since its opening in May, and there were a lot of questions when we opened that restaurant about whether the New York had enough of a population here in Midtown to support this restaurant.
And the restaurant has hundreds and hundreds on waiting list every evening.
This time, we've done more than push the boundary, we've completely shattered it.
We spent years in design, taking the best elements of observation decks, cultural institutions, experiential art and immersive technology, and combined it all into Summit.
The result is an experience that has the potential to not only become one of the most sought-after destinations in New York City, but a true global phenomenon.
The energy in New York has been palpable this past month.
New York is back.
On certain days of the week, we are reaching nearly 40% physical occupancy in our portfolio, a substantial increase that's been building up over the past few weeks.
As a sense of normalcy returns to the city, ambitious projects, like One Vanderbilt, ensure that New York remains a top global destination.
People from around the world come here to shop, to be entertained, to enjoy great food, to see great architecture and visit world-class museums.
Summit now becomes an important addition to that lineup.
The primary drivers of this market, finance, technology, business services, media and healthcare, are all doing unbelievably well, and beginning to make space commitments that evidence net demand in our market that will stabilize the occupancy rate and hopefully turn into meaningful positive absorption toward the end of this year and 2022.
With over 450,000 square feet leased in the third quarter in our portfolio and nearly 1.4 million square feet leased in SL Green portfolio to date, we are tracking well ahead of our leasing goals for the year.
And we're doing that at rental levels that are ahead of expectations and almost flat with expiring escalated rents.
We carry this momentum into the fourth quarter with the announcement of the seismic Chelsea Piers lease.
It's a 56,000 square foot lease to one of the best operators of fitness, wellness and health in New York City.
It's only their second Manhattan location.
We've been negotiating with Chelsea for quite a while, and they've selected one Madison to be their East side home where they'll be making substantial investment to make a fitness destination that I think is going to be second to none.
It's going to be awesome.
And that really bodes well for one Madison, which otherwise is already about six to seven weeks ahead of schedule on construction and significantly under budget, even beyond the numbers that we discussed back in December of last year, the buyouts, which now stand at close to 92% of the total project, have resulted in over $12 million of additional contingency savings.
And that's above and beyond the savings we had already factored in to that deal through smart bidding, smart project management, and just given the overall state of the construction market right now, we're experiencing savings while the city and I think the nation at large is experiencing cost increase as a result of supply chain issues that are driving up price.
So we're managing that to the best we can, staying well within our budget, and one Madison with that new lease now done and more conversations underway, we feel very, very good about that development.
During the quarter, we also completed a couple of dispositions previously announced, but we closed them.
Most significantly, the consummation of the sale of about a 50% interest to institutional -- overseas institutional investor in the News Building.
And we have more transactions teed up that we think we'll be able to complete in the fourth quarter.
So we continue to have great success in monetizing our assets, our gains, and we see that continuing to Q4.
That, of course, enabled us to repurchase about an additional $80 million of stock in the fourth quarter, which brings us close, but not completely rounded out -- I'm sorry, in the third quarter, my mistake.
$80 million of stock in the third quarter.
And that brings us close, but not completely rounded out to our repurchase objectives for the year.
So as we sit here, end of October with a rigorous two month sprint to the finish line to get done, all we need to do to close out this year and then embark on what we feel is going to be a solid 2022 for this company, and more importantly, this city.
I think it's great to have the call on this day.
That is really a historic event for the company to open this wonderful experience.
It's truly -- it's fun, it's exhilarating, it's thrilling, and it's everything we set out for it to be.
With that, I think we'll open up to questions.
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revising its earnings guidance ranges.
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I'm Steven Sintros, UniFirst's President and Chief Executive Officer.
Actual future results may differ materially from those anticipated, depending on a variety of risk factors.
As I have said the last couple of quarters, I want to start by saying that first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of this virus.
Overall, we're pleased with the results of our first quarter, which came in mostly as expected from a top line perspective.
Consolidated revenues for the quarter were $446.9 million, down 4% from our fiscal 2020 first quarter.
These results were impacted by a strong quarter from both the nuclear and cleanroom operations of our Specialty Garments segment.
Fully diluted earnings per share for the quarter was $2.20, which exceeded our expectations as many variable expenses trended lower than our projections.
As we have discussed, the pandemic has clearly highlighted the essential nature of our products and services.
We believe the need and demand for hygienically clean garments and work environments positions our company well to support the evolving economic landscape.
Like many businesses, we expect the quarters ahead to be uneven and bumpy, but we continue to be confident in the Company's position to weather the storm.
We also continue to position our sales resources to take advantages of opportunities that exist in the market today and as the economy recovers.
Some positive trends of note for the quarter include new business installs at roughly the same level as the first quarter a year ago, as well as improved customer retention.
In addition, although reductions in wearers continue at higher than normal levels, the significant reductions experienced in our energy-dependent markets during the third and fourth quarters of fiscal 2020 have started to moderate.
Overall, the outlook continues to be difficult to forecast.
Vaccine optimism is being balanced by uncertainty as to when and how quickly the vaccine will create positive movement in the economy.
In addition, the recent surge in positive COVID cases has started to cause increased business restrictions in certain states, provinces and municipalities.
The impact of these or further potential restrictions could have an impact on our results moving forward.
As a result of the ongoing uncertainty, we will not be providing any guidance at this time.
As we've talked about over the last year or two, we continue to be focused on making good investments in our people, infrastructure and technologies.
All of our investments designed to deliver solid long-term returns to all UniFirst stakeholders and are integral components to our primary long-term objective to be universally recognized as the best service provider in our industry.
Our solid balance sheet positions us well to meet the ongoing challenges presented by the COVID-19 pandemic while continuing to invest in growth and strengthen our business.
Certain investments scheduled for this year will continue as planned including the deployment of our new CRM system.
As we've talked about before, some of these investments will pressure on margins in the near term.
However, we feel strongly that keeping these improvements to our company on schedule, will be critical to our long-term success.
As Steve mentioned, in our first quarter of 2021, consolidated revenues were $446.9 million, down 4% from $465.4 million a year ago and consolidated operating income decreased to $56 million from $60.1 million or 6.7%.
Net income for the quarter decreased to $41.9 million or $2.20 per diluted share from $48.2 million or $2.52 per diluted share.
Our effective tax rate in the quarter was 25% compared to 22.1% in the prior year which unfavorably impacted the earnings per share comparison.
Our Core Laundry operations revenues for the quarter were $393.2 million, down 5.6% from the first quarter of 2020.
Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was also 5.6%.
Throughout our quarter, our weekly revenues remained relatively stable.
However, as expected, our organic growth rate trended unfavorably compared to our prior sequential quarter, due to the timing of certain annual pricing adjustments in the prior year.
Core Laundry operating margin decreased to 12.4% for the quarter or $48.9 million from 12.9% in prior year or $53.8 million.
The decrease in the segment's profitability was primarily due to the impact of the decline in rental revenues on our cost structure, which was partially offset by lower travel-related, healthcare and energy costs.
However, the segment's operating income exceeded our expectations due to a slightly stronger revenue performance, combined with a number of other costs that trended favorably compared to our expectations.
As we have discussed in the past, some of our expenses can be variable from quarter to quarter and difficult to forecast in the short term.
We do expect that a number of these costs that have been trending favorably will eventually normalize and pressure margins in the quarters ahead.
Energy costs decreased to 3.6% of revenues in the first quarter of 2021, down from 3.9% in prior year.
Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $38.1 million from $33.4 million in the prior year or 14.2%.
This increase was primarily due to higher direct sales and project-related work in the U.S. and Canadian nuclear operations as well as continued growth in the clean room operations.
Segment's operating margin increased to 18.8% from 14.6%.
This increase was primarily due to lower production and delivery costs as a percentage of revenues as well as lower travel-related, healthcare and energy costs.
These items were partially offset by higher merchandise expense as a percentage of revenues.
The Specialty Garments' quarterly top line and profit performance significantly exceeded our expectations as certain direct sales and project related work that had been deferred in the second half of fiscal 2020 related to the COVID-19 pandemic were finally realized as well as some additional direct sale activity that was anticipated later in fiscal 2021 came through early.
As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services.
Our First Aid segment's revenues were $15.5 million compared to $15.7 million in prior year.
However, the segment's operating profit was nominal compared to $1.4 million in the comparable period of 2020.
This decrease is primarily due to reduced sales from the segment's higher margin wholesale business combined with continued investment in the Company's initiative to expand its first aid van business into new geographies.
We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $473 million at the end of our first quarter of fiscal 2021.
For the first three months of fiscal 2021, capital expenditures totaled $41.8 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives.
Our quarterly capex spend was elevated primarily due to the purchase of a building in New York City for $14.1 million, which will provide us a strategic location for a future service center.
During the quarter, we capitalized $2.9 million related to our ongoing CRM project which consisted of license fees, third-party consulting costs and capitalized internal labor costs.
As of the end of our quarter, we had capitalized a total of $25.5 million related to the CRM project.
As discussed on our last call, we are piloting a number of locations and expect that we will start a broader deployment in the second half of this fiscal year, at which time we will begin depreciating the system.
Eventually, the depreciation of the system combined with additional hardware we will install to support our new capabilities, like mobile handheld devices for our route drivers, will ramp to an estimated $6 million to $7 million of additional depreciation expense per year.
During the first quarter of fiscal 2021, we repurchased 41,000 common shares for a total of $7.2 million under our previously announced stock repurchase program.
As of November 28, 2021 [Phonetic], the Company had repurchased a total of 355,917 common shares for $59.5 million under the program.
As Steve discussed, due to continued uncertainty regarding how states, provinces, municipalities and our customers will respond to the recent surge in positive COVID cases, as well as how quickly the vaccine will provide pandemic relief to the economy, we will not be providing guidance at this time.
However, I will remind you that our second fiscal quarter tends to be a lower margin quarter due to the seasonality of certain expenses that we incur.
As we have done in our recent quarters, we also wanted to provide you an update on our current revenue trends.
Throughout December, the weekly rental billings in our Core Laundry operations have been trending down compared to the comparable weeks in prior year by approximately 3.5% to 4%.
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compname posts q1 earnings per share $2.20.
q1 earnings per share $2.20.
q1 revenue $446.9 million versus refinitiv ibes estimate of $438.5 million.
had no long-term debt outstanding as of november 28, 2020.
at this time, overall outlook in quarters ahead remains uncertain.
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Such statements are based upon current information and management's expectations as of this date and they are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
Relieved that one of the most difficult years in the company's 100-year history is behind us and optimistic considering market share gains accomplished during the first fiscal quarter of 2021 and strengthening oil prices, which enhanced financial health of our customers.
We entered the new year, with 94 rigs running in U.S. land that's double the number we had in August, and the upward trend continues.
Around this time last year VTI prices were trading in the low-50s there were approximately 800 rigs operating in the U.S. land market and H&P was operating in a 194 of those rigs.
Contrast that with today, where oil prices are up over 10%, up into the upper 50s and the industry rig count is approximately 415 rigs and H&P is running 103 FlexRigs.
Obviously, a lot of happened between these two data points, and it shouldn't surprise anyone that the short and medium term activity outlook from E&P companies is taking a while to take shape.
However, if market expectations for U.S. production levels continue to drop that should have a positive impact on oil prices, which further supports consensus of expectations for approximately 500 active rigs in the U.S. at year-end.
Taking this a step further, by our count, there are approximately 630 super-spec rigs available in the U.S. market.
Looking forward, we believe the vast majority of all working rigs drilling horizontal wells will continue to trend toward the super-spec classification and if activity does reach 500 rigs, the industry rig count would begin to approach utilization levels that have historically provided pricing power.
Today, we are hopeful and encouraged by the recent worldwide deployment of COVID-19 vaccines.
We are encouraged with an improving crude oil price picture and we're encouraged by the progress we continue to make on strategic efforts to deploy additional digital technology solutions and to advance new commercial models.
Even with the early success of vaccines for COVID-19, there remains a significant level of uncertainty regarding the global economic recovery as well as the changing political environment, and that certainly tempers our short-term optimism.
While it's encouraging to see oil prices higher than expectations, we are cognizant that even in a stable or improving environment, there remain several challenges ahead for the industry.
We are encouraged seeing the industry rig count begin to recover, the customers are still in the budgeting process to determine their capital allocation and those levels will set the tone for activity during the remainder of 2021.
We do expect public E&Ps to maintain financial discipline, related to their announced budgets.
We also expect private E&Ps to add rigs, however, we don't expect an outsized increase in fiscal '21 rig count, even if oil prices reach $60 per barrel.
A return-driven capital allocation strategy is in the best long-term interest of our industry, and that's what we're aiming to support with our solutions based offering.
H&P has a differentiated customer-centric approach of combining our people, rigs and leading-edge automation technology, which enables us to deliver the highest value wells for our customers.
And underlying principle of our performance contracts is the creation of a sustainable win-win scenario based not only on efficiency, but also by employing the advantages of automation related to wellbore quality and placement.
Our patented drilling automation software is a key driver in improving well economics for the customer by enabling the drilling of consistently higher quality and better placed wellbores throughout the drilling program.
To-date our autonomous AutoSlide technology is deployed on 25% to 30% of our FlexRig fleet and we currently have similar percentages for performance-based contracts.
Automation solutions improve the drilling efficiency of the well, but it also has a significant influence on the lifetime value of the asset by delivering a better wellbore to the completion phase, which will ultimately enhance production economics.
When successful, the combination of the FlexRig and digital technology solutions leads to superior well economics by lowering risk and increasing returns, for our customers, as well as for H&P.
We can't control the macro challenges, but we can remain laser focused on our technology solution deployment, our performance-based contracts and our value accretion for customers.
We're encouraged that several customers have adopted these new solutions, but we recognize that more work is ahead, an additional efforts aimed at change management must occur within the industry.
Accordingly, improvements in technology solutions and performance-based contract adoptions are not likely to be linear and may not always correlate with our rig count.
That said, we're seeing remarkable progress as being made today and we're steadfast and confident in our ability to lead and effect change in our industry.
I'm very pleased with our people's service attitude and the ability to quickly respond to customer demand and improve activity by roughly 35% during the first fiscal quarter.
Our market share today is back to pre-pandemic levels.
We are adding back more rigs in the competition due to our proven ability to reactivate rig safely, efficiently and cost effectively.
We believe there is an opportunity to grow our market share above 25%.
If you look at previous downturns we have faced since the 2008 Financial Crisis, we have emerged stronger with greater capability as we differentiated our offerings and grew market share in the premium part of the market.
Going forward, in a structurally smaller U.S. market, we believe super-spec rigs combined with digital technology solutions that provide improved value through wellbore quality will prevail.
Relative to the 800 rig drilling a year ago, many idle SCR and less-capable AC rigs may be permanently sidelined.
Further, not all of our competitors with super-spec rigs have the ability to enable firm coordination[Phonetic] features that many customers are beginning to require.
In the super-spec classification segment, we have approximately 37% of the U.S. capacity with 234 super-spec FlexRigs that are unique with their digital technology capability across our uniform fleet.
Another aspect of our asset deployment strategy, we plan to execute, will occur over the medium to long-term in international markets.
That strategy is to opportunistically reduce our U.S. super-spec concentration over time by deploying rigs internationally for appropriately scaled contracts.
Our international business development team is seeing some bidding activity in Argentina, Colombia, the Middle East as well as other markets.
At this time, these prospects are in early stages, but we are encouraged by the customer interest in H&P FlexRigs due to a combination of our expertise and unconventional drilling.
Our strong historical performance in these areas and the need for, what we would consider an imminent legacy rig replacement, driven by an evolution toward digital technology for wellbore quality and placement.
These are great opportunities for H&P in addition to our initiatives to improve our cost structure, where Mark will provide more details in his remarks.
On the last call, we discussed having made investments in geothermal projects and you may have seen some recent announcements by our strategic partners.
Along with looking at admissions reducing opportunities like geothermal, H&P will continue to explore and invest in new and diversified technologies as well as expand our digital technology capabilities for the long-term sustainability of the company.
Before turning the call over to Mark, I want to underscore once more the focus and success our company has made on its strategic objectives, particularly given the economic and industry headwinds we are navigating.
As we've indicated previously, introducing disruptive technologies and new business models, is a long, arduous and sometimes, unpredictable process.
I believe our dedicated teams are well equipped and our conservative financial stewardship will enable us to capitalize on the challenges and opportunities ahead.
Today, I will review our fiscal first quarter 2021 operating results, provide guidance for the second quarter, update full fiscal year 2021 guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed first quarter ended December 31, 2020.
The company generated quarterly revenues of $246 million versus $208 million in the previous quarter.
The quarterly increase in revenue was due to higher rig count activity in North America Solutions as operators resumed some drilling activity.
Total direct operating costs incurred were $200 million for the first quarter versus $164 million for the previous quarter.
The sequential increase is attributable to the aforementioned additional rig count in the North America Solutions segment and the related rig recommissioning expenses.
General and administrative expenses totaled $39 million for the first quarter, higher than our previous quarter due to the resumption of short-term incentive accruals for fiscal 2021, but within our guidance for full fiscal year '21.
During the first quarter, we closed on the sale of an offshore platform rig to its long-standing customer as per a provision in the original long-term contract.
The sale closed for consideration of $12 million paid out over two years.
The rig had an aggregate net book value of $2.8 million and the resulting gain of $9.2 million as reported as a part of the sale of assets on our consolidated statement of operations.
In connection with the sale, we entered into a long-term management contract for this rig in our Gulf of Mexico segment.
Our Q1 effective tax rate was approximately 19%, which is on the lower end of our guided range due to a discrete tax expense.
To summarize this quarter's results, H&P incurred a loss of $0.66 per diluted share versus a loss of $0.55 in the previous quarter.
Absent these select items, adjusted diluted loss per share was $0.82 in the first fiscal quarter versus an adjusted $0.74 loss during the fourth fiscal quarter.
Capital expenditures for the first quarter of fiscal '21 were $14 million below our previous implied guidance.
This is primarily due to the timing of spending, which has shifted to the remaining three quarters of the fiscal year.
Turning to our three segments, beginning with the North America Solutions segment.
We averaged 81 contracted rigs during the first quarter, up from an average of 65 rigs in fiscal Q4.
I will note here that at the end of fiscal Q1, all idle but contracted rigs, which I will refer to as IBC rigs thereafter have returned to work compared to an average of approximately 15 IBC rigs in the previous quarter.
During the first quarter, we doubled our rig activity from the prior quarter low of 47 active rigs.
We exited the first fiscal quarter with 94 contracted rigs, which was slightly above our guidance expectations as demand for rigs continue to expand from the low, reached midway through the end of the previous quarter.
Revenues were sequentially higher by $53 million due to the previously mentioned activity increase included in this quarter's revenues were roughly $4 million of unexpected early termination revenue from the cancellation of one rig contract.
North America Solutions operating expenses increased $47 million sequentially in the first quarter, primarily due to adding 25 rigs, a 35% increase in North America activity as well as reactivating 10 idle but contracted rigs, both of which resulting in one-time reactivation expenses of approximately $10.6 million.
Looking ahead to the second quarter of fiscal 2021 for North America Solutions.
As I mentioned earlier, we exited Q1 with slightly more rigs contracted and running than expected.
The activity level has continued to grow, albeit at a more moderate pace than the prior quarter as operators add rigs to maintain production levels with oil above $50 per barrel.
As of today's call, we have 103 rigs contracted with no IBC rigs remaining.
We expect to end the second fiscal quarter of '21 with between 105 and 110 contracted rigs.
As John discussed, our performance contracts are gaining customer acceptance and of the approximately 34 rigs that we have added to the active H&P rig count after September 30th through today, more than a quarter, are working under such performance contracts.
In the North America Solutions segment, we expect gross margins to range between $60 million to $70 million with new early termination revenue expected.
As we continue to add rigs, we will also incur related one-time reactivation expenses, such expenses are expected to be approximately $6 million in the second quarter.
As we have seen in previous cycles, there is a correlation between the reactivation cost per rig and the length of time a rig has been idle.
As a reminder, most of our rigs were stacked back in April of 2020, nine months ago.
Historical experience indicates that rig stacked for nine months or longer will incur cost of $400,000 to $500,000 to reactivate.
Reactivation costs are incurred in the quarter of start-up, so the absence of such costs in future quarters is margin accretive.
Our current revenue backlog from our North America Solutions fleet is roughly $448 million for rigs under term contract, but importantly this figure does not include additional margin that H&P can earn is performance contract criteria are met.
Regarding our International Solutions segment.
International Solutions business activity declined from five active rigs at the end of the fourth fiscal quarter to four active rigs at December 31.
This decrease is the result of an expected rig release in Abu Dhabi, due in large part to the disruption created by the ongoing COVID-19 pandemic.
As we look toward the second quarter of fiscal '21 for International, our activity in Bahrain is holding steady with three rigs working.
We also have one rig under contract in Argentina.
In the second quarter, we expect to have a loss of between $1 million to $3 million, apart from any foreign exchange impacts, as the legacy structural cost in Argentina continue to hamper International margins.
Also we still have a pending rig deployment in Colombia that continues to be delayed, as our customer awaits on required regulatory approvals to begin work.
Turning to our Offshore Gulf of Mexico segment.
We currently have four of our seven offshore platform rigs contracted and we have active management contracts on three customer owned rigs, one of which is on full active rig.
Offshore generated a gross margin of $6 million during the quarter, which was at the lower end of our estimates.
As we look toward the second quarter of fiscal '21 for the Offshore segment.
We expect that Offshore will generate between $6 million to $9 million of operating gross margin.
Now let me look forward to the second fiscal quarter and update full fiscal year 2021 guidance as appropriate.
Capital expenditures for the full fiscal of '21 year are still expected to range between $85 million to 180 -- a 105 -- $85 million to $105 million, with remaining's been distributed over the last three fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal 2021 year, have not changed and remain at approximately $160 million.
We also remain comfortable with the 19% to 24% range for estimated annual effective tax rate and do not anticipate incurring any significant cash tax in fiscal 2021.
The difference in effective tax versus statutory rate, is related to permanent book-to-tax differences as well as state and foreign income taxes.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $524 million at December 31, 2020 versus $577 million at September 30.
Including our revolving credit facility availability, our liquidity was approximately $1.3 billion, not included in the previously mentioned the cash balance is approximately $35 million of income taxes receivable and related interest that we collected after the end of the first fiscal quarter.
Our debt-to-capital at quarter end was about 13% and our net cash position exceeds our outstanding bond.
H&P's debt metrics continue to be in best-in-class measurement among our peer group, but allows us to keep our focus on maximizing our long-term position.
As a reminder, we have no debt maturing until 2025 and our credit rating remains investment grade.
Now a couple of notes on working capital.
Our trade accounts receivable at fiscal year-end of $150 million grew by $38 million to approximately $188 million, due to the added rig activity, as previously mentioned.
The preponderance of our AR continues to be less than 60 days outstanding from billing day.
Also included in AR, there is another approximately $10 million of tax refund receivables.
Our inventory balances have declined approximately $5 million sequentially from June -- from September 30th to $99 million and we continue to leverage consumables across the entirety of U.S. basins to use and reduce inventory on hand.
These efforts are resulting in better spending rationalizations, that are reducing our out-of-pocket expenditures.
Our accounts payable terms optimization project, mentioned on the last earnings call will extend our payable terms with certain key vendors.
And finally of note, our one, the majority of our annual ad valorem taxes accrued through the year are paid annually in the fourth calendar quarter.
And two, the short-term incentive compensation accruing for fiscal year '21 will not be paid until the first quarter of fiscal year '22.
As I mentioned on the November call, we expected to use a modest amount of cash on hand, as we work toward a 100-plus rig count activity level.
As mentioned earlier in my comments we arrived at a 100 rig count level, during this second quarter.
We believe that this activity level, our point forward quarterly operating earnings, will fund our maintenance capital expenditures that service cost and dividends.
Based on our updated forecast, we expect to end fiscal 2021 with cash and short-term investments at or above the $500 million.
In closing, we are continuously working to manage our costs, both operating and SG&A expenses, as well as capital expenditures.
We believe active cost management is crucial in the now structurally smaller United States upstream market.
Various initiatives are under way to identify and drive our costs where possible to enhance margins going forward.
That concludes our prepared comments for the first fiscal quarter.
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q1 loss per share $0.66.
qtrly adjusted loss per share $0.82.
helmerich and payne - expect north america solutions operating gross margins to be between $60-$70 million for q2.
helmerich and payne - sees fy 2021 gross capital expenditures are still expected to be approximately $85 to $105 million.
fiscal year 2021 gross capital expenditures are still expected to be about $85 to $105 million.
helmerich and payne - ended quarter with $524 million in cash and short-term investments and no amounts drawn on its $750 million revolving credit facility.
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We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics.
John is a well-respected leader with broad operational and financial experience.
He is already bringing a great perspective to our business and long-term strategy with a clear focus on growing shareholder value.
We are thrilled to have him on the team.
I also want to take a moment to tank Pat Dugan for his nearly 20 years of service to Wabtec.
We're grateful for all that he has contributed to the company.
I will start with an update on our business, my perspective on the quarter and our long-term value framework and then John will cover the financials.
Overall, we made significant progress against our strategy and delivered a strong third quarter as noted by our sales growth, adjusted margin and adjusted earnings per share each of which were up year-over-year.
Total sales for the quarter were $1.9 billion driven by growing demand in freight services and components but offset by continued weakness in the North America OE end market.
Adjusted operating margin was 17% driven by strong mix and productivity, ongoing lean initiatives and cost actions.
Total cash flow from operations was $244 million this takes year-to-date cash from operations to $759 million versus $458 million a year ago.
This is a solid illustration of how the team is driving good operational performance.
Cash conversion for the year is at 103%.
Finally, we ended third quarter with adjusted earnings per share of $1.14 up 20% year-over-year.
Today, we're also pleased to share that we have achieved our $250 million synergy run rate, a full-year earlier than expected at the time of the GE Transportation acquisition.
We have consolidated and optimized our operations reduced costs to drive stronger profitability, accelerated lean across the enterprise and created additional capabilities in best cost countries.
We're already feeling the benefit of these efforts which will continue to improve our competitiveness.
So overall, really strong execution by the team as we continue to deliver on our long-term strategy.
Shifting our focus to Slide 5 let's talk about our end market conditions in more detail.
Internationally, freight activity continued to improve in the third quarter, across our major markets and our order pipeline remains strong.
We expect long-term revenue growth in Russia/CIS Brazil, Africa, Asia and Australia.
Rate trends in North America weakened slightly year-over-year in the third quarter, not driven by lack of demand but by global supply chain disruption that has impacted intermodal volumes and auto production.
Consumer and industrial activity continue to spur volume growth in chemicals, metals and materials.
Locomotive parkings continue to decline despite weaker freight traffic in the quarter.
We expect demand for reliability, productivity and fuel efficiency to continue to increase placing our services business in a position of strength.
When it comes to the North America railcar build, demand for railcars is improving.
About 21% of the North American railcar fleet remains in storage a slight improvement from the previous quarter and in line with pre-COVID levels.
As a result, industry orders for new railcars are starting to improve.
We forecast the railcar built this year will be in the neighborhood of 30,000 cars.
Transitioning to the transit sector, ridership remains a bit uneven in some markets, however infrastructure spending for green initiatives continues to be a bright spot, especially as governments globally turn to rail for clean, safe and efficient transportation.
Overall, the long-term market drivers for passenger transport remain strong.
Shifting to Slide 6, we are developing innovative solutions that address the main cost drivers for our customers, including fuel efficiency and increased velocity in the transportation sector.
Our commitment to succeed in these efforts is underscored by our focused on continuing to position rail transportation as the safest and most sustainable way to move freight and people overland.
Today, we have the capability and expertise to transition diesel-powered locomotives to battery power and drastically reduce emissions as we're doing with our FLXdrive locomotive.
We expect to extend this technology further to hydrogen fuel cells and help lead the industry to a zero emission rail networks of the future.
And we're not stopping there; we have extended battery technology to other areas of our business as well and we are driving several technology breakthroughs to boost transit efficiency and reduce emissions and pollutants.
An example of this is our Green Friction technology which drastically reduces brake emissions by up to 90% an incredible milestone and significantly improving the quality of the air in our metros.
We're also leading the change to create a safer and more efficient rail network; a great example of this and a solution of growing interest among Class 1 customers is Trip Optimizer Zero-to-Zero.
These advanced technology allows an operator to autonomously start a train from 0 miles per hour and stop it using software integrated with positive train control.
It builds on Trip Optimizer's proven performance which has saved railroads more than 400 million gallons of fuel since inception and reduces emissions by over 500,000 tons per year.
Looking forward, we will continue to advance efforts toward cleaner, more energy efficient transport and will share our progress on this front as well as our broader environmental social and governance priorities in our next sustainability report which will be released in a couple of weeks.
In the third quarter, we secured new orders for our FLXdrive locomotive.
We also closed a significant order for international locomotive kits and one additional contract in Asia to help our customers improve asset utilization and reduce emissions.
In Freight Services, we want a significant long-term service contract as well as an order for 100 locomotive modernizations in North America.
Overall, mods backlog remains strong and we are showing good momentum on deliveries.
Finally in transit we won new power collection, HVAC and service contracts in Germany, Switzerland and the UK.
Looking ahead, we are confident Wabtec will continue to capture growth with innovative and scalable technologies that address our customers' most pressing needs.
We also will continue to control while we can and leverage the strength to combat the current challenges that we are facing due to supply change disruptions, increasing metal and commodity costs and labor shortages.
These dynamic have adversely impacted our third quarter results and have resulted in significant cost increases.
Across the board, our team's working hard to mitigate the impact of these pressures by triggering price escalations and surcharges as well as driving operational efficiencies wherever we can.
We anticipate our costs will continue to increase over the next few quarters and we will continue to aggressively manage these challenges.
It's great to be with you and I'm very excited to join the team at Wabtec.
It is a storied company with incredible talent, deep innovation and best-in-class differentiated technologies that is well positioned to deliver the future of rail while growing shareholder value and I look forward to meeting with many of you in the coming months.
Now, turning to Slide 8 before getting into the financials, we would like to discuss the dynamic cost environment and supply chain challenges that we face.
During the third quarter, we experienced delays in production and deliveries of our products as well as significant increases in many key input costs.
On the revenue side, we are experiencing adverse impacts to our sales results due to shortages across many component parts, including computer chips, which are causing delays in production and customer delivery.
We believe that our enterprise revenues were to 2% to 3% lower than they would have been without the supply chain disruptions and that the majority of these lower revenues represent delayed sales, not lost sales.
The impacts to Wabtec's cost structure come in four areas.
First, commodity inflation; where markets year-over-year are up more than 200% for steel, 94% for aluminum and roughly 40% for copper.
The second area of impact is elevated freight and logistics costs, which in many cases are up over 3 times to 4 times from pre-COVID levels.
Third is wage inflation and labor availability, which are adversely impacting the business and finally, we are experiencing loss manufacturing efficiencies, largely due to component and chip shortages.
Our costs have increased during the quarter and have impacted both our Freight and Transit segments.
We estimate that cost increases in the third quarter are in the range of $15 million to $20 million.
Having said that, we expect these headwinds to intensify as the full cost of rising metals and lower manufacturing efficiencies work their way through our inventories and purchase contracts.
We anticipate cost to continue to increase over the next few quarters.
Our team is working hard to mitigate the impact of these cost pressures and supply chain disruptions by triggering price escalation clauses that are included in many of our long-term contracts, implementing price surcharges, driving operational productivity, and lean initiatives and finally through higher realization of synergies.
Turning to Slide 9, I'll review our third quarter results in more detail.
We had good operational and financial performance during the quarter, sales for the third quarter were $1.91 billion, which reflects a 2.2% increase versus the prior year.
Sales were positively impacted by the continued broad-based recovery we are experiencing across much of our portfolio.
The acquisition of Nordco and favorable currency exchange, partially offset by continued weakness in the North America OE locomotive market and lower year-over-year sales in Transit.
For the quarter adjusted operating income was $325 million which was up 10.6% versus the prior year.
Most notably, we delivered margin expansion in both our segments, up 1.3 percentage points on a consolidated basis.
Margins were aided by strong mix favorability, improved productivity and better than expected realization of synergies.
As Rafael stated during the quarter, we achieved our goal of $50 million of synergy run rate a significant milestone delivered a full year earlier than originally forecasted.
What makes this quarter's margin expansion even more impressive is the fact that our margin gains were achieved in the face of an incredibly dynamic supply chain and inflationary environment.
Looking at some of the detailed line items for the third quarter; adjusted SG&A was $257 million which was up $16.1 million from the prior year due to the normalization of certain expenses, higher incentive compensation and employee benefit costs and the acquisition of Nordco.
For the full year, we expect SG&A to be about 12.25% of sales, adjusted SG&A excludes $12 million of restructuring and transition expenses, of which most was allocated to further optimize our European footprint.
Engineering expense increased from last year, we continue to invest engineering resources and current business opportunities but more importantly, we are investing, our future as an industry leader in decarbonization and digital technologies that improve safety, productivity and capacity utilization.
Our 2021 investment in technology, which includes engineering expense remains at 67% of sales.
Amortization expense was $72.5 million and our adjusted effective tax rate during the quarter was 24.8%, bringing our year-to-date adjusted effective tax rate to 25.8%.
For the full year, we still expect an effective tax rate of about 26% excluding discrete items.
In the third quarter, GAAP earnings per diluted share were $0.69 and adjusted earnings per diluted share were $1.14 up 20% versus prior year.
We are pleased with our Q3 results.
In particular, our sales growth in the face of supply chain disruptions, our margin growth in the face of sharp cost increases.
We remain diligent and proactive as we work to minimize these challenges.
Now, let's take a look at segment results on slide 10 starting with the Freight segment.
Across the Freight segment, total sales increased 4.7% from last year to $1.3 billion, primarily driven by continued strong growth at our services and component businesses.
In terms of product lines, equipment sales were down 5.7% year-over-year due to fewer locomotive deliveries this quarter versus last year and no new locomotive deliveries in North America, partially offset by strong mining sales.
This year-over-year performance demonstrates the resiliency of our equipment portfolio.
In line with an improved outlook for rail, our services sales grew a robust 13.6% versus last year.
The year-over-year sales increase was largely driven by higher aftermarket sales from our customers modernizing their fleets, the unparking of locomotives and the acquisition of Nordco.
The performance, reliability and availability of our fleet continues to drive customer demand as railroads increasingly look for predictable outcomes across their fleet.
Excluding Nordco, organic sales for the third quarter were up 6.1%.
Digital Electronics sales were down 3.6% year-over-year driven by delays in purchase decisions due to economic and cost uncertainties as well as chip shortages.
We continue to see a significant pipeline of opportunities in our digital electronics product line as customers globally focus on safety, improved productivity, increased capacity and utilization.
Component sales continued to show recovery and were up 6.7% year-over-year driven by demand for railcar components and recovery in industrial end markets.
We remain encouraged by the continuing trend of railcars coming out of storage higher order rates of new railcars and accelerated recovery across industrial end markets.
Shifting to operating income for the segment; Freight segment adjusted operating income was $266 million for an adjusted margin of 20.6%, up 1.7 percentage points versus the prior year.
The benefit of higher volumes, improved mix across our portfolio and increased synergies and productivity were partially offset by significantly higher input costs.
Finally, segment backlog was $18.2 billion, up $375 million from the prior quarter and the broad multiyear order momentum that Rafael discussed across the segment.
Turning to Slide 11, across our Transit segment sales decreased 2.5% year-over-year to $612 million.
Sales were down versus last year, due in large part to supply chain issues and COVID related disruptions.
This was partially offset by positive ridership trends.
Excluding near term supply chain challenges, we estimate that Transit sales would have been up slightly on a year-over-year basis.
We believe the medium and long-term outlook for this segment remains positive as infrastructure spending for green initiatives continues.
Adjusted segment operating income was $77 million, which resulted in an adjusted operating margin of 12.5%, up 50 basis points versus prior year.
Across the segment, we continue to drive down cost and improve project execution despite the volatile cost environment.
For the year, we remain committed to deliver about 100 basis points of margin improvement for the segment and the team continues to take aggressive action to mitigate rising costs and supply chain disruption, which will pressure the pace of near term margin improvement.
As we execute in the fourth quarter, we expect significantly improved operating margin driven by strong productivity gains, improved project mix and more favorable comps versus the prior year's fourth quarter.
Finally Transit segment backlog for the quarter was $3.6 billion, which was flat with the prior quarter after adjusting for the negative effect of foreign exchange.
Now, let's turn to our financial position on Slide 12.
We had another strong quarter for cash generation.
We generated $244 million of operating cash flow during the quarter, bringing year-to-date cash flow generated to over $759 million.
This performance, clearly demonstrates the quality of our business portfolio.
During the quarter, total capex was $23 million bringing year-to-date capex to $78.5 million.
In 2021, we now expect capex to be approximately $120 million.
This is $20 million lower than our previous guidance as the team judiciously manages every dollar of spend.
Our adjusted net leverage ratio at the end of the third quarter was 2.6 times and our liquidity is robust at $1.62 billion.
Also during the quarter we returned capital to shareholders, repurchasing $199 million of shares.
As you can see in these results, our balance sheet continues to strengthen and we are confident we can continue to drive solid cash generation, giving us the liquidity and flexibility to allocate capital toward the highest return opportunities and to grow shareholder value.
Let's flip to Slide 13 to discuss our updated 2021 financial guidance.
We believe that the underlying customer demand for our products and the end market momentum remains strong.
As John indicated, we do expect continued headwinds from a more challenging sales and cost environment into the fourth quarter.
Taking into consideration this market backdrop and volatile cost environment combined with our solid performance in the first three quarters we are narrowing our full year revenue and earnings per share guidance.
We expect sales of $7.9 billion to $8.05 billion and adjusted earnings per share to be between $4.20 and $4.30 per share.
We expect cash flow conversion to remain greater than 90% resulting in strong cash generation of about $1 billion for the full year.
Now, let's turn to our final slide; everything we've outlined today reinforces that we have a clear strategy to accelerate long-term profitable growth.
Our strategy is built on our expansive installed base and deep industry expertise grounded in innovation, breakthrough initiatives and scalable technologies that drive value for our customers and accelerated by our lean continuous improvement culture and disciplined capital allocation.
I'm proud of the strong execution by the team in the third quarter despite a challenging supply chain, cost and market environment.
You are seeing their efforts in the strength of the company and our financial results.
As we go forward the rail sector is well positioned to increase share and address the critical issues facing the world's freight and logistics sector.
We will continue to lean into the strong fundamentals of this industry and our company to deliver long-term profitable growth.
As we've said before, Wabtec's mission holds a larger purpose to move and improve the world.
After demonstrating strong performance in the first three quarters of 2021, I'm confident that this company will continue to deliver and lead the transition to a more sustainable future.
We will now move on to questions.
But before we do and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question.
If you have additional questions, please rejoin the queue.
Operator, we are now ready for our first question.
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compname reports q3 adjusted earnings per share $1.14.
q3 adjusted earnings per share $1.14.
q3 gaap earnings per share $0.69.
q3 sales rose 2.2 percent to $1.91 billion.
compname says tightened its 2021 sales guidance to a range of $7.90 billion to $8.05 billion.
sees fy 2021 adjusted earnings per share $4.20 to $4.30.
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Many factors could cause future results to differ materially.
A more detailed description of such factors can be found in our filings with the Securities and Exchange Commission.
Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Ware Grove, Chief Financial Officer.
Throughout the past year, I emphasized the fundamental characteristics of our business that I believe enable us to continue to perform well in both favorable and less favorable business climates.
As I described on our second quarter call, these characteristics include that approximately 70% of our revenue is generated from essential services, including our tax services, insurance services, payroll services and a host of others that we provide to our clients regardless of economic conditions in the market.
We generally retain approximately 90% of our clients from year-to-year.
We have a broad geographic footprint.
We serve a diverse client base in terms of size and industry.
We enjoy strong and constant cash flow and have a substantial amount of variable expenses in our business.
Our ability to grow throughout the challenging business climate that was 2020 is a testament to those characteristics, the strength of our business model and the agility and resilience of our team.
As expected and reflected in our results, some of our businesses performed better than others in more uncertain and volatile business environments.
Generally, the essential services described earlier tend to continue to perform well even in more challenging business climates while certain more discretionary services are less predictable.
Many of our more discretionary services are in higher demand when our clients are pursuing or making decisions around growth, such as acquisitions or significant expansion plans.
We saw much of this play out during 2020.
Within our Financial Services group, we experienced strong performance from our core tax & accounting business and our litigation support business and continued steady performance from our government healthcare consulting business.
We also experienced a slowdown in the second and third quarters in demand for certain of our more discretionary project-oriented services, such as our valuation business and portions of our private equity advisory practice.
However, demand for many of those services began to rebound in the fourth quarter, particularly for those services that are tied to supporting our clients' pursuit of acquisition opportunities.
One note on our government healthcare consulting practice.
On our last call, we discussed how the rate of growth had temporarily slowed during COVID due to restrictions of access to client facilities and delays in receiving client information.
In the fourth quarter, we were pleased to see the rate of growth for that business resume to more normal levels, and we expect demand for the services provided by that business to remain strong throughout 2021.
Turning to our Benefits and Insurance group.
We had a similar experience to our Financial Services group with strong performance from the essential services that we provide, including our employee benefits business, the commercial and personal lines portion of our property and casualty business, the advisory services we provide for our clients on the retirement plans and demand for our upmarket, more robust payroll platform.
From a consolidated view, the solid results that we experienced for those services were somewhat clouded by the softer results from a relatively small portion of our property and casualty business tied to the hospitality and adventure sports, a decline in the number of payrolls processed for some of our smaller clients, particularly those tied to the restaurant industry and a number of other more project-oriented service lines.
The encouraging note here is that we expect the portions of that business that were negatively impacted by the soft economic conditions to return to more normal growth levels once the economy improves.
One last note as it relates to our Benefits and Insurance business.
We have made substantial investments over the past several years in hiring, training and supporting new producers within this group.
Those investments are essential to drive sustained long-term organic revenue growth.
The early report card on those investments is very encouraging.
And as a group, the new producers that we brought into this program are outperforming our projections.
As a result, we are continuing to invest in our new producer program and to expand this program to other business lines.
Now looking forward, we enter into this year in a position of financial strength with a very strong balance sheet, low debt and ready access to capital.
As we demonstrated in 2020, we also have a significant amount of variable expenses and considerable discretionary spending items that we can manage to preserve liquidity, if economic conditions are worse than currently anticipated.
While much remains uncertain, we expect client demand for our core essential services to remain strong and for client interest in many of our more discretionary services to increase as business conditions continue to improve.
Based on our performance in 2020, the financial strength of the business, the cost control measures that we have at our command and our current view of the business climate for 2021, we have elected to reinstate guidance for this year.
I want to caution that while we are comfortable issuing annual guidance, we do expect more volatility than we ordinarily experience when comparing a given quarter to the same period in the prior year.
So we would caution against doing so.
These assumptions include the first six to nine months of 2021 will be similar to what we experienced in the second half of 2020, and we expect continued recovery in the M&A market, which impacts many of our more project-based and private equity services.
We saw improvement in the fourth quarter and expect this trend to continue throughout 2021.
The total revenue growing by 1.6% for the full year and margin on pre-tax earnings from continuing operations increasing by 90 basis points.
We were pleased to report earnings per share of $1.42 for the full year, up 11.8% over $1.27 reported a year ago.
To recap a few important points.
As the impact of the COVID pandemic unfolded, there was considerable risk and uncertainty everywhere.
We took a number of immediate actions to protect our liquidity, and we took measures to prudently control expenses with a view toward preserving our ability to serve clients in order that we could emerge as a strong and healthy business ready to resume growth.
We have not been completely immune, but with many actions we took, coupled with the dedication of our CBIZ team, we are pleased that our business model has weathered the storm, and we are now a stronger company for the experiences in 2020.
Our primary concern operating under the pandemic environment was to protect our liquidity.
Perhaps the best measure of our success in 2020 is the continuing nature of our strong positive cash flow.
We ended 2020 with $108 million of outstanding debt on our credit facility, increasing only $2.5 million from $105.5 million at year-end a year ago.
After an active first quarter in 2020, repurchasing 1.2 million shares and closing three acquisitions, we paused both acquisitions and share repurchase activity from mid-March through mid-September until we could develop more confidence with the stability of our cash flow trends.
For the full year of '20, we closed seven acquisitions and utilized $89.7 million of capital for acquisition activities.
We also deployed $57.6 million to repurchase approximately 2.3 million shares for the full year, including the repurchase of one million shares in the fourth quarter.
For the full year, with $147.3 million of capital used for these two purposes, our borrowing increased by only $2.5 million.
This results in a leverage ratio of approximately 0.8 times on adjusted EBITDA of $132.1 million, with $286 million of unused capacity.
Going into '21, this offers us great flexibility to continue to deploy capital for acquisitions and for continuing our share repurchase activity.
Through February 16 to date this year, we have repurchased an additional 600,000 shares, and we intend to continue to repurchase shares.
With this recent activity, when combined with shares repurchased in 2020, this has resulted in the repurchase of more than 5% of our shares outstanding.
When you also consider the 1.2 million shares repurchased in the prior year 2019, we have repurchased approximately 4.1 million shares or roughly 7.5% of shares outstanding within the past two years, and we've utilized nearly $100 million of capital for these activities.
Considering our strong balance sheet and cash flow attributes, we can repurchase this level of shares without compromising our capacity for acquisitions.
With the seven acquisitions closed in 2020, plus an eighth transaction we announced effective on January one this year, collectively these newly acquired operations will generate approximately $48 million of annualized revenue.
Strategically, these acquired operations will further strengthen Benefits and Insurance services.
We'll add an important component to our financial advisory services and we'll add capacity in order to accelerate the rollout of our integrated payroll services platform that focuses on upmarket clients.
Acquisition-related payments for earn-outs from previously closed transactions are estimated at $13.6 million in 2021.
In 2022, we estimate a use of approximately $15.4 million, approximately $9.1 million in 2023, $13 million in 2024 and approximately $800,000 in 2025.
For 2020, capital spending for the full year was $11.7 million, of which $2.2 million was in the fourth quarter.
We expect capital spending within a range of $12 million to $15 million, looking ahead into 2021.
Depreciation and amortization expense for the full year of '20 was $23.1 million, $9.6 million of depreciation with $13.5 million of amortization.
In the fourth quarter, depreciation and amortization expense was $5.9 million.
A major concern for us as the pandemic unfolded in 2020 was our clients' ability to pay receivables.
As we transition to remote work conditions at the end of the first quarter in 2020, our team did a great job refining and adopting new processes and digital tools for billing and management of receivables.
These tools are now a more permanent fixture in our workflow processes and in our communication with clients.
Days sales outstanding performance on receivables improved this past year despite the volatile conditions and financial stress throughout the economy.
At the end of the year, days sales outstanding stood at 72 days compared with 75 days a year earlier.
Although not completely immune to financial stress, this is also good evidence that with our diverse client base, there is no significant concentration of clients in the more severely impacted areas of the economy, such as hospitality, travel, restaurant or entertainment businesses.
At the end of the first quarter in 2020, we recorded an additional $2 million of reserve for bad debt.
With continuing uncertainty in the economy, although days sales outstanding performance has improved, we continue to carry that level of reserves for bad debt.
For the full year of '20, bad debt expense was 45 basis points of total revenue compared with 25 basis points of total revenue for 2019.
Total consolidated revenue for the full year was up 1.6%, with same unit revenue declining slightly by 0.4%.
In the fourth quarter, total revenue grew by 3.9% and same unit revenue grew by 1.1%.
Within Financial Services, total revenue for the full year was up 2.1%, with same unit revenue up 0.8%.
In the fourth quarter, total revenue in Financial Services was up 6.6% with same unit revenue up 3.3%.
Turning to Benefits and Insurance.
For the year, total revenue grew by 0.5%, with same unit revenue declining by 3%.
And in the fourth quarter, revenue declined by 0.8% and same unit revenue declined by 3.2%.
As I indicated in our third quarter conference call, revenue growth numbers were impacted by a relatively small number of our operations, where the nature of advisory or transactional services was more severely impacted by economic conditions.
For the full year, these businesses represented 16% of our total revenue, but collectively, these businesses declined by 12.8% in 2020 compared with the prior year.
Adjusting total revenue to exclude the impact of these businesses, the remaining core revenue would reflect growth of 4.9% rather than the 1.6% reported.
Same unit revenue would reflect growth of 2.5% rather than the 0.4% decline reported.
Fourth quarter revenue adjusted to exclude these businesses, grew by 8.3% versus the reported 3.9% and same unit revenue grew by 4.7% versus the reported 1.1%.
With pre-tax income margin improving by 90 basis points to 10.7% from 9.8% the prior year, we saw a favorable impact resulting from the cost control measures we took in deferring discretionary items, plus the favorable impact from the natural reduction in travel, entertainment expense and from the lower cost for our self-funded healthcare benefits.
Among other things, for 2020, T&E costs came in at approximately 30% of the prior year levels, and healthcare costs came in at approximately 85% of expectations as discretionary and elective medical procedures were deferred.
Adjusting the reported operating margin to remove the impact of accounting for gains and losses on assets held in the deferred compensation plan, operating income was 11.2% for the full year, up 70 basis points compared with 10.5% in 2019.
As Jerry outlined, we think business conditions in 2021 will look very much like the environment we experienced during the second half of 2020.
Of course, the timing and impact of a successful COVID vaccination rollout is very unclear, and there is still risk and uncertainty ahead.
Considering the stability and performance of our core businesses in 2020, together with the impact of recent acquisitions, we think revenue will continue to grow in a similar matter, as I just described.
We are projecting total revenue growth in 2021 within a range of 5% to 8%.
As a reminder, we do not provide guidance for quarterly results.
But as you think about the year ahead, bear in mind, the first quarter last year was a relatively strong quarter before we felt a COVID impact in the second half of March.
With the 5% to 8% revenue growth expectation, we are looking to increase earnings per share within a range of 8% to 12% over the $1.42 recorded for 2020.
Consistent with our longer-term goals, we can manage a number of discretionary items, and we expect to improve margin within a range of 20 to 50 basis points.
You will note the effective tax rate was 24.3% in 2020.
Aside from any change in tax law that may arise from the new administration, there are a number of variables that can impact our tax rate, either up or down.
But as we look ahead to 2021, we are projecting a 25% effective tax rate.
Ongoing share repurchase activity will impact the fully diluted weighted average share count.
At this time, we are estimated 54.5 million fully diluted shares for the full year, down from 55.4 million shares in 2020.
As I mentioned, we are continuing to repurchase shares, and we will update this estimate at the end of the first quarter and throughout the year.
Adjusted EBITDA for 2020 came in at $132.1 million or 13.7% of revenue, a 9.6% increase from the prior year, and we expect to further improve that margin in '21.
So in conclusion, we were pleased to see stability in client demand and cash flow as we progress through the year.
We have emerged from the challenge of 2020 as a stronger company with stronger processes.
Going into 2021, we think our business will continue to reflect the stability, evidenced by the performance this past year.
We recognize the uncertainty and risks ahead, and we will plan to update our expectations as conditions dictate throughout the balance of the year.
First, I would like to talk about our unique position in the market and how it allows us to provide solutions to our clients that are unmatched in our industries.
While we have a large number of very capable competitors for many of the services we provide, they are often not aligned and lack the ability to provide the holistic, multidisciplinary solutions that our clients need when analyzing decisions that relate to their most impactful opportunities or greatest challenges.
We witnessed the strength of our business model throughout 2020 as we move quickly to collaborate across businesses, service lines and geographies to bring CBIZ's resources and expertise to bear in coordinated services that were responsive to our clients' most pressing needs.
We are encouraged by the value that our holistic multidisciplinary solutions approach brings to our clients and are excited for the opportunities that it presents for CBIZ to further distinguish us from our competitors.
Next, relating to M&A.
The acquisition of BeyondPay brings additional implementation capacity to support sales of our upmarket payroll solution and follows another similar acquisition earlier in 2020.
We also acquired Borden Perlman Insurance Agency within our property and casualty business.
Based in New Jersey, Borden Perlman is a leading provider of property and casualty insurance with an over 100-year history of serving clients on the East Coast.
Both of these acquisitions provide strategic value, but are also strong cultural fits, which is the most important factor when we consider acquisition opportunities.
As Ware mentioned, overall, we completed seven acquisitions in 2020, all of which bring expertise, capacity, talent and a strong client base to our business.
As I mentioned earlier, in 2021, we've already completed one acquisition with our core accounting and tax practices with the addition of Middle Market Advisory Group in Denver, Colorado.
MMA provides tax complying and consulting services to middle market companies and family groups across a number of attractive industries and complements our rapidly growing Colorado practice.
Acquisitions continue to be an essential component of our growth strategy.
While the M&A market slowed in the second and third quarters of last year, we are seeing activity resume.
We are finding that our performance throughout the pandemic allows us to tell a compelling story when it comes to potential partners.
The challenges faced by many of our smaller competitors throughout COVID shined a light on the value that CBIZ can bring to our team members and our clients as a result of our scale, breadth and depth of services and expertise.
As a result, our pipeline of outstanding acquisition prospects is stronger than it has been in many years, and we have access to capital to be aggressive as we seek to take advantage of many of these opportunities as we can.
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compname reports q3 earnings per share of $0.41 from continuing operations.
sees aggregate annual revenue from acquisitions of about $72 million on full year basis (not sees fy revenue about $72 million).
sees fy gaap earnings per share $1.36 to $1.42.
q3 same store sales rose 8.3 percent.
q3 earnings per share $0.41 from continuing operations.
sees fy revenue up 12 to 15 percent.
q3 revenue rose 18.6 percent to $282.7 million.
cbiz sees fy gaap earnings per share of $1.36 to $1.42.
sees fy revenue about $72 million.
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Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time.
We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question.
Before I get into the slides, I would like to share some perspective on our first quarter.
As you will see in the results, we are benefiting from our diverse portfolio and are continuing to execute on our margin expansion plans.
While markets have been very dynamic over the past year, we are seeing improving conditions across the majority of them.
Against this backdrop, we are demonstrating not only the resiliency of our operations, but also the ability to drive organic content growth ahead of our markets while expanding operating margins and demonstrating strong free cash flow generation that is in line with our business model.
We are positioned to continue to benefit from secular trends and growing markets, while driving the margin expansion plans that we've highlighted to you.
And you'll see the benefit of these efforts in our first quarter results, as well as our guidance for the second quarter.
With that as a quick backdrop, let me now frame out some of the key messages of today's call.
First, I am very pleased with our execution in the first quarter and I believe our teams delivered strong results.
We delivered sales growth of 11% and adjusted earnings-per-share growth of 21% year-over-year, demonstrating the strength and diversity of the portfolio and the benefits from our operational improvements.
Our sales were ahead of our expectations in each segment, but with the greatest outperformance in transportation, where we continue to generate strong content growth from electrification of the powertrain as well as increased data in the vehicle.
We continue to demonstrate our strong cash generation model with our quarter-one free cash flow being at a first quarter record of approximately $530 million.
We continue to expect approximately 100% free cash flow conversion to adjusted net income for this fiscal year.
And as we look to our second quarter, we are expecting our strong performance to continue.
We expect sales and adjusted earnings per share, similar to the first quarter, at approximately $3.5 billion of revenue and a $1.47 in earnings per share.
And like in the first quarter, we again expect double-digit sales and adjusted earnings-per-share growth year-over-year.
Now, I'd like to take a moment to discuss our performance relative to where our markets were in the pre-COVID timeframe of our fiscal 2019.
And we do hope this will provide a baseline for evaluating our performance and progress this year.
At the overall company level, our revenue is approximately back to pre-COVID levels, despite the majority of our markets being below 2019 levels and I'd like to give you some color by the three different segments.
In our Communications segment, we have seen strong improvement in our end markets.
And this has helped enable sales to recover above pre-COVID levels and for example, in Data and Devices as well as in Appliances, we're benefiting from continued data center build-outs and home investments respectively.
In our Industrial segment, it is a very different environment.
We have markets that continue to remain weak as a result of COVID impacts.
Commercial layer and medical markets and car sales are still well below pre-COVID levels.
However, what we are seeing is it does look like order patterns are indicating that we could be touching along the bottom in both of these businesses and we could see some improvements later in the year.
And in our Transportation segment, our Auto and Commercial Transportation businesses are now generating revenue above the levels we saw prior to COVID, even though global auto and truck production is still forecasted to be below fiscal 2019 levels.
Content growth and share gains have driven the outperformance, reflecting our leadership position in these markets.
TE products and technology are designed in the next generation of sustainable vehicles at every leading OEM worldwide.
The real proof of the traction is our content-per-vehicle progression.
In fiscal 2019, our content per vehicle in Auto was in the low 60s and it's now trending into the low 70 range.
As consumer adoption increases for hybrid and electric vehicles and we continue to bring more innovation to our customers, we expect our content per vehicle to expand into the 80s over time.
What surprises is that consumer preference continue to drive the features and the technology and we will continue to benefit as vehicles become more safe, green and connected, driving more content for connector and sensing solutions.
While I am pleased with our results and the progress that we've made operationally, I'm even more excited about the sales growth and margin expansion opportunities that we still have ahead of us.
We continue to execute on our margin expansion plans in Transportation and Industrial that we started prior to COVID and accelerated during the pandemic.
I'm also very proud of the margin progression in Communications, which has offset the volume-related pressure that we're seeing in Industrial as a result of the market impacts due to COVID.
Quarter-one sales of $3.5 billion were better than our expectations, up 11% on a reported basis and 6% organically year-over-year.
We had 12% organic growth in both Transportation and in Communications with growth across all businesses in those two segments.
Industrial segment sales were down 8% organically due to the COVID-related impacts I already talked about.
During the quarter, we saw orders of $4 billion and this was up 25% year-over-year, reflecting an improvement in the majority of the end markets we served and I'll come back to orders in a couple of slides.
From an earnings per share perspective, our adjusted earnings per share was $1.47.
This was up 21% year-over-year.
It is a strong operational performance where we showed adjusted operating income being up approximately 25% year-over-year.
As we look forward, we expect our strong performance to continue into our second quarter, with sales and adjusted earnings per share being similar to first-quarter levels despite lower sequential auto production.
For the second quarter, we expect sales to be approximately $3.5 billion and this is up approximately 10% year-over-year on a reported basis and mid-single digits organically.
Similar to our first quarter, year-over-year growth will be driven by Transportation and Communications, partially offset by an organic decline in Industrial.
Adjusted earnings per share is expected to be approximately $1.47 in the second quarter and this will be up 14% year-over-year with adjusted operating margin expansion included in the earnings performance.
For the first quarter, our orders will approximately $4 billion with a book-to-bill of 1.15.
I would like to highlight that this level of orders reflects improvements in a number of our end markets, as well as some supply chain replenishment.
As we see markets improving, it is not surprising that our orders reflect the impact of supply chains being replenished after the shutdowns that occurred in the U.S. and Europe in the third quarter of last year.
We are also seeing customers placing advanced orders in some cases due to product constraints in the broader electronic component categories like semiconductors and certain passive components.
And the guidance that we give does factor in the impacts of these supply chain dynamics.
In looking at orders by segment, on a year-over-year basis, Transportation and Communication orders both grew 36% with broad-based growth across all businesses.
Industrial orders declined slightly year-over-year, but on a sequential basis, we did see orders grow in all businesses in each segment.
So, let me also add some color on what we're seeing in orders from a geographic perspective and I'll provide this on an organic basis.
In China, our orders were up 33% in the first quarter with growth, driven by Transportation and Communications.
We are benefiting from our strong position in Auto, Commercial Transportation and Appliances and continue to see strong improvement across those markets in China.
We also saw 26% year-over-year growth in Europe, with growth in all segments.
This represents the second consecutive quarter of orders growth in Europe with some markets improving, following the large drops from COVID, back in the middle of last year.
And in North America, our orders were flat with growth in Transportation and Communications being offset by declines in Industrial.
Now, what I'd like to do is touch upon our segment results briefly and I'll cover those on Slide 5 through 7 of the slides we issued.
Starting with Transportation, our sales were up 12% organically year-over-year, with growth in each one of our businesses.
In Auto, sales were up 11% organically versus global auto production growth in the low single digits.
The outperformance is driven by continued strong content growth and some benefits from the supply chain replenishing.
We are seeing gains from our leadership position in next generation products and technology and the value that we bring to our customers.
As I mentioned earlier, we are seeing strong content growth from the move to an electric powertrain and increased data connectivity, as well as the continued electronification of the vehicle.
In our Commercial Transportation business, we saw 25% organic growth, driven by electronification trends, which are helping content outperformance as well as ongoing share gains.
We are also benefiting from higher emission standards and new increased operator adoption of Euro 5 and 6 in China and new emission standards in India.
We saw growth in all regions as well as all market verticals that we serve in our Commercial Transportation business and continue to benefit from our strong position in China.
We are also seeing increased program wins in the electric powertrain and commercial transportation that will provide future content growth.
In Sensors, we saw 29% growth on a reported basis, which included the revenue contribution from the First Sensor acquisition.
On an organic basis, sales increased 3%, driven by growth in auto applications and we continue to expand our design win pipeline in auto sensing and expect growth at these platforms continue to increase in volume.
From an operating margin perspective, the segment expanded margins by 200 basis points to 19.4%, driven by strong operational performance.
Now, let me move over to the Industrial segment, where, as I mentioned, our sales declined 8% organically year-over-year and our adjusted operating margins were down slightly to 13.5% despite the 8% organic sales decline.
I am very proud, we were able to maintain our mid-teens adjusted operating margins due to the cost actions that we initiated over the past couple of years.
During the quarter, the segment continued to be impacted by the decline in the commercial aerospace market, with our AD&M business declining 22% organically.
As I mentioned earlier, we do believe we're touching along the bottom in this business and could see improvement in Comm Air later in this year.
Our Industrial Equipment business was up 8% organically, with growth in all regions and strength in factory automation applications.
And we continue to see weakness in our Medical business with ongoing delays in interventional elective procedures that have been caused by COVID.
We anticipate this to be a short-term dynamic in Medical that is consistent with what our customers are seeing and expect this market to return to growth as these procedure start to increase later in the year.
And lastly, in our Energy business, we saw a 4% organic decline, driven by COVID impact on utility spending, but we did see growth in renewable energy applications and the wind and solar applications.
Now, let me turn to the Communications segment, where our sales grew 12% organically year-over-year, with growth in both Data & Devices as well as appliances.
We do continue to benefit from the recovery in China and Asia more broadly, which represents over half of our sales in this segment.
In Data & Devices, our sales grew 5% organically year-over-year due to the strong position we've built in high-speed solution for cloud applications.
And in Appliances, we grew 21% organically year-over-year, with growth across all regions and benefits from home investments and an improved housing market.
I would have to say, our Communication team continues to perform very well, delivering 17.6% adjusted operating margins, which is up 550 basis points versus the prior year.
Adjusted operating income was $624 million, up approximately 25% year-over-year with an adjusted operating margin of 17.7%.
GAAP operating income was $448 million and included $167 million of restructuring and other charges and $9 million of acquisition-related charges.
We plan for the restructuring to be front-end loaded this year and continue to expect total restructuring charges in the ballpark of $200 million for fiscal '21 as we continue to optimize our manufacturing footprint and improve the fixed cost structure of the organization.
Adjusted earnings per share was $1.47 and GAAP earnings per share was $1.13 for the quarter and included a tax-related benefit of $0.09.
We also had restructuring, acquisition and other charges of $0.43.
The reconciliation is provided.
The adjusted effective tax rate in Q1 was approximately 20%.
For the second quarter, we expect our tax rate to be in the high teens and continue to expect an effective tax rate of around 19% for fiscal '21.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
Currency exchange rates positively impacted sales by $106 million versus the prior year.
We are demonstrating our business model execution with adjusted earnings per share of $1.47, up 21% year-over-year.
Adjusted operating margins were 17.7% as I mentioned earlier, and that is an expansion of 190 basis points versus prior year.
I am pleased with the progress we are making in driving improvements to our cost structure and our strong operational performance.
And we continue to execute on our footprint consolidation and cost reduction plans in both Transportation and Industrial, and we are now benefiting from the heavy lifting that we have already completed in our Communications segment.
Transportation adjusted operating margin was 19.4%, which is nearing our business model target of 20%.
Industrial adjusted operating margins remained in the mid teens, despite significant volume drops, which demonstrates the benefits of our cost actions we have been discussing with you over the past few years.
I'm also very pleased with the 17.6% adjusted operating margin in Communication, which reflects our strong operational execution that I mentioned earlier.
In the quarter, cash from continuing operations was $640 million and we have very strong cash flow for the quarter of approximately $530 million, which represents a first-quarter record, as Terrence mentioned.
And we returned $286 million to shareholders through dividend and share repurchases.
Our strong cash flow performance last year and into the first quarter of this year demonstrates the strength of our cash generation model and we continue to expect free cash flow conversion to approximately 100% for the full year.
We remain committed to our disciplined use of cash and over time, we expect two-thirds of our free cash flow to be returned to shareholders and about a third to be used for acquisitions.
And before we go on to questions, I want to reiterate that we remain excited about how we've positioned our portfolio with leadership positions in the markets we serve, along with organic growth and margin expansion opportunities ahead of us.
To summarize, we've discussed the benefits of secular trends across our portfolio.
You are seeing content growth enabling sales performance above our markets in Auto and Commercial Transportation, benefits from the market recovery in Data & Devices and Appliances and some markets that have been impacted by COVID in the Industrial segment that are now showing signs of stabilization.
We initiated cost actions well ahead of the COVID downturn and you are seeing strong margin expansion as a result of our efforts.
We expect to continue to generate strong cash flow, maintain a disciplined and balanced capital strategy and drive to business model performance and our focus on value creation for our stakeholders going forward.
Sujal, Sherryl, could you please give the instructions for the Q&A session?
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q1 adjusted earnings per share $1.47.
q1 gaap earnings per share $1.13 from continuing operations.
q1 sales $3.5 billion versus refinitiv ibes estimate of $3.26 billion.
sees q2 adjusted earnings per share about $1.47.
sees q2 sales about $3.5 billion.
qtrly orders of approximately $4 billion, up 25% year over year.
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Should one more of our risk or assumptions prove incorrect, or should this information be changing, the results may differ significantly from results expressed or implied in these communications.
In addition, we may use certain non-GAAP financial measures in this conference call.
Just a note on the 10-Q availability, we've been attempting to file the 10-Q with the SEC since 5:00 p.m. yesterday, but an SEC filing system breach has prevented the filing from being uploaded and accessible.
We expect this will be resolved shortly.
These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes.
I hope and pray that everyone's family is healthy and safe.
We are truly in a challenging and unprecedented time as we continue to manage through the COVID-19 pandemic.
During this time, the safety of our team members has been our top priority.
I have to say, I'm so proud of the men and women of MasTec, their sacrifices, resilience, creativity and commitment have been inspiring.
Millions of families throughout the U.S. rely on the power, communication, entertainment and other services we help our customers provide.
First, a quick recap of our second quarter.
Revenue for the quarter was $1.569 billion.
Adjusted EBITDA was $166 million.
Adjusted earnings per share was $0.95.
Cash flow from operations was roughly $295 million, and year-to-date cash flow from operations was $497 million.
And backlog at quarter end was a second quarter record at $8.2 billion.
We had a solid second quarter, meeting our revenue guidance and exceeding our guidance for EBITDA and EPS.
It's important to keep in mind that most of our services have been deemed essential under state and local pandemic mitigation orders, and all of our business segments have continued to operate.
We are managing through the COVID-19 challenges, including: first and foremost, the safety of our employees and their families; and other challenges, including governmental permitting, crew social distancing mitigation and the impact that, that may have on project schedules and any potential project delays.
Our 2020 guidance, which George will cover in detail, assumes the impact of these risks based on the best information we have as of today.
While I'll cover our segments in more detail in a minute, I'd like to focus on how I feel MasTec is positioned for long-term success.
I'm extremely optimistic about our future prospects.
We are very well positioned to take advantage of the continued and growing investment in telephony networks, including Internet connectivity and 5G, the continued investment in grid reliability in the energy sector and the growth of the clean energy sector.
As it relates to clean energy, during the second quarter, we made a decision to rebrand our Power Generation and Industrial group to Clean Energy and Infrastructure.
We believe this better represents what we are actually doing today as this segment becomes a much larger and important part of MasTec's future.
As one of the nation's leading clean energy construction companies, we have experienced significant growth over the last few years, growing revenues from $300 million in 2017 to over $1.5 billion of expected revenues this year.
We expect continued growth in 2021 and believe that, by 2022, this segment will exceed the size of what our Oil and Gas segment is today.
Today, we also announced record Oil and Gas backlog levels.
I'd like to offer some color on this segment's backlog.
First, we are highly confident that all of the projects in our current backlog will be built.
We believe this backlog represents our strength in the market and our ability to offer value while still attaining solid margins.
We view this level of backlog as a significant competitive advantage as we do believe new work will slow down through the first half of 2021.
There will still be new work awarded but less of it.
Basically, if you don't have a lot of backlog today, the next 1.5 years will be tough.
We do expect an improvement in the market as conditions improve and demand increases in a post-COVID environment.
In the meantime, between what we have in backlog and other work we have been negotiating with our customers, we believe revenue levels for our Oil and Gas segment in 2021 will be similar to 2020 levels.
While George will cover guidance in detail later, we have lowered our annual revenue guidance in Oil and Gas based on the delay of two projects, which have been impacted by regulatory and judicial issues.
As I think about our 2020 guidance, I think there are some important takeaways to highlight.
First, in the midst of a pandemic, our revenue guidance for 2020 is only down about $200 million or 3% less than 2019 full year revenue.
Within that, our Oil and Gas revenue expectation is that it will be down approximately $800 million in 2020 from 2019.
That means the rest of our segment revenues will be up approximately $600 million versus last year in the middle of a challenging environment.
More importantly, margins on a year-over-year basis are expected to be relatively flat at 11.4% EBITDA margins versus 11.7% last year.
Between both the pandemic challenges and the impacts of demand and regulatory issues on our oil and gas markets, I think our financial guidance demonstrates the strength of our diversified portfolio and the efforts we have made over the years of having a strong, diversified service offering.
Now I'd like to cover some industry specifics.
Our Communications revenue for the quarter was $654 million.
More importantly, margins came in strong, and we're up 370 basis points year-over-year and 380 basis points sequentially.
We are seeing strong demand from our customers as they work to meet the demands in this changing environment.
COVID has helped highlight the importance of our nation's telecommunications networks, and our customers are working hard at providing their customers with reliable and high-speed connectivity.
We expect this trend to continue and believe there will be a renewed focus on continuing fiber expansions in the residential markets.
This, coupled with the continued opportunities around 5G deployment, provide us with significant opportunities to grow our business.
While margins were much improved in the quarter, our revenue has been negatively impacted by COVID.
Our installation business has been impacted by strict mitigation efforts related to entering customers' homes, and we continue to have a couple of large markets where work has been very limited.
Our guidance assumes these impacts continue through year-end and also include the potential impacts of local permitting delays as some areas slow reopenings or even move back to more strict closures.
We have been working with these cities and municipalities to bolster remote permitting capabilities.
Revenue in our Electrical Transmission segment was $124 million versus $100 million in last year's second quarter.
While margins have been improving over the course of the last year, we had a project that negatively impacted margins based on the change in environmental requirements.
We believe these increased costs are mostly recoverable and expect to benefit in the second half of the year.
Backlog improved both year-over-year and sequentially, and we made good progress on diversification within this segment.
We have been awarded four new MSAs, or master service agreements, as this has been a focus for us to drive consistent recurring work.
We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewables and system hardening.
Between our strong backlog and the opportunities we see in the market, we expect to be able to deliver both strong revenue growth, coupled with margin expansion in the coming years.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $426 million for the second quarter versus $250 million in the prior year, a 70% year-over-year increase.
We continue to achieve significant growth rates in this segment, and backlog at quarter end exceeded $1 billion.
Margins for this segment were strong at 7.1%, and we continue to expect margins to improve over 2019 by over 100 basis points.
The size and scope of the opportunities we are seeing in this segment continues to grow.
We have made significant investments in this segment to profitably grow our business through organic opportunities.
We continue to add talent and resources to meet the increasing demand for our services.
While we've highlighted this segment more over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio.
Between both the opportunities provided by future clean energy initiatives and the potential for an infrastructure bill after the election, we believe this segment provides significant opportunities for long-term growth.
Our Oil and Gas pipeline segment revenue was down, as expected.
Second quarter revenue was $369 million compared to revenues of $937 million in last year's second quarter.
We ended second quarter with backlog of almost $2.7 billion.
As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines, with the majority of our business being tied to natural gas.
We have also focused on growing both our distribution and integrity business over the last few years, and we are encouraged by our progress.
To recap, we had a good second quarter and are confident we are mitigating the effects and impacts of the COVID-19 virus.
While times are challenging and uncertain, opportunities always arise from these challenges.
Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them.
In that lies our opportunity.
Our greatest strength has been to understand the trends in our industry and our customers' needs.
Our ability to provide services, whether existing or new, has always been a strength.
I'm excited for what the future holds for MasTec.
Keep up the good work.
Today, I'll cover second quarter results, our guidance expectation for the balance of 2020, including the ongoing impact of the COVID-19 pandemic, as well as our strong cash flow performance, capital structure and liquidity.
As Marc indicated at the beginning of our call, the discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, our second quarter 2020 results were better than expected, with adjusted EBITDA being the high end of our guidance expectation by $6 million, and adjusted diluted earnings per share exceeding the high end of our guidance expectation by $0.06.
These results also exceeded Street consensus, with adjusted EBITDA of $166 million beating Street consensus estimates by $14 million, and adjusted diluted earnings per share of $0.95 beating Street consensus by $0.15.
Second quarter 2020 results also continue our strong cash flow performance, generating $293 million in cash flow from operations and reducing sequential total debt levels by $177 million.
Our first half 2020 cash flow from operations of $497 million represents a record performance level for MasTec.
And we reduced total debt levels by $190 million during the first half of 2020 despite investing approximately $130 million in share repurchases and M&A.
This strong performance gives us confidence in our expectation that annual 2020 cash flow from operations will be at a new record level, approximating $600 million.
Subsequent to quarter end, we took advantage of favorable credit market conditions to refinance our four 7/8% $400 million senior unsecured notes, which we have called for redemption in mid-August.
Due to the strong demand for the new issue, our new senior unsecured notes offering was upsized by 50% to $600 million, with a lower interest rate of 4.5% and extended maturity to 2028 and overall better terms.
Our new senior notes offering is expected to close in early August.
I will make further remarks on our capital structure later, but suffice it to say that our cash flow, capital structure and liquidity are in excellent shape, even stronger than last quarter.
And this combination affords us full flexibility to invest in strategic opportunities as well as giving us a strong advantage as we navigate through the uncertain economic climate resulting from the COVID-19 pandemic.
Now I will cover some highlights regarding our second quarter segment results and guidance expectations for the balance of 2020.
Second quarter 2020 Communications segment revenue of $654 million was basically flat with the same period last year.
Second quarter 2020 Communications segment adjusted EBITDA margin rate was 11.7% of revenue, representing a sequential increase of 380 basis points when compared to the first quarter of 2020 and a 370 basis point improvement when compared to last year's second quarter.
As Jose mentioned in his remarks, this performance level includes disruption and lost revenue related to the COVID-19 pandemic as we had selected markets in which construction work slowed and, in some cases, stopped due to local municipality permitting approval delays.
We believe that the evolution toward 5G technology, coupled with increasing remote workplace and education trends in the U.S. because of the COVID-19 pandemic, will drive significant long-term demand for our wireless and wireline services in 2021 and beyond as the COVID-19 pandemic effects begin to normalize.
As we look to the remainder of 2020, we expect second half 2020 Communications segment revenue levels will approximate first half 2020 revenue levels, with some continued disruption and lost revenue primarily from local municipality permitting issues related to the COVID-19 pandemic.
We are also increasing our annual 2020 Communications segment adjusted EBITDA margin rate expectation by approximately 100 basis points and now expect that Communications segment annual 2020 adjusted EBITDA margin rate will approximate 10% of revenue, which equates to a 200 basis point improvement over last year.
While we are pleased with the expected 200 basis point improvement in 2020 Communications segment adjusted EBITDA margin rate, especially in light of challenging conditions in 2020, it is important to note that this performance level still leaves ample room for future improvement in 2021 and beyond as pandemic conditions normalize and telecommunications market trends continue to develop.
As expected and previously communicated, second quarter 2020 Oil and Gas segment revenue of $369 million decreased 61% compared to the same period last year based on project start time.
Second quarter 2020 Oil and Gas segment adjusted EBITDA margin rate was 21.7% of revenue, continuing our strong performance trend with this performance, including the benefit of project mix comprised of reduced levels of lower-margin, cost-plus activity and continued strong project productivity on numerous smaller pipeline projects.
During the second quarter, we were awarded approximately $450 million in new Oil and Gas project awards, bringing the total of new backlog additions during the first half of 2020 to approximately $1.5 billion.
Second quarter 2020 Oil and Gas segment backlog of $2.66 billion represented a new all-time segment backlog record.
First half 2020 Oil and Gas segment award activity gives us strong visibility for solid project activity over the next 12 to 18 months.
That said, predicting the project start timing has become more difficult due to the impact of regulatory and judicial challenges.
Given the size of our large projects, a 30-day delay in project activity could impact monthly revenue by as much as $100 million to $150 million.
Our current annual 2020 revenue guidance expectation incorporates revised project start dates for two large projects with late summer, early fall start dates.
This results in annual 2020 Oil and Gas segment revenue now expected to approximate $2.3 billion, with solid backlog activity shifting into 2021.
Given that the majority of project activity shifting to 2021 is related to lower-margin, cost-plus activity, we are increasing our annual 2020 Oil and Gas segment adjusted EBITDA margin rate expectation from the high teens to the low 20% range.
Second quarter 2020 Electrical Transmission segment revenue increased approximately 24% compared to the same period last year to approximately $124 million, and segment adjusted EBITDA was a slight loss of approximately $3 million.
As Jose indicated, during the quarter, we experienced production inefficiencies as we worked toward completion of a project.
The project is approximately 90% complete as of the end of the second quarter, and we expect to recover a portion of these inefficiencies from our customer during the back half of 2020.
As we look toward the remainder of 2020, we expect Electrical Transmission segment second half 2020 revenue will approximate first half 2020 levels, with second half 2020 adjusted EBITDA margin rate for this segment expected in the high single-digit range.
Our second quarter 2020 electrical distribution segment backlog of $551 million increased sequentially 27% or $117 million when compared to the first quarter, and this supports our continued belief that end-market conditions for this segment are supportive for strong 2021 revenue and adjusted EBITDA growth in this segment.
Second quarter 2020 Clean Energy and Infrastructure segment revenue of $426 million increased approximately 70% compared to the same period last year.
Second quarter 2020 adjusted EBITDA margin rate was 7.1% of revenue, a sequential increase of 540 basis points relative to the prior quarter and 360 basis points compared to the same period last year.
We are pleased with the second quarter 2020 adjusted EBITDA margin rate improvement in this segment, which begins to reflect our longer-term expectation of potential for this segment in the high single-digit range.
As Jose indicated in his remarks, we expect strong annual 2020 revenue growth and improved adjusted EBITDA margin rate performance when compared to last year, with continued growth expectations into 2021 and a very active clean energy market.
Now I will discuss a summary of our top 10 largest customers for the 2020 second quarter period as a percentage of revenue.
AT&T revenue, derived from wireless and wireline fiber services, was approximately 16% and install-to-the-home services was approximately 3%.
On a combined basis, these three separate service offerings totaled approximately 19% of our total revenue.
As a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe.
Permian Highway Pipeline was 10% of revenue.
Verizon, comprised of both wireline fiber and wireless services, was 6%.
Iberdrola, Comcast and Xcel Energy were each 5%.
And NextEra Energy, NG, Duke Energy and Enterprise Products were each at 4%.
Individual construction projects comprised 64% of our revenue, with master service agreements comprising 36%, once again highlighting that we have a substantial portion of our revenue derived on a recurring basis.
Lastly, it is worth noting, as we operate in a COVID-19-induced period of macroeconomic uncertainty, that all of our top 10 customers, which represented over 66% of our second quarter revenue, have investment-grade credit profiles.
Now I'll discuss our cash flow, liquidity, working capital usage and capital investments.
During the second quarter, we generated $293 million in cash flow from operations and ended the quarter with net debt, defined as total debt less cash of $1.19 billion, which equates to a very comfortable book leverage ratio of 1.6 times.
We ended the quarter with DSOs at 90 days compared to 102 days last quarter.
During the first half of 2020, we generated a record-level $497 million in cash flow from operations, which allowed us to reduce our total debt levels by approximately $190 million, while investing in approximately $130 million in share repurchases and M&A.
During the first half of 2020, we repurchased approximately 3.6 million shares, or approximately 5% of our outstanding share base, with the vast majority of this activity occurring in the first quarter.
Regarding our share repurchase program, we expect to opportunistically invest in this program as conditions warrant, while also prudently managing our balance sheet.
We currently have $158 million in open repurchase authorizations.
And as of today, have not executed any share repurchases during the third quarter.
We are fortunate that our business operations profile typically generates significant cash flow from operations, affording us the flexibility to invest strategically in efforts to maximize shareholder value.
Based on our strong first half 2020 cash flow performance, we are increasing our expectation for annual 2020 cash flow from operations to approximate $600 million, a new record level.
This cash flow performance expectation incorporates our view that second half 2020 revenue levels will accelerate, thereby increasing our working capital investment as we close out the 2020 year.
As previously indicated, we opportunistically took advantage of market conditions after the end of the second quarter to further strengthen our capital structure through a successful offering of $600 million in new senior unsecured notes, maturing in 2028 with a favorable 4.5% coupon.
This offering is expected to close in early August and will allow us to redeem our existing $400 million four 7/8% senior notes at a lower interest rate, extend our maturity profile and will increase our overall liquidity by approximately $200 million, which should approximate $1.3 billion post closing.
In summary, our record 2020 cash flow expectation, coupled with solid long-term capital structure, low interest rates, no significant near-term maturities and ample liquidity, places MasTec's balance sheet in an extremely strong position.
Regarding capital spending, during the second quarter, we incurred net cash capex, defined as cash capex net of equipment disposals, of approximately $63 million, and we incurred an additional $80 million in equipment purchases under finance leases.
We currently anticipate incurring approximately $175 million in net cash capex in 2020, with an additional $115 million to $135 million to be incurred under finance leases.
Moving to our current 2020 guidance.
Our third quarter 2020 revenue expectation is approximately $1.9 billion, with adjusted EBITDA guidance approximately $254 million or 13.4% of revenue and adjusted earnings per share guidance at $1.67.
We are projecting annual 2020 revenue to approximate $7 billion, with adjusted EBITDA expected to approximate $800 million or 11.4% of revenue and adjusted diluted earnings per share to approximate $4.93.
These guidance expectations incorporate the impact of projected lower second half 2020 Oil and Gas segment revenue as regulatory delays on two large projects are expected to lower 2020 project activity and shift awarded work into 2021, as well as improved 2020 EBITDA margin rate expectations in our Oil and Gas and Communications segments.
As we have previously provided some color as to our 2020 segment expectations, I will now briefly cover some other guidance expectations, as highlighted in our release yesterday.
Based on our expected strong cash flow, lower nominal interest rates and our recent senior notes offering, we expect annual 2020 interest expense levels to approximate $63 million, with this level only including currently executed share repurchase activity.
Our estimate for full year 2020 share count is now 73.6 million shares.
It should be noted that, for valuation modeling purposes that based on the timing of repurchases, our year-end 2020 share count will approximate 73 million shares, and that's inclusive of the full impact of the repurchases made to date.
We expect annual 2020 depreciation expense to approximate 3.7% of revenue due to the combination of lower expected 2020 revenue levels and timing impact of capital additions and acquisition activity.
Lastly, we continue to expect that our annual 2020 adjusted income tax rate will approximate 24%.
This expectation includes our existing first half 2020 adjusted tax rate as well as the expectation that quarterly adjusted income tax rates for the balance of 2020 will approximate 26%, and this blend leads to an annual 2020 adjusted tax rate that approximates 24%.
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q1 revenue rose 25 percent to $1.8 billion.
sees fy adjusted non-gaap earnings per share $5.40.
sees q2 adjusted earnings per share $1.25.
sees q2 revenue about $2.1 billion.
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This is Michael Haack.
Let me start my comments today by stating that this was another very good quarter for Eagle Materials.
From a market perspective, we are well-positioned U.S. Heartland cementitious materials producer, and we are a national scale U.S. Gypsum Wallboard producer.
From the people perspective, we have a talented team that understands their markets and make great decisions.
Simply put, this is a very good time to be in each of our businesses.
This is not just due to current conditions, but because the outlook for both businesses looks favorable.
I'll spend some time today on the macro backdrop as it provides some context to our favorable outlook.
COVID vaccination hesitancy, lingering supply chain issues and federal budget uncertainties and have weighed on economic momentum.
Offsetting these issues are job growth and consumer spending.
In 2021, we are seeing some of the strongest job creation in U.S. history and strong consumer spending growth.
Supply side headwinds are likely to pose less of a challenge in 2022, allowing for healthy industrial production growth as a monumental backlog of orders are gradually cleared.
Housing construction, which is an important driver for both of our businesses, and especially for Wallboard, continues to enjoy strong demand.
With healthy household balance sheets, low interest rates and relative affordability by historical standards, we see good headroom for continued trend growth.
In this regard, it should be noted that housing activity is especially strong in the Southern U.S.
This is important for Eagle as this is where most of our plants reside, and this region represents more housing starts than all other regions in the U.S. combined over this past year.
There is a positive knock-on effect from robust housing demand for repair and remodeling, which we expect will continue to grow at a mid- to high single-digit pace through 2022.
In Cement, the key wildcard remains infrastructure spend.
Most of the funding today comes from the states.
The states in our footprint generally have healthy balance sheets, driven by increased receipts from property and sales taxes.
The national discussion has focused on federal infrastructure spend.
Federal infrastructure funding will happen someday and is certainly necessary.
When it does happen, it will intensify the supply demand dynamics of Cement.
Commercial construction activity looks promising for pickup.
And again, regional strength in leading indicators favor the Midwest in the South, aligned with our U.S. Heartland footprint.
It is also worth noting that the U.S. shift toward renewables is very constructive for Eagle.
Wind farm construction is concrete intensive.
If you look at the map of planned wind projects and advanced development for projects under construction, it aligns well with our Cement plants.
Cement imports will be increasingly required this cycle to meet demand as strong market conditions are leading to very high effective rates of capacity utilization in domestic plants.
These imports will come at a cost in both our higher intensity carbon footprint and in price as the Baltic Dry Index is up 135% from a year ago and is at a 10-year high.
Now let me speak to volume, pricing and cost trends for each of our two businesses.
First, let's discuss volume.
Fortunately, we still have some capacity headroom in Wallboard.
However, the recent supply chain disruptions experienced by homebuilders is no doubt delaying the construction of some homes and pushing the demand up to the right.
Once these log jams clear, we expect to be even busier.
Our high cement utilization has been well chronicled.
We are virtually sold out and operating full tilt.
We are working closely with customers to meet their needs.
As demand increases, there are limits to how much more volume growth we can squeeze out of our cement system, unless, of course, we could expand our system through acquisitions.
Quality U.S. cement plants that meet our strategic criteria are admittedly hard to come by, and we are patient investors, which is why a balanced approach to share repurchases when quality assets are not available makes so much sense for a company like Eagle.
You can see in this quarter, we purchased approximately $185 million of Eagle stock.
We know our assets and know their value.
To reduce our carbon intensity at the cementitious product level and to service our customers with additional volume, it is our ambition to ramp up our limestone cement product offerings.
Over time, this has the potential of literally creating another cement plant worth of product for sale for us, when fully implemented across our system.
Some aspects in realizing this ambition are not within our control, such as DOT approvals, but we are seeing good progress here and are encouraged.
Over the next three years, we expect to move the needle meaningfully on this initiative.
Moving on to pricing.
Cement prices have not yet recovered as much as most of other building materials in this cycle.
We have announced double-digit cement price increases effective January one across the majority of our network.
As for Wallboard, pricing is most strongly driven by demand, and demand has been strong as evidenced by our 33% year-on-year increase in Wallboard prices.
I suspect it may raise the question in some people's minds as to whether we are nearing the peak for this cycle.
If our demand outlook is correct, I think we are not.
There has been a lot of discussion about cost headwinds, in many cases, exaggerated by supply chain disruption.
Let me put this in perspective for Eagle.
We own and control virtually all of our raw materials.
In some sense, one might say we already purchased the raw material with our investments and reserves decades ago, and by doing so, have mitigated a supply chain issue concerning raw material.
Energy inputs are important.
We often get asked about hedging.
We are currently hedged for approximately 50% of our natural gas needs through the remainder of our fiscal year at slightly under [$4 per million], which should help us manage our cost swings.
Natural gas is the primary fuel used in our Wallboard business.
The spike in OCC costs this summer were material this last quarter.
But as we've said many times, pricing mechanisms in our sales contracts allow us to pass on higher OCC prices, albeit on a lag of one to two quarters.
Outbound freight in Wallboard is also important, and we saw a 14% increase in freight costs this quarter.
However, the good news is that freight costs seem to have plateaued during the summer.
Let me close my remarks with an update we are proud to share as it aligns with our environmental and social disclosure report we published on our website.
It is a recent noteworthy development on one of our long-term initiatives that has to do with carbon capture.
We were notified on October seven that Chart Industries, a technology development leader in this area, has received a significant funding award from the U.S. Department of Energy to conduct an engineering scale test to advance point source carbon capture, with a specific mandate to conduct this research at our Sugar Creek cement plant.
Chart Industries' cyrogenic carbon capture technology was recognized by researchers at MIT and Exxon as the most cost competitive among highly effective carbon capture systems.
Our role in this endeavor is to provide technical support and operational data during the development and execution of the project.
I want to emphasize that even with successful outcome, there are many other dates and hurdles to ultimate adoption, including transport and storage.
But this is an important and significant step on the path to net carbon zero future.
Second quarter revenue was a record $510 million, an increase of 14% from the prior year.
The increase reflects higher sales prices and sales volume across each business unit.
Second quarter diluted earnings per share from continuing operations was $2.46, a 14% increase from the prior year.
And adjusting for our refinancing actions during the quarter, adjusted earnings per share was $2.73, a 26% improvement.
Turning now to our segment performance.
This next slide shows the results in our Heavy Materials sector, which includes our Cement and Concrete and Aggregate segments.
Revenue in the sector increased 5%, driven by the increase in cement sales prices and sales volume.
The price increases range from $6 to $8 per ton and were effective in most markets in early April.
Operating earnings increased 13%, reflecting higher cement prices and sales volumes as well as reduced maintenance costs.
Consistent with the comments we made in the first quarter, and because we shifted all of our planned cement maintenance outages to the first quarter, our second quarter maintenance costs were about $4 million less than what they were in the prior year.
Moving to the Light Materials sector on the next slide.
Revenue in our Light Materials sector increased 28%, reflecting higher Wallboard sales volume prices.
Operating earnings in the sector increased 39% to $67 million, reflecting higher net sales prices, which helped offset higher input costs, mainly recycled fiber costs and energy.
Looking now at our cash flow, which remains strong.
During the first six months of the year, operating cash flow was $262 million, a 27% year-on-year decrease reflects the receipt of our IRS refund and other tax benefits in the prior year.
Capital spending declined to $27 million.
And as Michael mentioned, we restarted our share repurchase program and our quarterly cash dividend this year and returned $259 million to shareholders during the first half of the year.
We repurchased approximately 1.7 million shares or 4% of our outstanding.
At the end of the quarter, 5.6 million shares were available for repurchase under the current authorization.
Finally, a look at our capital structure.
Eagle maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile.
During this quarter, we completed the refinancing of our capital structure, which included issuing $750 million of 10-year senior notes with an interest rate of 2.5%.
We extended our bank credit facility five years, paid off our bank term loan and retired our 2026 senior notes.
We'll now move to the question-and-answer session.
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compname reports q2 earnings per share $2.46.
q2 adjusted earnings per share $2.73 from continuing operations.
q2 earnings per share $2.46.
q2 revenue rose 14 percent to $510 million.
q2 adjusted earnings per share $2.73.
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Our call today will be led by our president and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer.
To the extent that our remarks today contain information on historical information, please note that we are relying on the safe harbor protections afforded by Federal Law.
Any such remarks should be made in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
During the fourth quarter of 2021, the company generated revenues of $161 million and adjusted consolidated EBITDA of $13.4 million representing sequential increases of 15% and 57%, respectively, despite global challenges associated with the COVID-19 pandemic, supply chain disruptions, and a modest seasonal decline in U.S. customer completion activity.
Fortunately, the illnesses associated with the latest variant of COVID-19 have been relatively mild and of shorter duration.
We expect less impact from COVID-19 as we progress into 2022.
Highlighting our fourth quarter was a 34% sequential increase in our Offshore/Manufactured Products segment revenues, coupled with another quarter of strong orders booked into backlog yielding a 1.1 times book-to-bill ratio for the period and a full-year ratio of 1.2 times.
Expanding global economic activity and increasing backlog levels support a stronger outlook for this segment going into 2022.
During the fourth quarter of 2021, the industry experienced a 9% sequential quarterly increase in the average U.S. frac spread count compared to the same period in 2020, the average U.S. frac spread count has doubled.
Increases in completion activity have favorably impacted all of our segments.
Completion activity in the U.S. shale basins continues to increase and the outlook for 2022 looks constructive for continued growth and demand for our products and services.
Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
During the fourth quarter, we generated revenues of $161 million adjusted consolidated EBITDA of $13.4 million and a net loss of $19.9 million or $0.33 per share.
These quarterly results were burdened by a $9.3 million reclassification of unrealized foreign currency translation adjustments and $2.2 million of noncash inventory and fixed asset impairment charges due to the decision to exit certain nonperforming regions and service lines.
In addition, we recorded $0.8 million or $800,000 of severance and restructuring charges in the quarter.
Excluding these charges, our adjusted net loss was $0.14 per share.
We ended the year with $53 million of cash on hand, compared to $68 million at the end of the third quarter.
The quarterly decrease in cash was attributable to a $24 million build in working capital, essentially all of which related to trade receivables associated with the sequential increase in revenues in our Offshore/Manufactured Products segment.
As of December 31, no borrowings were outstanding under our asset-based revolving credit facility and amounts available to be drawn totaled $49 million, which, together with cash on hand, resulting in available liquidity of $102 million.
At December 31, our net debt totaled $126 million, yielding a net debt-to-capitalization ratio of 15%.
We spent $6.5 million in capex during the fourth quarter, which was substantially offset by proceeds received from the sale of assets totaling $5.4 million.
In 2022, we expect to invest approximately $25 million to support the expected market expansion.
For the fourth quarter, our net interest expense totaled $2.6 million, of which $0.5 million was noncash amortization of debt issuance costs.
Our cash interest expense, as a percentage of average total debt outstanding, was approximately 5% in the fourth quarter.
Fourth-quarter corporate expenses were lower than I previously guided to due to certain adjustments for employee benefits and incentive accruals.
In terms of our first quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $18.2 million, net interest expense to total $2.7 million, and our corporate expenses are projected to total $9.3 million.
Our Offshore/Manufactured Products segment reported revenues of $92 million and adjusted segment EBITDA of $13.7 million in the fourth quarter of 2021, compared to revenues of $69 million and adjusted segment EBITDA of $8.6 million reported in the third quarter of 2021.
Segment revenues increased 34% sequentially, driven primarily by increases in project-driven and service revenues of 72% and 17%, respectively.
Adjusted segment EBITDA margin in the fourth quarter of 2021 was 15%, compared to 12% in the third quarter of 2021.
Backlog totaled $260 million as of year-end, a 4% sequential increase culminating in our highest backlog level achieved since the first quarter of 2020.
Fourth quarter 2021 bookings totaled $105 million yielding a quarterly book-to-bill ratio of 1.1 times and a year-to-date ratio of 1.2 times.
During the fourth quarter, we booked one notable project award exceeding $10 million.
Our fourth-quarter bookings were broad-based across many product lines and regions.
Approximately 11% of our fourth quarter bookings were tied to non-oil and gas projects, bringing our full-year non-oil and gas bookings to 10%.
During the fourth quarter, we completed several strategic milestones, including the successful installation of riser equipment on a major project in South America; qualification of a new subsea tree connector with significant market opportunities on upcoming Brazilian projects; received a third-party certification on our new condition-based monitoring program for marine drilling riser systems; and the securing of our third rental contract for a newly sized proprietary Merlin high-pressure drilling riser to a customer in the Middle East.
For nearly 80 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical deepwater and offshore environments.
As the world expands investment in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space.
Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea minerals, offshore wind developments, and other renewable and Queen Tech energy systems globally.
In our Well Site Services segment, we generated revenues of $43 million in the fourth quarter of 2021, and adjusted segment EBITDA increased sequentially to $6.2 million, excluding severance and restructuring charges in the comparable periods.
Adjusted segment EBITDA margin in the fourth quarter of 2021 increased to 14%, compared to 13% reported in the third quarter of 2021.
During the most recent quarter, we made a strategic decision to exit certain nonperforming service offerings within this segment, resulting in $2.2 million in noncash inventory and fixed asset impairment charges and $300,000 in severance and restructuring charges.
Considering all Well Site Services lines that were exited during 2021, both domestically and internationally, we have streamlined our operations and we'll allocate capital going forward to our strongest equipment and service offerings.
The service line and region exits will temper our revenues going forward, but are expected to improve segment margins.
We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
As market expansion opportunities unfold in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completions service offerings.
In our Downhole Technologies segment, we reported revenues of $26 million and adjusted segment EBITDA of $0.1 million in the fourth quarter of 2021, compared to revenues of $26 million in adjusted segment EBITDA of $1.4 million reported in the third quarter of 2021.
The increased sales of our perforating products in the U.S. were essentially offset by declines in international perforating products, sales, and completion product sales due to seasonality and transitory reductions in customer demand patterns.
The latest variant of COVID-19 had a larger impact on our Downhole Technologies segment relative to our other segments as staffing during the pandemic was challenging and restaffing our operations in support of increasing market activity and demand has been somewhat slow.
We expect international sales of our perforating equipment and U.S. sales of our frac plugs to improve in the first quarter and throughout 2022, based upon current market drivers.
Going on to our overall market outlook.
COVID-19 disruptions and supply chain challenges have hampered activity in domestic and international markets for two years now, but these disruptions appear to be easing.
Global oil inventories are now below their pre-pandemic five-year seasonal averages, leading to higher commodity prices and expectations of a significant increase in U.S. customer spending through 2022.
Shale regions, as well as seeing an improved outlook in international and offshore markets, which should support our product and service offerings.
Given improvements in the frac spread count over the last several months, we expect our Well site Services and Downhole Technologies segments to grow in 2022 with increasing EBITDA contributions.
Revenues in our Offshore/Manufactured Products segment are also expected to improve given the increased level of backlog coming into the year along with improved short-cycle product demand.
Our outlook for the full year 2022 suggests that our consolidated revenues will increase 20-plus percent with much of this growth in the second quarter and beyond due to seasonality that we typically experience in the first quarter, coupled with COVID-19 and supply chain disruptions.
We expect 2022 full-year consolidated EBITDA to range from $60 million to $70 million with roughly 60% of the total generated in the second half of 2022.
Now, I'd like to offer some concluding comments.
The COVID-19 pandemic has negatively impacted global activity for two years now, but the pandemic appears to be winning.
crude oil inventories have now drawn down considerably with expanding economic activity, leaving the U.S. at 411.5 million barrels in inventory as of February 11, which was about 10% below the five-year range.
Crude oil prices have responded with spot WTI crude oil over $90 per barrel, setting up a very favorable outlook for 2022.
Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings, with value-added products and services available to meet customer demands globally.
In addition, we will continue our product development efforts in support of emerging renewable and clean tech energy investment opportunities.
That completes our prepared comments.
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compname announces q4 loss per share of $0.33.
q4 adjusted loss per share $0.14 excluding items.
q4 loss per share $0.33.
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We appreciate your joining us today for Gartner's fourth quarter 2020 earnings call and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral, unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available on the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates, unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
2020 was an extraordinary year.
The COVID-19 pandemic, global macroeconomic conditions, social unrest and geopolitical changes, all pose significant challenges to enterprises around the world.
In this context, Gartner delivered a strong performance across contract value, revenue, EBITDA and free cash flow.
As many of you know, we entered 2020 with a financial plan to align cost with revenues.
By executing this plan and taking swift cost actions when the pandemic first began, we quickly stabilized our financial position.
We maintained discipline cost management throughout the year over strong investments to support future growth.
We've successfully pivoted our global workforce to operate effectively in a remote environment.
We grew our capability and key functions across our business.
We drove strong operational execution and we were extremely agile in serving our clients.
Pivoting our content to address critical contemporary issues such as the pandemic, remote work environments, cost optimization and business continuity.
We are well positioned to spring back quickly as the macroeconomic environment improves.
Our performance improved in Q4 compared to earlier in 2020.
We delivered strong performances in GBS contract value, research revenues, EBITDA and free cash flow.
Research is our largest and most profitable segment.
This is a vast market opportunity across all sectors, sizes and geographies.
Our research segment serves executives and their teams across all major enterprise functions in every industry around the world.
We are uniquely positioned to support leaders enterprisewide on hundreds of critically important topics.
Topics with the highest interest during Q4 included data and analytics, cost optimization and talent management.
Global Technology Sales or GTS, serves leaders and their teams within IT.
For the full year 2020, GTS contract value grew 4%.
Our key underlying metrics have improved each quarter since Q2.
Fourth quarter 2020 contract value from new logos was up from a year ago, while cancels were about the same.
Our existing clients continued to increase their spend, however it was a slower pace than in 2019.
This was the biggest factor impacting our growth in the quarter.
Client engagement continue to be strong with both content and analyst interactions up 30% versus 2019.
We saw strong performances across several regions and industries, including tech, retail and services.
Some of the topics with the highest interest included digital transformation, application development, cloud management and the digital workplace.
We expect GTS contract value growth to accelerate in 2021 and return to double-digit growth in the future.
Global Business Sales or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS contract value continued to perform well throughout the year with contract value growth of 7%.
New business growth was a very strong 26% in the quarter, driven by our GxL product line.
The sales, finance and HR practices all ended Q4 with double-digit growth rates.
And all practices, with the exception of marketing, contributed to GBS's growth.
Across our entire research business, we've practiced relentless execution of proven practices, and we're seeing the results of our efforts.
Our research business is well positioned to return to sustained double-digit growth over the medium term.
As many of you know, our conferences segment had great momentum coming out of 2019, but was hard hit in 2020 by the global pandemic.
To replace our traditional in-person destination conferences, which were no longer possible in 2020, we pivoted to virtual conferences.
The performance of these conferences exceeded our expectations in 2020.
And now with several months experience under our belt, we've got a set of best practices that will continue to refine.
Our value proposition for virtual conferences remains the same as for in-person conferences.
We deliver extraordinarily valuable insights to an engaged and qualified audience.
Beyond personal conferences, operationally, we are preparing to return to in-person conferences in the second half of 2021.
Gartner Consulting is an extension of Gartner Research and helps clients execute their most strategic initiatives through deeper extended project-based work.
Our consulting segment was also impacted by the pandemic with revenues down 12% in Q4 and 5% for the full year 2020.
Over the past several years, we've made great progress in our consulting business, and it will continue to serve as an important complement to our IT research business.
Companywide, we continued to strengthen our stance against racism and discrimination.
We appointed a new leader of diversity, equity inclusion.
We established a Center of Excellence dedicated to improvement in this area.
And we strengthened our employee resource groups, which help remove barriers for diverse populations and support associate engagements.
Sustainability is an important factor in how we manage our business.
For example, we've signed contracts for our Stamford headquarters and our U.K. hub to be powered by 100% renewable energy.
We'll be eliminating single-use plastics across our offices.
And finally, we're benchmarking our environmental footprint and development programs to minimize it over time.
Summarizing, we've performed well in the context of a pandemic.
Looking ahead, we are well positioned for sustained growth.
We expect to return to revenue growth in 2021 and are on track to return to double-digit CV and revenue growth thereafter.
We expect to deliver 2021 EBITDA margins, up 2019 and to further expand margins over time.
We've generated significant free cash flow in excess of net income, which will deploy to return capital to our shareholders through share repurchases and make strategic tuck-in acquisitions.
With that, I'll hand the call over to Craig.
I hope everyone remain safe and well.
Fourth quarter results were ahead of our expectations, headlined by a strong performance in GBS, better than planned cost management and outstanding free cash flow generation.
As our 2021 guidance highlights, we expect total revenue to increase versus 2020, while also positioning Gartner for a return to strong growth.
Looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we can fund growth investments, we have ample capital to return to shareholders and to deploy to strategic tuck-in acquisitions when we find the right opportunities.
Our board authorized an additional $300 million for repurchases, bringing the total available to around $860 million.
Reviewing our year-over-year financial performance, for the full year 2020, total contract value increased 4%, total FX-neutral revenue was down 3%, FX-neutral adjusted EBITDA increased 20%, diluted adjusted earnings per share was a strong $4.89 and free cash flow was $819 million, up almost 100% from 2019.
We did see some timing benefits, which I will discuss a bit later.
Fourth quarter revenue was $1.1 billion, down 8% as reported and 9% FX-neutral.
Excluding conferences, our revenues were up 2% year-over-year FX-neutral.
In addition, total contribution margin was 68%, up more than 580 basis points versus the prior year.
EBITDA was $245 million, up 13% year-over-year and up 10% FX-neutral.
Adjusted earnings per share was $1.59, and free cash flow in the quarter was a robust $237 million.
Research revenue in the fourth quarter grew 5% year-over-year as reported and 4% on an FX-neutral basis.
Fourth quarter research contribution margin was 72%, benefiting in part from the temporary cost avoidance initiatives we put in place starting in the first quarter of 2020.
Total contract value grew 4% FX-neutral to $3.6 billion at December 31.
This was the highest contract value in Gartner history, a notable achievement in a challenging year.
For the full year 2020, research revenues increased by 7%, both on a reported and FX-neutral basis.
The gross contribution margin was 72%, up about 240 basis points from the prior year.
Global Technology Sales contract value at the end of the fourth quarter was $2.9 billion, up almost 4% versus the prior year.
The selling environment continued to improve in the fourth quarter, but we are still seeing less upsell with existing clients than normal.
Our clients are staying with us, but not adding as much incremental CV as we've historically seen given the challenging economic environment.
Moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021 consistent with our experience coming out of the last downturn.
By industry, CV growth was led by technology, retail and services.
While retention for GTS was 98% for the quarter, down about 600 basis points year-over-year, a majority of our industry groups saw retention improve from the third quarter.
GTS new business declined 5% versus last year, an improvement from both the second and third quarters.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $696 million at the end of the fourth quarter.
That's about 20% of our total contract value.
CV increased 7% year-over-year.
CV growth was led by the healthcare and technology industries.
The sales, finance and human resources practices, all recorded double-digit CV growth for the year.
All practices contributed to the 7% CV growth rate for GBS with the exception of marketing, which was impacted by discontinued products.
That said, our marketing business saw improving retention rates and a return to year-over-year new business growth in the fourth quarter.
Wallet retention for GBS was 101% for the quarter, down 43 basis points year-over-year.
GBS new business was up 26% over last year, led by very strong growth in HR, finance and legal.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Overall, GBS continue to demonstrate its resilience and strength as we exited 2020.
The conferences segment was materially impacted by the global pandemic, as you know.
During the year, we pivoted to producing virtual conferences with the focus on maximizing the value we deliver for our clients.
We held 13 virtual conferences in the fourth quarter.
We also held a number of virtual Evanta meetings, shifting these one day local conferences online due to the pandemic.
Conferences revenue for the quarter was $93 million.
Contribution margin in the quarter was 78%.
Our fast transition to virtual conferences has been positive for the overall business.
As we discussed last quarter, virtual conferences offer significant value to our research clients and prospects.
And while we've shown that we can run virtual conferences profitably, it is important to recognize the different economics associated with virtual versus in-person conferences.
Similar to last quarter, I'd highlight two primary differences.
First, our mix of revenue from attendees and exhibitors has essentially flipped, with the in-person format approximately two-thirds of revenue comes from exhibitors and one-third from attendees.
In the virtual format, we've seen about two-thirds of revenue come from attendees.
Second, the vast majority of our attendee revenue has continued to come from research contract entitlements as opposed to incremental tickets.
I'd also highlight that our fourth quarter destination conferences have historically been our largest most profitable conferences.
In 2020, we held our biggest most highly anticipated conferences of the year in the fourth quarter in a virtual format.
For the full year 2020, revenue decreased by 75%, both on a reported and FX-neutral basis.
Gross contribution margin was 48%, down about 290 basis points from 2019 as we maintained some of our cost of service as well as SG&A despite the lower revenue.
We did this to ensure we were in a position to execute our new virtual conferences and to resume in-person conferences when it is safe and permitted.
Lastly, the timing of receiving conference cancellation insurance claims remains uncertain, so we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds.
Fourth quarter consulting revenues decreased by 10% year-over-year to $94 million.
On an FX-neutral basis, revenues declined 12%.
Consulting contribution margin was 26% in the fourth quarter, down about 160 basis points versus the prior year quarter due to lower contract optimization revenue, which usually flows through at high margins.
Labor-based revenues were $73 million, down 10% versus Q4 of last year or 12% on an FX-neutral basis.
Labor-based billable headcount of 730 was down 10%.
Utilization was 63%, up about 300 basis points year-over-year.
Backlog at December 31 was $100 million, down 14% year-over-year on an FX-neutral basis.
Our backlog provides us with about four months of forward revenue coverage.
Our contract optimization business was down 9% on a reported basis versus the prior year quarter.
As we have detailed in the past, this part of the consulting segment is highly variable.
Full year consulting revenue was down 4% on a reported basis and 5% on an FX-neutral basis and its gross contribution margin of 31% was up 68 basis points from 2019.
SG&A decreased 6% year-over-year in the fourth quarter.
SG&A as a percentage of revenue was up year-over-year as we restored certain compensation and benefit costs and had significantly less revenue from conferences.
For the full year, SG&A decreased 3% on a reported and FX-neutral basis.
EBITDA for the fourth quarter was $245 million, up 13% year-over-year on a reported basis and up 10% FX-neutral.
As we have seen improvements in the macro environment, we have resumed growth spending and started to restore some of the compensation and benefit programs, which we'd put on hold when the pandemic first hit.
Fourth quarter EBITDA benefited from several factors.
First, we've continued to maintain very strong cost discipline across the company.
Second, we had better than planned revenue performance in research and conferences, which flowed through with very strong incremental margins.
Third, we had planned for an increase in certain costs, such as travel, which didn't materialize due to pandemic-related shutdowns.
And finally, we have been conservative in our implied fourth quarter guidance given the geopolitical uncertainty due in part to the U.S. election, rising COVID counts and a still recovering global economy.
Depreciation in the quarter was up approximately $4.5 million from last year, including expense acceleration from facilities-related charges.
Amortization was down about $800,000 sequentially.
Net interest expense, excluding deferred financing costs in the quarter was $26 million, flat versus the fourth quarter of 2019.
The Q4 adjusted tax rate, which we use for the calculation of adjusted net income, was 25% for the quarter.
The tax rate for the items used to adjusted net income was 28.4% in the quarter.
The adjusted tax rate for the full year was 21%.
Adjusted earnings per share in Q4 was $1.59.
For the full year, adjusted earnings per share was $4.89.
EPS growth for the year was 25%.
Note that about $7 million of equity compensation expense, which we normally would have incurred in the fourth quarter, has shifted into the first quarter of 2021.
That was a benefit to fourth quarter adjusted earnings per share of about $0.07.
Operating cash flow for the quarter was $260 million compared to $83 million last year.
The increase in operating cash flow was primarily driven by cost avoidance initiatives, improved collections and timing of tax payments.
Capex for the quarter was $23 million, down 57% year-over-year.
Lower capex is largely a function of lower real estate expansion needs due to the pandemic.
We define free cash flow as cash provided by operating activities less capital expenditures.
Free cash flow for the quarter was $237 million, which is up about 700% versus prior year.
Free cash flow as a percent of revenue or free cash flow margin was 20% on a rolling four quarter basis, continuing the improvement we have been making over the past few years.
Free cash flow was well in excess of GAAP and adjusted net income.
Adjusted for timing and one-time benefits, 2020 normalized free cash flow margin is around 13%.
We had a fantastic year for free cash flow, driven by the resiliency of the business, continued strong collections, disciplined cost and cash management and lower cash taxes and deferrals of certain tax payments.
We took a number of actions in 2020 to further strengthen our balance sheet.
We had two successful bond offerings and amended and extended our credit facility.
We reduced our maturity risk and our annual interest expense will be lower starting in 2021.
Our December 31 debt balance was $2 billion.
At the end of the fourth quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12 month EBITDA is about 2.5 times.
At the end of the fourth quarter, we had $713 million of cash.
We resumed our share repurchases after pausing earlier in the year, buying back $100 million in stock at an average price of $156 per share.
The board recently increased our share repurchase authorization by $300 million because we have significant capacity for buybacks from cash on hand and expected free cash flow.
As of February 8, we have around $860 million available for open-market repurchases.
We expect the board will refresh the repurchase authorization as needed going forward.
We will deploy excess cash for share repurchases and strategic tuck-in acquisitions.
Before providing the 2021 guidance details, I want to discuss our base level assumptions and planning philosophy for 2021.
For research, most of our 2021 revenue is determined by our year end 2020 contract value.
As we move through the year, we will revisit the research revenue outlook.
Operationally, we are planning to relaunch in-person one day events in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing, related to both the full year of virtual and in-person conferences.
We've excluded the variable costs, primarily venue-related, associated with the in-person conferences from our guidance.
We've been able to run profitable virtual conferences in 2020, and that is reflected in our 2021 guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
The economics in 2021, even in a partial in-person year, won't be fully back to normal.
As we get closer to the go-no-go decision point, we'll provide additional insight to sizing the incremental revenue and profits.
For consulting revenues, the compares get easier as we move through the year.
We have more visibility into the first half based on the composition of our backlog and pipeline as usual.
For expenses, we have planned for the full reinstatement of benefits that were either canceled or deferred in 2020.
This includes our annual merit increase and certain other benefits.
We are also returning to growing our sales forces, with planned quota-bearing headcount growth in the high-single-digits for both GTS and GBS.
We have also planned for several additional programs, including technology investments.
The impact of most of these expense restorations or investments impact our P&L, starting in the second quarter.
As you know, travel expense was close to zero from April through December.
Our current plans assume a modest ramp up in travel-related expenses over the course of 2021.
Most of this ramp is built into the second half of the year.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
Our guidance for 2021 is as follows.
We expect research revenue of at least $3.815 billion, which is growth of at least 5.9%.
We expect conferences revenue of at least $160 million, which is growth of at least 33%.
We expect consulting revenue of at least $390 million, which is growth of at least 3.6%.
The result is an outlook for consolidated revenue of at least $4.365 billion, which is growth of 6.5%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
We expect full year adjusted EBITDA of at least $760 million, which is a decline of about 7% and reported margins of at least 17.4%.
This is based on conferences running virtual only.
We expect our full year 2021 adjusted net interest expense to be $102 million.
We expect an adjusted tax rate of around 22% for 2021.
We expect 2021 adjusted earnings per share of at least $4.10.
For 2021, we expect free cash flow of at least $630 million.
This is before any insurance proceeds related to 2020 conference cancellations.
It is also important to note that we have revalued our contract value at current year FX rates, which had a modest overall impact.
Our 2020 ending contract value at 2021 FX rates is $2.9 billion for GTS and $706 million for GBS.
Details are included in the appendix of the earnings supplement.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $200 million of EBITDA in Q1 of 2021.
In summary, despite an unfavorable economic environment, we delivered better than planned financial results in 2020.
We had outstanding free cash flow and strong EBITDA.
We strengthened our balance sheet and moved quickly to implement cost avoidance initiatives, while still investing for future growth.
While there is still uncertainty in the macro outlook, our contract value held up better than in the last downturn.
We were able to launch and monetize virtual conferences and virtual Evanta meetings.
We will continue with targeted investments and restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers.
As I mentioned at the start of my remarks, looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we could fund growth investments, we have ample capital to return to shareholders through our buyback programs and to deploy to strategic tuck-in acquisitions when we find the right opportunities.
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compname posts q4 adjusted earnings per share $1.59.
q4 revenue $1.1 billion versus refinitiv ibes estimate of $1.07 billion.
q4 adjusted earnings per share $1.59.
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We caution you that such statements reflect our best judgment based on factors currently known to us and that actual results and events could differ materially.
These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
This is the start of an open and informative dialogue.
We value trust and transparency, and I'll have the opportunity to model this as a public company.
And since this is our first earnings call, I'd like to give some background on our journey and how we got here.
I will then turn it to Nick and Dave to provide some highlights from our most recent quarter and outlook.
We launched SentinelOne in 2013 with the idea that cybersecurity incorporated faster speeds, greater scale, higher accuracy, and most importantly, do this through more dimension.
We created an autonomous cybersecurity platform to deliver our vision.
Attacks and threats are only becoming more sophisticated and more common, and legacy solutions and human defenses just can't keep up.
Look no further than all the ransomware attacks.
Unfortunately, this isn't new, and it isn't going away, and it's impossible to ignore.
Our mission to protect our customers and our way of life has never been more important in a digitized world.
There are several structural forces at play that will drive long-term and sustained growth for us and our industry.
The growing threat landscape is just one of them.
Next is the digital enterprise environment, more devices, more places, more data, requires updates to critical enterprise infrastructure, and that includes new attack surfaces such as containers and workloads.
At the same time, we've moved to a hybrid work environment.
This is the new normal, forcing the evolution of how we work, where we work from, and fundamentally how we secure the future of work.
The only way to ensure safety and security is with zero trust across the entire enterprise, from endpoint to cloud.
Companies want partners and platforms, not siloed point solutions.
Our open XDR approach is helping unify the entire enterprise view from data to device to cloud.
Putting all of this together, cybersecurity has never been more critical and more challenging for the enterprise.
That gives me tremendous confidence in the long-term growth potential in front of SentinelOne.
Over the last eight years at SentinelOne, we've developed AI and machine learning models, built patented Storyline technology, and created an in-house cloud data platform.
We knew from the beginning that the best solution would have to harness the power of data and AI.
And as a result, we're delivering real-time industry-leading threat detection and response from endpoint to IoT to cloud.
To us, prevention is the fundamental component of modern-day cybersecurity.
Equally critical is machine speed detection, response, and remediation.
We've achieved many important milestones already this year.
Certainly, the IPO is part of that.
At the same time, top scores from MITRE ATT&CK, the industry standard test for EDR, as well as the highest score in the Gartner Critical Capabilities for each buyer type has helped build credibility and industry recognition.
Operationally, we've expanded our board of directors and instituted an advisory board.
And with an eye to the future, we just announced that we'll be opening an R&D facility in the Czech Republic to support our growing scale and global presence.
Finally, delighting our customers.
I'm especially proud that our Net Promoter Score, or NPS, has risen every single quarter in the past year.
It jumped in Q2 to above 70.
That puts us well above the ranks of many consumer and technology companies and ahead of category-defining technologies loved by users such as the iPhone.
Our customers choose us as their cybersecurity partner, and we take the responsibility and trust seriously.
We're helping our customers stay ahead of our adversaries, prevent breaches and autonomously respond through innovation.
Turning to the business.
In Q2, our ARR growth accelerated to 127% year over year, and our revenue was up 121%.
I want to pause on that for a second.
Our business is expanding well into the triple digits both for ARR and revenue, and our guidance for Q3 shows that we expect that to continue.
Our growth is very well balanced across new and existing customers, as well as large and midsized enterprises.
Enterprises represents about two-thirds of our business today, and we're gaining even more traction.
In Q2, we added the highest number of customers with ARR over $1 million compared to prior quarters.
We're also expanding with existing customers through securing more devices and services, along with bringing new security control and visibility modules.
Our net retention rate was the highest it's ever been at 129%.
Our channel partners are bringing us into an increasing number of opportunities, giving our sales teams access, scale, and reach around the globe.
Nick will talk a lot more about our differentiated go-to-market and how that's fueling growth.
I'm proud of the technology and the innovation we're bringing to customers through our Singularity XDR platform.
We sell three platform tiers, Core, Control, and our most comprehensive and popular tier, Complete.
These tiers enable us to bring our technology to a diverse set of buyer types and organizations, from medium-sized businesses all the way to the world's largest Fortune 500 enterprises.
We also offer more than 10 modules that extend our platform value to more enterprise needs, from IoT discovery and security to cloud and container workload protection.
Our modules help customers with today's critical management, protection, and visibility challenges.
In Q2, we enhanced our capabilities around automation, zero trust, and data.
Automation is key to neutralizing threats effectively and in real time.
Security teams simply can't analyze and respond to billions of events every day.
The response piece is especially important.
A human-powered 1-10-60 benchmark is a legacy model.
Our customers want real-time response and protection.
This is why our patented Storyline technology is so important.
It monitors and contextualizes all events across an enterprise at machine speed.
That means fewer and more accurate alerts based on data.
It also means autonomous remediation, taking machine-delivered responses to a whole new level of automatic efficiency.
The chief information security officer of a Fortune 500 oil company captured it well saying, "SentinelOne's Storyline technology fundamentally changes EDR. Instead of people having to manually assemble data points, the technology assembles stories for us and even makes decisions in real time.
We listen to our customers, adding even more automation capabilities.
In Q2, we added Storyline Active Response, or STAR.
With STAR, security teams can now create custom detection and response rules and deploy them in real time.
In other words, write the rules once and let it trigger automatic alerts and instant responses enterprisewide.
That's more control, and more automation, and more prevention.
The second area of focus is around zero trust.
Every edge of the network must be secured.
We did this in two ways in Q2, tackling rogue IoT devices and expanding zero trust partnerships.
An enterprise can protect what it can see, including IoT and unmanaged devices.
One compromised printer can quickly become an adversary's home base for an attack.
The solution for the IoT and unmanaged device challenges our Ranger module.
Ranger identifies and corrects all rogue IoT devices, and we've just released auto-deploy.
Our new auto-deploy capability tackles one of the oldest problems in enterprise IT, quickly deploying protection to unmanaged and sometimes unreachable assets with ease.
Ranger auto-deploy takes a SentinelOne endpoint and enables it to transmit protection to any and all unmanaged devices surrounding it.
This is a first, and we're already seeing demand for auto-deploy, which helped secure $1 million customer win in Q2, where we replaced legacy AV in one of our other major next-gen competitors.
We also expanded our marketplace ecosystem through new partnerships with Zscaler and Cloudflare.
Partnering with other zero-trust leaders strengthens our customers' security postures.
Finally, we're focused on data.
Cybersecurity is fundamentally a data problem.
We use AI to parse petabytes of data, identify anomalies and autonomously mitigate attacks in real time.
Earlier this year, we acquired Scalyr, enhancing our ability to ingest index-free data at scale from structured and unstructured sources.
Our goal is to optimize for scale, performance, and cost.
We're excited about the future go-to-market synergies.
We've also begun transitioning our data back into Scalyr for new proof-of-concept deployments, onboarding new customers at scale.
Before I turn it to Nick and Dave, I want to say I'm excited about what we've achieved as a company.
I'm proud of the scale of our business and the triple-digit growth rates we've now delivered for two consecutive quarters.
This is truly a testament to the hard work of the entire team at SentinelOne.
Your feedback and trust puts us in the winning side of cyber warfare every day.
I'm even more excited about what we can do from here.
The endpoint security market is large and growing, and we're just at the beginning.
Cyber defense should be even more holistic.
It has to be flexible and automated.
And that means not just across endpoint operating systems but also IoT devices, servers, cloud workloads, and the data itself.
This is XDR. We are XDR. And with that, let me turn it to Nick Warner, our chief operating officer.
I've been at SentinelOne for over four years now.
Everyone here has a lot to be proud of, especially how quickly we scaled in just the past year alone.
We've built a go-to-market flywheel of sales and marketing, our channel, and technology partners.
Together, our brand and market traction is reaching new highs.
Let's discuss the business.
ARR of nearly $200 million and growing 127% is nothing short of astounding.
Looking back, it took over three years to reach $100 million in ARR and just three quarters to nearly reach the next $100 million.
Our future is unbounded.
That's because of vision, execution, and listening to the needs of our customers.
Over 5,400 customers use our Singularity XDR platform.
That's over 2,000 more than last year.
I'm delighted to help protect that many businesses.
Our customers are diverse in size, scope, and geography.
Our focus on automation, speed, and accuracy is critical to any enterprise -- in fact, all enterprises.
We're protecting even more mission-critical businesses.
In Q2, we added one of the largest telecommunications and mass media companies in North America.
And we also added one of the world's largest global financial institutions as well.
Make no mistake, this is a competitive market.
We go up against incumbent and next-gen players all the time.
When I think about how we're doing in the market, three things capture it most effectively: one, our 97% gross retention rate, which means our customers are happy and staying with us; two, we don't compete with our channel partners.
So, they are able to lead with our technology platform.
We enable and embrace the channel; and three, we win more than 70% of POCs against the competition.
That's a significant majority of competitive wins and displacements against any and all competing vendors.
Let me share some more details from the quarter.
We're making tremendous progress with large enterprises, which represent about two-thirds of our business.
We grew customers with ARR over $100,000 by 140% versus last year.
We added the highest number of million-dollar ARR customers this past quarter.
In the past year, we've more than tripled the number of customers with ARR over $1 million.
It's clear from both of those points that we're succeeding with larger customers and landing in larger deals.
Our net retention rate was 129%, a new record for our company, fantastic execution from our sales and go-to-market teams.
We're helping customers expand agent deployments, access more functionality with package tiers, and adopt new module solutions.
When it comes to our modules, our innovations help enterprises do more.
Just looking at our modules that cover IoT, cloud, and data, these grew more than six times year over year in Q2 and represent over 10% of the quarter's new business.
We're still early with our modules and see this as a long-term lever for our business.
Next, I'll share some insights on our go-to-market.
Our internal sales and support teams, combined with our diverse and growing partner ecosystem, gives us an incredibly vast reach.
Earlier this year, we rolled out a new channel partner training and accreditation program.
Feedback has been positive, and we've issued over 2,000 accreditations to date.
Our strong channel metrics are leading pipeline and traction indicators.
We partner with managed security service providers, MSSPs; managed detection and response providers, MDRs; and incident response, IR, partners.
We equip them with industry-leading capabilities.
And in return, we get tremendous market access and scale.
We don't compete with them.
We support and enable their business.
We're rapidly expanding this ecosystem, and it's driving meaningful growth for us.
I want to double-click on our incident response partnerships.
Driven by the rising wave of ransomware attacks, breaches have become pervasive for businesses around the world.
In the unfortunate but often common case of a company being breached, IR partners are called in to identify and remediate the attack.
They use our technology to understand what's going on, stop the attack and remediate the network.
Our ecosystem of IR partners are armed with the best technology available when it comes to rapidly recovering from a breach.
After seeing the immediate value of our technology, we see extremely high adoption rates post breach as post-breach enterprises standardize on SentinelOne as a modern approach to cybersecurity.
In Q2, we added over a dozen additional IR partners and are bringing more online in Q3 and beyond.
It's not just quantity but quality.
In Q2, we added world-renowned IR partners like Kroll, Alvarez & Marsal, and Group IB.
These and others are global leaders with extensive enterprise relationships.
These are the go-to experts who cyber insurers and Boards call when there is a breach.
In fact, our IR partner ecosystem is our fastest-growing channel.
For all of us at SentinelOne, our values and goals align on protecting customers and putting them first.
From sales to support, marketing to channels, business development to customer success, Vigilance MDR to SentinelLabs, our go-to-market organization is world class.
And I'm proud to work with this global team of relentless Sentinels each and every day.
I'll touch on a few of the highlights before we open for Q&A.
We are very excited about our performance in the second quarter.
Looking at our Q2 results.
We achieved record revenue of $46 million, increasing 121%.
Fueled by new customers and existing customer expansion, we delivered ARR of $198 million in the quarter, accelerating 127% year over year.
Even after backing out the $10 million in acquired ARR from Scalyr, our organic growth was still well into the triple digits.
Obviously, we're very enthusiastic about our top-line drivers.
Now I'll discuss our costs and margins and then provide our guidance outlook.
Our non-GAAP gross margin in Q2 was 62% and expanded 900 basis points, a healthy pickup from last quarter.
The biggest benefits are coming from our increasing scale and business expansion.
Additionally, we're also starting to see benefits from our renegotiated cloud hosting agreement, which we signed earlier this year to align with our expected growth.
Looking at the rest of our P&L.
We're investing for growth, and it's clear that it's working, once again reflected in our triple-digit top-line growth rate.
During the quarter, we made strategic investments in preparation for becoming a public company, enhancing our product and scaling our go-to-market.
Our non-GAAP operating margin was negative 98%, an improvement over negative 101% in the year-ago quarter, even as we prepared for our IPO.
In the shareholder letter, we've reiterated our long-term margin targets.
These are the same targets that we shared during the IPO.
The key point is that as we progress to our long-term targets, we intend to invest in growth while also improving our margins and profitability.
A recent example is the diversification of our R&D footprint outside of Israel and Silicon Valley.
We just announced that we'll be expanding our engineering excellence into the Czech Republic.
With all of this opportunity in front of us, fiscal 2022 remains an investment year.
Now for our outlook for Q3 and the full fiscal year.
In Q3, we expect revenue of $49 million to $50 million, reflecting growth of 102% at the midpoint.
For the full year, we expect revenue of $188 million to $190 million or 103% growth at the midpoint.
We expect the strong momentum we saw in Q2 to continue next quarter and our structural tailwinds to persist.
Combined with ongoing benefits from our product innovation, improved brand awareness, and continuing to scale our go-to-market, this collectively supports our triple-digit growth outlook.
We expect Q3 non-GAAP gross margin to be between 58% to 59% and full-year gross margin of 58% to 60%.
Most importantly, this remains well above 53% we reported in the first fiscal quarter this year and at or above 58% we delivered in fiscal 2021.
We are benefiting from increased scale, cloud hosting agreements, and processing efficiency gains.
Reflected in our guidance is our plan to migrate existing customers to our Scalyr back end in Q3 and Q4.
The migration will result in some duplicative storage and processing cost as we ensure data and performance continuity.
This is intended to further improve data processing for the future and unlock long-term platform and go-to-market synergies.
Excluding the redundant costs for the Scalyr migration, we estimate fiscal 2022 gross margin would be roughly similar to our gross margin we achieved this quarter.
Finally, for operating margins, we expect negative 96% to 99% in Q3.
Our full-year operating margin guidance is for negative 99% to 104%.
This is an improvement upon our fiscal year 2021 operating margin of negative 107%.
We see tremendous opportunity for growth, and the investments we're making today will put us in a position to succeed for the long term.
Finally, we have two quick housekeeping items.
Both of these are included in the shareholder letter with more detail as well.
The first item is share count.
We ended Q2 with total basic shares outstanding of 265 million.
This is the base run rate going forward.
The second item is the lockup.
We have two triggers.
The first is on September 28.
If the stock price remains at current levels, it will unlock up to approximately 40 million outstanding shares as of July 31, 2021, excluding vested equity awards.
The remainder of the lockup will expire subsequent to our Q3 earnings report.
In closing, Q2 was an excellent quarter with strong execution, and we're expecting that momentum to continue into the second half of the year.
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q4 sales $16.1 billion versus refinitiv ibes estimate of $14.65 billion.
qtrly adjusted earnings per share $0.71.
currently no signs of delta variant impacting demand; strong july sales.
raise earnings per share guidance for fiscal year 2022 to $3.33 to $3.53.
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I'm joined by John Garrison, Chairman and Chief Executive Officer; and John Duffy Sheehan, Senior Vice President and Chief Financial Officer.
In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations for these non-GAAP measures can be found in the conference call materials.
Most importantly, I hope you and your families are remaining safe and healthy.
Throughout these challenging times, we are proud of all Terex team members who are keeping themselves and others safe, meeting the needs of customers and helping our communities.
Safety remains a top priority in the company, driven by Think Safe, Work Safe, Home Safe.
All Terex team members have contributed to our effort to continue to produce for our customers, while following the protocols and maintaining a safe working environment.
Before I discuss our Q1 results, I would like to review our commitment to ESG.
Environment, social and governance is not a new concept at Terex.
It has been front and center for many years through our Zero Harm safety program and our commitment to maintaining a vibrant and supportive working environment.
ESG is foundational to the Terex culture.
Our company purpose is to help improve people's lives.
Through our Terex Way Values, we are focused on strong governance, a commitment to diversity, equity, and inclusion at every level and supporting the communities where we live and work, including being responsible, environmental stewards.
First, strong governance and leadership.
Our independent and engaged board with diverse backgrounds, perspectives and experience adds value for all stakeholders.
Second, we've enhanced our DE&I governance and we are energized by the engagement of our team members.
And third, electrification, by interview using sustainable products, such as our new Genie electric drive scissors.
We've made good progress in our sustainability program, including publishing our first annual ESG report, which enhances our ESG communications.
We're working on standard reporting frameworks, which a group of company senior leaders are charged with implementing.
We will keep stakeholders apprised through our investor conferences and quarterly earnings calls.
We believe companies that recognize the importance of ESG are better able to identify strategic opportunities and meet competitive challenges.
Turning to slide five.
We're off to a very strong start to 2021.
Customer demand continued to increase during the quarter, resulting in revenues exceeding our expectations.
We increased operating margins and backlog in AWP and MP year-over-year.
We significantly improved our first quarter earnings per share compared to last year, and we are increasing our full year sales, operating profit, cash flow and earnings per share outlook.
Despite having to address supply chain challenges, AWP delivered improved margins in Q1.
Materials process continued its strong execution by overcoming supply disruptions and delivering increased sales and profitability.
As a result of the improved execution in both segments, year-over-year operating margins of the company improved by 800 basis points.
Our intense focus on net working capital management and improved profitability drove $40 million of positive free cash flow in the quarter, which is an excellent start to the year.
During the first quarter, our team continued to meet increased customer demand, tightly managed all costs and delivered outstanding positive free cash flow.
Overall, our Q1 financial performance demonstrated strong execution by our global team in the face of increasing supply chain challenges.
We continue to improve Terex's global cost competitiveness.
Our SG&A cost reduction initiative, with a target of full year 2021 of approximately 12.5% or better SG&A to sales remains on track.
We are maintaining strict cost discipline.
In addition, during the quarter, we announced the plan move of our Oklahoma City Telehandler production to Monterrey, Mexico.
This action will position us with cost competitive Telehandler products to the North American market.
The team is addressing increasing supply chain disruptions.
Our operations team are demonstrating adaptability and flexibility to overcome the dynamic supply chain environment.
We continue to listen to our customers, ensuring our products and services offer the features and benefits that provide value.
We'll also invest in our connected assets and digital capabilities to better serve customers.
For example, our new Genie E-Drive scissors are designed to offer significant performance improvement and reduce maintenance cost by 35% over the life of the machine.
Customer and dealer integration, or CDI, is a global initiative spearheaded by our parts and service organization.
Dealers are sharing their data, which allows the team to better serve customers.
Finally, we continue to invest for future growth.
Our MP team is in the process of executing a localization plans in China to meet growing demand for industry-leading crushing and screening products, as it is the world's largest aggregate market.
Terex is well-positioned for growth in 2021 and beyond, because we have strong businesses, strong brands and strong market positions.
We continue to invest including a new products, digital capabilities and manufacturing capacity.
Turning to slide seven.
I'll provide some comments about our end markets and what we are seeing today.
In our Genie business, in North America, fleet utilization continues to improve, rental rates are improving, used equipment pricing is strong, which are all positive signs of a recovering and growing rental industry.
In Europe, the market continues to demonstrate improvement, and in China, adoption of working safely at height with Genie equipment is driving significant growth.
Globally, the secular trend toward rental continues.
Turning to our utilities business.
Demand is strong across its end markets of tree care, rental and investor owned utilities.
Next, the Materials Processing.
We expect global demand for crushing and screening equipment to continue to grow.
Broad-based economic growth, construction activity, and aggregates consumption are the primary market drivers.
We're seeing continued improvement in our cement mixer, material handler and environmental businesses.
Overall, we're seeing improved market conditions around the world for our industry-leading products and solutions.
Turning to slide eight.
Looking at the first quarter, we achieved net sales higher than our expectations.
Throughout the quarter, we saw our end markets continue to strengthen.
Overall, revenues of $864 million were up 4% year-over-year.
Notably, our Materials Processing segment's revenues were up almost 20% year-over-year.
For the quarter, we recorded an operating profit of $62 million compared to an operating loss of $7 million in the first quarter of last year.
We achieved an operating margin of over 7% through disciplined cost control and meeting strengthening customer demand.
The first quarter operating profit includes severance and charges associated with the closure of our Oklahoma City manufacturing facility, which were offset by the gain on the sale of our TFS on book financing portfolio.
Improved gross margins and lower SG&A as a percent of sales allow Terex to expand operating margin by 800 basis points year-over-year.
Interest and other expense was approximately $4 million lower than Q1 of last year, because of several factors, including lower interest expense and a $3 million mark-to-market gain recognized in other income.
Our first quarter 2021 global effective tax rate was approximately 16%, driven by two favorable discrete items in the quarter.
Our tax rates estimate for the remainder of the year remains 19%, consistent with our previous outlook.
Finally, our reported earnings per share of $0.56 per share includes the nearly offsetting operating impact and the favorable benefits in other income that I just discussed Turning to slide nine, and our AWP segment financial results.
AWP sales of $477 million were down 7% compared to last year, driven by a decline in North America, offset by improvement in Europe and Asia-Pacific.
The utilities market improved significantly evidenced by strong customer bookings.
AWP delivered significantly improved operating margins in the quarter, driven by increased production and aggressively managing all costs.
AWP delivered 680 basis points improvement in operating margin, which includes $3 million of severance and charges for the closure of our Oklahoma City facility.
First quarter bookings of $961 million were up to dramatically compared to Q1 2020, while backlog at quarter-end was $1.3 billion, up 82% from the prior year.
Now, turning to slide 10, and Materials Processing's Q1 financial results.
MP had another strong quarter, achieving 13% operating margins, as end markets are strengthening is a testament to the MP team's operational strength to deliver these consistent positive operating margins.
Sales were higher at $378 million, driven by improving customer sentiment across all end markets and geographies.
The MP team has been aggressively managing all elements of cost, as end markets improve resulting in incremental margin performance of 38%.
Backlog of $713 million more than doubled from last year and was up 36% sequentially.
MP saw its businesses strengthened through the quarter, with bookings up more than 100% year-over-year.
Customer sentiment in both segments continues to dramatically improve, as equipment is being utilized and ordered as end market demand strengthens Turning to slide 11.
I'd like to update you on how we currently anticipate the full year to develop financially.
It's important to realize that while the end market demand environment has improved significantly, increasing supply chain headwinds are impacting results.
We have taken these factors into consideration in the outlook we're providing today.
As for commercial demand, we have seen our end markets improved dramatically over the course of the first quarter.
Although, there are things being equal, we do expect continued and market improvement in both segments and increasing levels of AWP customer's fleet replenishment.
From a quarterly perspective, we expect revenues for the full year to be slightly higher in the first half than the second half of the year, with the second quarter being the strongest of the year.
Operationally, the absolute amounts of operating profit and operating margins are expected to increase each quarter year-over-year, with operating profit relatively evenly split between the first half of the year versus the second half of the year.
We continue to plan for incremental margins, which meet or exceed our 25% target for the full year 2021.
Corporate and other costs will occur relatively evenly throughout the remainder of the year.
On April 1st, we completed the refinancing of our revolving credit facility and unsecured bond.
These transactions will result in Q2 charges of $25 million, which were not previously included in our 2021 financial outlook.
Including $0.30 per share of costs for refinancing of our capital structure, our earnings per share outlook is increased to $2.35 to $2.55 per share, based on sales of approximately $3.7 billion.
Quarterly earnings per share are expected to be generally consistent with the development of operating profits during the year.
For the full year 2021, we are estimating free cash flow of approximately $150 million, reflecting another year of positive cash generation.
We continue to plan for capital expenditures, net of asset dispositions of approximately $90 million.
The largest project included in capital expenditures is for the Genie Mexico manufacturing facility John referenced earlier.
Turning to slide 12, and I'll summarize our updated 2021 earnings per share outlook.
We expect the strong customer sentiment demonstrated in Q1 by our AWP and MP customers to continue throughout 2021.
Our 2021 full year earnings per share outlook comprehends, first, our Q1 outperformance.
Second, the operating profit contribution on additional revenue for Q2 through Q4.
Third, price and manufacturing efficiency, which is only partially offsetting increasing supply chain headwinds.
And finally, reduced interest expense and one-time capital structure charges of approximately $27 million, representing $0.30 per share.
Overall, our 2021 outlook represents a significant improvement in operating performance when compared to 2020.
We will continue to aggressively manage costs, while positioning the business for growth.
Turning to page 13, and I'll review our disciplined capital allocation strategy.
Our team members remain vigilant and will continue to aggressively manage production, especially within our AWP segment and scrutinize every expenditure.
The strong positive free cash flow of $40 million in the quarter demonstrates the hard work of our team members to tightly manage net working capital.
Terex has ample liquidity of approximately $1.2 billion available to us, with no near term debt maturities.
So, we can manage and grow the business.
As discussed during the Q1 earnings call, the proceeds from the sale of the TFS on book portfolio and our strong liquidity position allowed us to prepay $196 million of term loans in early February.
This prepayment resulted in reducing outstanding debt, lowering, leverage, and saving annual cash interest expense of approximately $7 million.
This deleveraging action resulted in a rating agency upgrading Terex's outlook and providing positive momentum for refinancing our capital structure.
Our refinancing included successfully renewing our $600 million revolving credit facility and placing 600 million of new bonds with a 5% coupon.
These new bonds replaced our 5.625% bonds due to mature in 2025 and reduce annual cash interest expense by approximately $4 million.
Importantly, Terex obtained lower costs, unsecured funding for the remainder of this decade.
This strong action demonstrates our commitment to improving Terex balance sheet, while maintaining flexibility to execute on our organic and inorganic growth plans.
Turning to slide 14, to wrap up our remarks.
Terex team members around the world are focused on the right things, safety, health, customers, and improve productivity.
End markets are strong, and the team is managing the increasing supply chain headwinds.
We're driving positive free cash flow.
We're continuing to invest in innovative products to meet increased customer demand.
We are focused on both organic and inorganic growth.
As a result of these actions, Terex is well-positioned to deliver strong 2021 results.
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sees fy earnings per share $2.35 to $2.55 including items.
sees fy sales about $3.7 billion.
quarterly earnings per share from continuing opns $0.56.
compname says increased its full-year outlook for sales to about $3.7 billion with earnings per share range of $2.35 to $2.55.
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Once again, this is John Bruno.
Joining me on the call from PPG are: Michael McGarry, Chairman and Chief Executive Officer; and Vincent Morales, Senior Vice President and Chief Financial Officer.
Our comments relate to the financial information released after US equity markets closed on Monday, July 19th, 2021.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Now, let me introduce PPG Chairman and CEO, Michael McGarry.
Most importantly, I hope you and your loved ones are remaining safe and healthy.
Now let me provide some comments to supplement the detailed financial results we released last evening.
For the second quarter, our net sales were a record and nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.94.
Our adjusted earnings per share were significantly higher than the second quarter of 2020, partially due to last year's second quarter, including various pandemic related impacts.
Looking back to pre-pandemic results.
Our adjusted earnings per share was similar to the second quarter of 2019, despite sales volumes being 6% lower than that period and we are dealing with historical high levels of raw material inflation in the current period [Phonetic].
Our strong year-over-year sales reflect a partial recovery from the unfavorable pandemic effects of last year, but also include better than market performance across many of our businesses for this quarter.
We achieved these higher sales levels, despite significant supply and component disruptions; including ones that reduce the overall manufacturing capability of our customers.
Coming in the quarter, we expected these disruptions would have an estimated impact of $70 million to $90 million.
However, the actual impact was much more severe and closer to $200 million.
Our adjusted earnings per share in the second quarter, while near all-time record levels was below our April forecast.
Three main factors impacted the difference: due to supply disruptions we experienced unprecedented levels of raw material and transportation costs that continually elevated as the quarter progressed.
This drove raw material inflation to be up a mid-to-high teen percentage on a year-over-year basis versus our original estimate of a high single-digit percentage increase.
Our automotive OEM business was impacted most significantly from supply disruptions as we estimate that more than 2 million less cars were built than initially expected during the quarter.
This impacted our sales by about $100 million or higher than $40 million more than we expected in April.
Finally, as we expected the supply disruptions led to shortages of certain raw materials with anticipated impact of $30 million to $50 million, but the actual impact was closer to $100 million.
We are highly confident that the sales related to these production disruptions will be deferred to later quarters and this will elongate the global automotive OEM recovery.
As I mentioned in April coming into the year, we are expecting an inflationary environment and had prioritize selling price increases across all our businesses.
This helped us achieve solid price increases year-to-date and our pace of price realization is well ahead of the most recent raw material inflation cycle in 2017 and 2018.
Clearly, this inflation cycle is much higher than anyone anticipated and we are continuing on a business-by-business basis, working to secure further selling price increases.
This includes executing additional pricing actions during the third quarter.
As a reminder, the second quarter of 2021 was our 17th consecutive quarter of higher selling prices.
We're also continuing our strong cost management evidenced by our SG&A as a percentage of sales being 130 basis points lower than the second quarter of 2019.
This is being supported by our ongoing execution on our structural cost savings programs, realized an incremental $40 million of savings in the second quarter.
We have increased our targeted full-year 2021 savings by about 10% to $135 million.
In the second quarter, we finalized three acquisitions: Tikkurila, Worwag and Cetelon.
We funded the acquisition through a combination of cash and external financing, which came in at a very attractive borrowing rate.
We had yet another strong operating cash performance during the quarter and ended the quarter with about $1.3 billion of cash and cash equivalents, given us continued flexibility to do additional accretive cash deployment in the upcoming quarters.
In regards to our other two recently completed acquisitions, our new Traffic Solutions business, which is comprised of the Ennis-Flint acquisition performed to our expectations in the quarter, despite significant challenges with raw material availability and its order book is at historical highs entering the third quarter.
Our VersaFlex acquisition was smaller is performing well and it's already helped us win significant protective coatings project in Central America, due to the advantaged technologies that we acquired.
Another notable accomplishment during the second quarter was the appointment of our company's first ever Vice President of Global Sustainability.
PPG has been a clear ESG leader in the coatings industry for our market-leading sustainable products and we have plans to further improve our overall ESG program.
We will provide updates on these initiatives in subsequent quarters.
Moving to our current outlook most important is that we're continuing to see very robust and broad-based demand globally, including in many industrial and OEM end-used markets and strong architectural coatings trade activity in the US.
Many of our customers have indicated that their order books were at high levels exiting the second quarter.
We anticipate the strong global demand pattern to continue.
In addition, we expect an eventual restocking of inventory to occur in many of our selling channels, either later this year or in 2022.
In the near-term, we expect some of our customers will continue to be challenged with input or component shortages.
So their production capabilities and schedules likely to remain choppy throughout the third quarter.
PPG is also experienced in the continuation of spot outages of direct coatings raw materials.
As a result, we expect some unfavorable sales impacts from both our direct supply chain disruptions and the production curtailment of some of our customers in the third quarter.
Our current best estimate is our sales are expected to be unfavorably impacted by about $150 million in the third quarter, due to these issues.
We expect these sales will be largely deferred to subsequent quarters.
We also expect raw material costs to remain at elevated levels in the third quarter, our current best estimate is that they will be inflated by [Indecipherable] 20%, compared to the third quarter of 2020 with businesses and our industrial coatings segment experiencing the largest increases, due to the raw material mix of those types of coatings.
As a result all our businesses are securing additional selling price increases, due to significant increases we experienced in the second quarter and anticipate in the third quarter, we now fully expect to offset raw material cost inflation in the fourth quarter on 2021 on a run rate basis.
As I've said previously, these current disruptions are temporary and we strongly believe there is sufficient capacity available in our supply chain once operating conditions normalize.
I'm very pleased that we've completed five by recent acquisitions since December 2020.
In the third quarter these acquisitions will add about $500 million of incremental sales to our company.
As we continue to integrate these acquisitions, we will start to realize meaningful synergies that will be a strong earnings catalyst.
We are also witnessing domestic flight activity picking up all over the world.
This will begin to benefit our commercial aftermarket business in aerospace in the second half of 2021.
And the information we posted on our website yesterday evening, we're projecting aggregate sales volumes to be up a low single-digit percentage in the third quarter, compared to the prior year quarter.
With differences by business and region.
Including our acquisitions, we expect overall sales growth to be over 20%, compared to the third quarter of 2020.
In addition, full-year 2021 adjusted earnings, excluding amortization expense and other non-recurring items is expected to be $7.40 to $7.60, which at the midpoint would be about 13% higher than the adjusted earnings per share we realized in 2019, despite the significant raw material inflationary pressures we are dealing with this year.
And the fact that sales volumes are still not fully recovered from the pandemic, when compared to 2019.
Finally, I'm very pleased that our Board recently approved a dividend increase of about 10%.
Our September payment coupled with the anticipated payment of a similar quarterly dividend in December, will mark 50 consecutive years of annual per share increases in the Company's dividend.
This is another testament of our Company's legacy of consistently rewarding our shareholders and the confidence that the Board and I have and our ability to continue to generate and grow our operating cash flow.
In closing, I could not be more proud of our now 50,000 employees around the world, who is [Phonetic] share of our customers, our communities and our many stakeholders.
Their dedication and commitment to doing better today than yesterday, every day helps ensure that PPG continues to protect and beautify the world.
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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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Today's presenters are Chairman and CEO, Chris Martin; President and Chief Operating Officer, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
Now, it's my pleasure to introduce Chris Martin, who will offer his perspective on our second quarter.
We hope that you and your families are healthy.
Our second quarter results were solid and the trends remained generally positive.
Operating earnings were strong with net interest income, the highest it has ever been for Provident.
And in spite of strong loan originations, loan portfolio growth was challenged in the quarter, as sales continued to exceed our forecast.
The loan pipeline however is the largest we have ever had.
And we anticipate stronger originations in the second half of the year.
Economic outlook is promising, assuming continued success against COVID-19 and our business clients are optimistic for the future.
Long-term loan growth is highly correlated to economic growth and we believe economic conditions in our markets continue to improve and support an expansionary trajectory.
Also a positive is the consumer and their personal savings position, which will continue to support solid consumer spending in the future.
As businesses see demand increasing, it is anticipated that credit line usage, which is currently on the low side will increase.
However, risk remain as interest rates have been volatile.
And the recent downward shift in rates is putting pressure on net interest income and margin.
Deposit growth continued to be strong with substantial increases in non-interest bearing deposits.
The growth in deposits improves our capacity to fund loan growth in the second half of 2021.
We are executing a disciplined approach to leveraging the excess liquidity on our balance sheet.
Initially, in the investment portfolio to produce better returns and augment our margin.
The net interest margin reflected lower earning asset yields, given the low rate environment and spread pressures from lending competition, although improved funding mix and better deposit pricing are helping to mitigate these factors.
As the quality continued to improve during the quarter and loan payment deferrals are negligible, all of our credit ratios and indicators are positive this quarter.
Our primary non-interest revenue sources namely Beacon Trust and SB One insurance will continue to provide meaningful impact to lessen the pressure being experienced in our spread business.
We expect most fee revenue categories to grow modestly for the remainder of 2021.
And we will continue our methodical approach to managing operating costs.
Our focus will be holding the line on expenses and creating operating efficiencies without sacrificing our commitment to technology enhancements, to improve the customer experience and our competitive position.
We believe we can further improve our returns to stockholders through a combination of balance sheet growth, active management of our margin, continuing to rationalize our branch network and further leveraging operational efficiencies gained with the SB One acquisition accompanied by a continued execution on our regulatory, risk and controlled framework.
With that, I will ask Tony to add some more color.
I would like to take a few moments and share some thoughts with you on market conditions, business line performance and the areas of focus.
Based on the tenor of our conversations with customers, increased activity in our key business lines and improved nonperforming assets and a reduction to an immaterial amount in COVID-related loan deferrals, we believe the economic outlook for the second half of 2021 is promising.
This supports improved growth and continued strong profitability for the remainder of the calendar year.
Excluding PPP loans, our commercial lending group has paced at or better than planned with regard to production.
In the second quarter, we closed over $460 million of new loans, an increase of 57% from the prior quarter.
This solid production in part, it was offset in part by a decline in line of credit utilization of approximately $161 million over the average for fiscal 2020.
In addition, there is significant excess liquidity in the market.
As a result, the competition has been persistently more aggressive on pricing and structure.
We remain committed to maintaining our credit culture and not sacrificing structure of quality for volume, which contributed to an increased level of prepayments.
Consequently, we saw a net decrease in our commercial loan portfolio of about $49 million for the quarter.
Despite the competition, we are seeing good activity within our lending teams.
At quarter end, our pipeline remains strong at approximately $1.7 billion.
However, we are seeing a decline in the average interest rate in the pipeline, which can add pressure to our net interest margin.
We expect a good pull-through rate in our pipeline.
And if our prepayments normalize, we should experience solid growth for the remainder of the year.
Like many banks, we have seen strong growth in our deposits.
Nevertheless, I'd like to point out that the largest percentage of our growth is a non-interest-bearing demand deposits, which grew at an annualized rate of 17% and presently comprised 24% of our deposits.
Our total cost of those deposits is about 26 basis points and is among the best in our peer group.
We continue to grow our fee revenue, largely through Beacon Trust and SB One Insurance.
SB One Insurance had a strong second quarter with new business that resulted in a 60% increase from the same quarter last year.
Beacon Trust also had a very good quarter with assets under management increasing approximately 24% annualized and revenue being up 32% over the same quarter last year.
Both Beacon Trust and SB One Insurance continue to demonstrate value add to our clients and the bank and they integrate well with the other business lines in our organization.
Looking forward, our focus is to responsibly deploy our excess liquidity, predominantly into our commercial lending book, continue to build our fee-based businesses, enhance the experience of our employees and customers and maintain operational efficiency.
This will improve our earnings and total return to our shareholders.
Our net income for the quarter was $44.8 million or $0.58 per diluted share compared with $48.6 million or $0.63 per diluted share for the trailing quarter.
Earnings for the current quarter benefited from $8.7 million of net negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of $15.9 million.
Pre-tax pre-provision earnings were $51.4 million or an annualized 1.56% of average assets.
This is an improvement from $48.9 million or 1.52% of average assets in the trailing quarter as revenue increased quarterly -- to a quarterly record $112 million and operating expenses declined by $2 million.
Our net interest margin compressed 6 basis points versus the trailing quarter.
Excess liquidity increased despite an increase in average investments as average loans decreased in average deposits group.
Loan repayments remained elevated and included increased PPP loan forgiveness.
We expect to deploy much of this excess liquidity into loans and securities in the near term to improve the earning asset yield and increased interest income.
We were able to reduce the cost of interest-bearing liabilities by 5 basis points versus the trailing quarter through reductions in deposit costs.
Including non-interest bearing deposits, our total cost deposits fell to 26 basis points this quarter from 30 basis points in the trailing quarter.
Average non-interest bearing deposits increased to $100 million or an annualized 17% to $2.48 billion, or 24% of total average deposits for the quarter.
Average borrowing levels decreased $146 million as we shifted funding to lower costing brokered demand deposits.
We expect to maintain a relatively stable net interest margin as we continue to deploy excess liquidity into loans and securities, while managing funding costs and emphasizing non-interest bearing deposit growth.
The pull-through adjusted loan pipeline at June 30th increased $250 million in the trailing quarter to a record $1.1 billion.
However, the pipeline rate decreased 35 basis points since last quarter to 3.28% reflecting the current competitive rate environment.
Our provision for credit losses on loans was a benefit of $10.7 million for the current quarter compared with a benefit of $15 million in the trailing quarter.
The current quarter benefit was attributable to $6 million of net recoveries on previously charged off loans, improved asset quality, a favorable economic forecast and a decrease in loans outstanding.
Asset quality metrics including COVID-19 related deferrals, nonperforming loan levels, early stage and total delinquencies criticized and classified loans and all related ratios improved versus the trailing quarter.
We had annualized net recoveries as a percentage of average loans of 25 basis points this quarter compared with net charge-offs of 4 basis points for the trailing quarter.
Non-performing assets decreased to 62 basis points of total assets from 65 basis points at March 31st.
Excluding PPP loans, the allowance represented 88 basis points of loans compared with 92 basis points in the trailing quarter.
Loans granted short term COVID-19 related payment deferrals have declined from their peak of $1.3 billion to just over $7 million.
This compares with $132 million at December 31st.
All commercial loans in deferral are paying interest.
Non-interest income was stable versus the trailing quarter at $21 million, as increased loan prepayment fees and growth in wealth management insurance agency income were offset by decreased bank-owned life insurance income and reductions in net profits on loan level swaps and gains on loan sales.
Excluding provisions for credit losses and commitments to extend credit, operating expenses were an annualized 1.84% of average assets for the current quarter compared to 1.95% in the trailing quarter and 1.86% for the second quarter of 2020.
The efficiency ratio improved to 54.12% in the second quarter of 2021 from 56.19% in the trailing quarter and 57.35% in the second quarter of 2020.
Our effective tax rate was 25.4% versus 25.1% for the trailing quarter.
And we are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.
We'd be happy to respond to questions.
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q2 earnings per share $0.58.
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I'm pleased to share our strong third quarter results underpinned by record breaking unit development, continued strong digital sales and the adaptability of our brands to meet the needs of our consumers in an ever-changing environment.
During the third quarter, we delivered 5% same-store sales growth or 3% same-store sales growth on a two-year basis.
Despite a challenging operating environment due to the ongoing COVID pandemic, I'm extremely proud that we opened 760 net new units; a Q3 record, with broad-based strength across our portfolio.
China continues to be a leader in development, we opened 379 net new units across the rest of our portfolio, roughly equivalent to our Q3 2019 global net new units, including China.
Our continued positive development momentum this quarter is a testament to the strength of our iconic brands, fueled by strong unit economics and a healthy well-capitalized franchise system primed for sustained growth.
Now, we'll discuss our Q3 results and two of the four growth drivers that underpin our Recipe for Growth: our Relevant, Easy and Distinctive brands or RED for short; and our unrivaled culture and talent.
I will also share an update on our ESG agenda, which we call our Recipe for Good.
Then Chris will talk about our other two growth drivers: our unmatched operating capability; and Bold Restaurant Development, in addition to providing more details on our third quarter financial performance and our strong balance sheet and liquidity position.
First, the two highlights from the quarter.
third quarter system sales grew 8%, led by same-store sales growth of 5%.
On a two-year basis, same-store sales grew 3%, which includes the impact of around 500 stores or 1% temporarily closed due to COVID as of the end of Q3.
COVID restrictions that limited mobility in a few markets, primarily in Asia, had a significant impact on sales.
However, our sales momentum remained strong, as evidenced by the fact that our global two-year same-store sales growth, excluding Asia, accelerated since last quarter.
Sales strength continued in many developed markets, including the U.S., U.K. and Canada with significant recovery seen across Europe as restrictions eased throughout the quarter.
We've also seen pockets of strength in our portfolio of emerging markets, including the Middle East, Latin America, Africa and India, to name a few.
As we previously shared, looking across the more than 150 countries in which we operate, our recovery will neither be consistent from country-to-country nor linear within a country, reinforcing the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on- and off-premise channels.
A key growth driver for our business remains the continued acceleration of our digital and technology strategy, including how we leverage our global scale with technology investments to enhance the customer and employee experience, strength in restaurant unit economics and provide a competitive advantage for our franchisees.
We're seeing strong and sustained momentum through our digital and off-premise channels across our global business even as customers return to our dining rooms.
We posted over $5 billion in global digital sales with a near 40% digital mix during Q3.
We continued to expand delivery capabilities across the globe, setting a record this quarter with over 41,000 stores offering delivery to our customers.
Most recently, we acquired Dragontail Systems, which will allow us to tap into the power of artificial intelligence to streamline the end-to-end food preparation process and further enhance our delivery capabilities.
Where we've deployed Dragontail's cutting-edge technology, we found that it makes it easier for team members to operate and run a restaurant and helps our franchisees strengthen store operations, all resulting in a better customer experience.
This is the perfect segue to talk about our four RED brands.
Starting with the KFC division, which accounts for 52% of our operating profit, Q3 system sales grew 11%, driven by 6% same-store sales growth and 7% unit growth.
On a two-year basis, Q3 same-store sales were up 1%, which included the impact of 1% of the stores being temporarily closed due to COVID.
At KFC International, same-store sales grew 6% during the quarter.
Same-store sales declined 1% on a two-year basis.
As previously mentioned, increased COVID case counts and limited mobility in a few key Asian markets pressured topline trends in the quarter.
This quarter, several Western European markets joined the group of resilient market, leading the recovery where sales have fully recovered to pre-COVID levels.
Strong digital and off-premise growth, newsworthy products and doubling down on value offerings have fueled topline growth in these markets, coupled with the continued strength of the chicken category across the QSR segment growth.
Next, at KFC U.S., same-store sales grew 4% during the quarter, while same-store sales increased 13% on a two-year basis.
The continued success of our chicken sandwich and the strength of the group occasion remains significant drivers of our same-store sales growth.
Additionally, as of July, our year-to-date digital sales in the U.S. surpassed our full year 2020 digital sales.
We speak to the results we're seeing from our investments in this critical growth channel.
Now on to the Pizza Hut Division, which accounts for 17% of our operating profit.
Q3 system sales grew 4%, driven by 1% unit growth and 4% same-store sales growth.
For the Division, two-year same-store sales grew 1% during the quarter, which included the impact of 1% of stores being temporarily closed as of the end of Q3 2021.
Pizza Hut International same-store sales grew 6% during the quarter.
On a two-year basis same-store sales declined 4%.
While our Pizza Hut International business continues to be pressured, given our substantial dine-in index, the sustained strength in our off-premise business as reflected by 21% same-store sales growth on a two-year basis bodes well for the future of the brand and continues to fuel franchisee interest in investing in assets focused on serving the off-premise occasions.
Our markets continue to demonstrate what it means to be RED by focusing on strong value propositions and innovative partnerships, including Beyond Meat product offerings in two markets this quarter.
At Pizza Hut U.S., we continued to see positive momentum with 2% same-store sales growth.
On a two-year basis, same-store sales grew 8% and the off-premise channel grew 17%.
Pizza Hut continues to delight customers by bringing Only For Pizza Hut premium innovation with the launch of the Edge Pizza and a return of the successful Detroit-Style Pizza in Q3.
Additionally, we promoted the Dig Dinner Box during back-to-school season for offering easy dinner solution for our Pizza Hut customers.
Moving on to Taco Bell, which accounts for 31% of our operating profit, third quarter system sales grew 8%, driven by 3% unit growth and 5% same-store sales growth.
Two-year same-store sales growth was 8% for the quarter.
Taco Bell continues to focus on long-term growth opportunities by expanding into multiple category entry points, including the relaunch of breakfast in August and the fried chicken category with the Crispy Chicken Sandwich Taco during the quarter.
Meanwhile, Taco Bell International remains focused on their mission to make Tacos cool around the world, while also ensuring the brand is culturally relevant in each market.
In the U.K., we gave away free taco to the country to celebrate England advancing to the finals in the European Championship.
Players on the English team even tweeted on behalf of the brand, resulting in Taco Bell being one of the top trending brands on Twitter during the finals.
And finally, at the Habit Burger Grill, we saw system sales grow 19% during the quarter, driven by 11% same-store sales growth and 7% unit growth.
on a two-year basis, same-store sales grew 7%, which included the impact of about 1% of stores being temporarily closed as of the end of Q3.
We continue to see strong results through our digital channels, even as customers return to our dining room.
During the quarter, we launched the culinary-forward Balsamic Grilled Chicken and Asparagus Salad that highlighted our unmatched char-grilled chicken and seasonal ingredients.
Now I'll discuss our unrivaled culture and talent growth drivers.
A hallmark of Yum!
is our people-first culture.
We have tremendous leaders across our organization that have been developed internally to lead our brands and because of our culture, we're able to attract world-class external talent.
This quarter, we have the opportunity to announce some exciting internal promotions with planned leadership transitions.
First, Tony Lowings, CEO of KFC will be retiring on March 1, 2022.
He has embodied, what it means to be a people-first leader throughout his career and will no doubt leave a lasting legacy on the KFC brand.
Tony's successor will be Sabir Sami, KFCs Global Chief Operations Officer who is an incredibly well respected and experienced leader, who has played a pivotal role in the KFC global business.
Sabir's promotion to CEO of KFC provide us an opportunity to elevate another internal talent with Dyke Shipp stepping in as President of KFC after serving as KFCs Global Chief People and Development Officer.
With their combined experience of over 40 years with Yum!
, both Sabir and Dyke will assume their new roles effective January 1, 2022.
I couldn't be more confident in our ability to continue to unleash the power of this iconic brand with both Sabir and Dyke leading KFC.
Next, we recently announced that David Graves, Pizza Hut U.S. General Manager, will be promoted to President of Pizza Hut U.S. effective January 1, 2022.
Alongside Kevin Hochman, David has helped architect the Pizza Hut U.S. strategy and is the right person to lead the way forward for the brand by continuing to partner with our franchisees.
These internal promotions demonstrate that our deep bench of experienced leaders is a real competitive advantage for us across the restaurant industry.
Lastly, we recruited significant external talent with the appointment of Aaron Powell as Chief Executive Officer of Pizza Hut.
Aaron joined us from Kimberly Clark, where he most recently led their Asia-Pacific business.
We're thrilled to have Aaron join our leadership team with his seasoned CPG executive experience and believe his leadership, alongside Vipul Chawla and David Graves will help fuel the brand growth strategy.
Equally as important as our Recipe for Growth is our Recipe for Good.
I could not be prouder of the progress Yum!
and our brands have made this year in sharpening the focus and execution of our ESG agenda, particularly on climate action and sustainable packaging, alongside our global Unlocking Opportunity Initiative to tackle inequality.
We are advancing our plans to reduce greenhouse gas emissions across our global system and supply chain by nearly half by 2030 while we work to implement, learn from, and scale pilots for reusable, recyclable and compostable packaging in the front of our restaurants to meet our 2025 public commitment.
Across all of our brands, we're focused on building a resilient business for the future with purpose and sustainability at the core.
Our iconic brands and unmatched scale put us in a class of our own.
We're competitively advantaged, given the size and capabilities of our franchise system and I'm thrilled with our teams as we continue to be nimble and meet the consumer where they are.
Overall, I'm proud of how our business is performing and I'm confident that we're positioned to win in a post-COVID world.
With that, Chris, over to you.
Today, I'll discuss our financial results, our unmatched operating capability and Bold Restaurant Development growth drivers and our solid balance sheet and liquidity position.
I'll start by discussing our financial results.
Our results year-to-date, through Q3, highlighted by 15% system sales growth translating into strong core operating profit growth of 26% demonstrate the resilience and strength of our economic model.
The continued momentum reflected in our results reaffirms our confidence in delivering, on an annual basis, the long-term growth algorithm we reinstated on our last call, specifically 2% to 3% same-store sales growth, plus 4% to 5% net new unit growth, translating to mid-to-high single-digit system sales growth and high-single-digit operating profit growth.
In the third quarter, specifically, Yum!
system sales grew 8%, driven by 5% same-store sales growth or 3% on a two-year basis, which includes the impact of about 1% of stores being temporarily closed as of the end of Q3.
We delivered 4% unit growth year-over-year, which included a record of 760 net new units this quarter.
Core operating profit increased 3% for the quarter, in line with our internal expectations, when accounting for one-time items that impacted comparability.
The largest of these items was the lap of last year's bad debt recoveries, which accounted for a 5 point headwind to core operating profit growth.
EPS, excluding special items, was $1.22, representing a 21% increase compared to ex-special earnings per share of $1.01 in the third quarter last year.
Reflected in our ex-special earnings per share this quarter, is an investment gain on our approximate 5% investment in Devyani International Limited, an entity that operates KFC and Pizza Hut franchise units in India.
Our minority stake in Devyani was acquired in lieu of cash proceeds upon the refranchising of approximately 60 KFCs in India during 2019 and 2020.
During the third quarter, Devyani completed an Initial Public Offering and we began reflecting the change in fair value of our investments in our results during the quarter.
This resulted in $52 million of pre-tax investment gains on our approximate 5% stake, which added $0.16 to EPS, but did not impact our core operating profit.
During Q3, we had bad debt expense of $3 million.
As a reminder, we had large quarterly swings in bad debt last year due to COVID and were lapping $21 million in bad debt recoveries in the third quarter of last year, resulting in a year-over-year headwind of 5 points, or $24 million to core operating profit growth this quarter.
We expect core operating profit growth to be negatively impacted again in Q4 as we lapped bad debt recoveries of $8 million in the fourth quarter last year.
Our general and administrative expenses on an ex-special basis for the quarter were $249 million.
On a full year basis this year, we now estimate consolidated G&A will be approximately $1.05 billion, an increase of about $60 million above our incoming expectations for the year, driven entirely by our above-target incentive compensation based on our strong business performance.
Our commitment to be an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged.
We expect our G&A to system sales ratio to move back to 1.7% next year on a full year basis.
Finally, we note that Taco Bell company store margins have begun to normalize in the back half of this year due to increased staffing in our restaurants as we return to our historical daypart mix, wage investments and recent commodity inflation.
While there will be quarterly variability due to the dynamic environment, we are confident in our ability to consistently deliver Taco Bell company store margins in line with our historical pre-COVID levels for full year 2021 and beyond.
Next, I'll discuss our unmatched operating capabilities.
We continue to invest in our technology strategy to expand both our digital capabilities and restaurant technology solutions.
We're prioritizing, making it easier to operate a restaurant, ultimately driving efficiencies in our stores to enhance franchise unit economics, while also improving the customer experience.
To that end, during the quarter, we closed on the acquisition of Dragontail Systems, a restaurant technology company that enhances both the team member and customer experience.
Dragontail uses innovative technology that streamlines the order management process in the restaurant and optimizes delivery routes for drivers resulting in our customers receiving the freshest possible products.
Thus far, the Dragontail solution has been deployed in 13 markets and in over 1,700 stores across the Pizza Hut system.
Many Pizza Hut restaurants leveraging Dragontail platform have already seen a positive impact on sales, order fulfillment and customer satisfaction scores, including product freshness and delivery times.
I recently participated in virtual store visits in the U.K. and in Latin America where franchisees demonstrated benefits of the Dragontail system and shared their team members' excitement.
Another example of how our technology investments yield enhanced operating performance is Taco Bell's continued execution of its All Access technology initiative.
This connected suite of core restaurant technology solutions is used to optimize operations and create a frictionless customer experience.
These strategic efforts contributed to Taco Bell's seventh consecutive quarter with drive-thru times below four minutes, enabling the brand to serve more customers through the drive-thru, while also delivering a great customer experience.
Moving on to our Bold Restaurant Development growth driver, I'm thrilled to discuss how we delivered another record development quarter with 760 net new units, including meaningful contributions across multiple geographies at our KFC, Pizza Hut and Taco Bell global brands.
While we continue to see strong development from Yum!
China, our brands are also seeing broad-based development across other markets.
The widespread strengths in our store level economics and cash on cash returns improving relative to pre-COVID levels are key drivers contributing to the acceleration and development we're seeing around the world.
Our KFC International markets have seen impressive development as China, Russia, India, Latin America and the Middle East continued to deliver strong unit development during the third quarter.
Additionally, over the past year, Pizza Hut International has driven a significant inflection in their unit growth, going from negative net new units in 2020 to opening nearly 200 net new units during the third quarter.
We expect this momentum to continue; a further testament to the confidence our franchisees have in the future of the brand.
At Taco Bell International, we continue to see strong development as key markets are approaching scale.
Not only are we seeing strong development across our brands, but given the continued strength in digital and off-premise growth, our teams continue to evolve the asset types being developed into more digitally enabled formats.
As an example, we now have 23 Go Mobile locations at Taco Bell U.S. These technology-forward restaurants, which include dual drive-thru's with a dedicated mobile pickup lane, mobile pickup shelves and a faster Bellhop experience, among other things, have been a big hit, and we have more in our development pipeline.
Next, I'll provide an update on our strong balance sheet and liquidity position.
In August, we completed our third whole business securitization issuance at Taco Bell in the past five years, issuing $2.25 billion of new Securitization Notes.
The weighted average yield of the new notes was approximately 2.24% and the proceeds were used to opportunistically repay $1.3 billion of existing higher coupon Taco Bell Securitization Notes and to support our share buyback program.
We still expect our 2021 interest expense to be approximately $500 million, in line with 2020.
We ended the quarter with cash and cash equivalents of $1 billion, excluding restricted cash.
Due to our continued recovery in EBITDA, our consolidated net leverage continues to be temporarily below our target of approximately 5 times.
With respect to our share buyback program, during the quarter, we repurchased 2.6 million shares at an average share price of $127 per share, totaling approximately $330 million.
Year-to-date, we've repurchased $860 million of shares at an average price of $117.
Capital expenditures, net of refranchising proceeds, during the quarter were $49 million.
We now expect net capital expenditures of approximately $175 million for the full year, reflecting roughly $75 million in refranchising proceeds and $250 million of gross capex.
Lastly, our capital priorities remain unchanged; invest in the business, maintain a healthy balance sheet, pay a competitive dividend and return the remaining excess cash to shareholders via share repurchases.
Before wrapping up, I'd like to take a moment to address both labor and cost inflation pressures and how Yum!
is well-positioned to navigate these challenges.
While our franchisees are not immune to these market pressures, we believe the power of our scale and the larger average size of our franchisees relative to those of our QSR peers, enables our system to manage the inflationary environment better than most.
For example, while many small chains and independent restaurants experienced difficulties adapting to these market dynamics, our franchisees continue to invest through this environment, accelerating investments that help widen their strategic advantage.
Additionally, our people-first culture is a true competitive advantage in both attracting and retaining team members.
We're confident in the ability of our brands to respond to the dynamic market conditions and are working closely with our franchisees to assess strategic opportunities to take price as and when needed, while ensuring we continue to offer compelling value to our customers.
While store level margins have moderated, franchisee unit economics generally remain incredibly healthy.
Overall, I'm pleased with our performance this quarter, driven by impressive unit growth and sustained digital sales.
We continue to invest in our digital ecosystem to scale technologies and provide a unique competitive advantage for our franchise operators, while enhancing the customer and team member experience.
Our franchise system is healthy and well-positioned to invest through the near-term pressures, fueling our development engine and future unit growth.
Our unit growth and sustained sales momentum, despite lingering COVID impacts, only make us more confident in our ability to deliver on our long-term growth algorithm.
With that, operator, we are ready to take any questions.
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compname reports second-quarter results; record 603 net-new units.
digital system sales of over $5 billion.
same-store sales growth of 23%.
reinstates long-term growth algorithm with raised unit guidance.
q2 earnings per share $1.16 excluding items.
q2 worldwide system sales excluding foreign currency translation grew 26%, with kfc at 35%, taco bell at 24% and pizza hut at 10%.
q2 worldwide system sales excluding foreign currency translation grew 26%, with 23% same-store sales and 2% unit growth.
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The theme for our on-hold music today was Strange Days.
It's one of the most common ways I've heard people describe life during this pandemic, strange days indeed.
It's common for some to refer to the current state of affairs as unprecedented.
I've concluded that while almost all agree that these are strange days, whether or not people believe these strange days are unprecedented is definitely age related.
Younger people are more likely to view our current situation as unprecedented.
People my age or older are far less likely to see these current strange days as unprecedented.
In 1967, when I was 13 years old and a rock band name The Doors released the song titled Strange days.
Clearly, I have a background from that.
This is the first versus of the song, "Strange days have found us.
Strange days have tracked us down.
They're going to destroy our casual joy.
We shall go on playing or find a new town".
The Doors were way ahead of their time, both musically and culturally.
And indeed, the next few years after 1967 would bring an extended period of strange days and civil unrest that were orders of magnitude stranger than we've seen thus far during the COVID storm.
I'm naturally optimistic, and I promise you this too shall pass.
Since we're all in this together, we will continue to encourage our Camden team to stay true to Camden's why, our purpose for being, that is to improve lives of our team members, residents and shareholders, one experience at a time.
Apartment demand is stronger in the market than we expected given the nearly 40 million Americans that have filed for unemployment benefits with an official employment unemployment rate of 11.1%.
Camden's geographic and product diversification has continued to lower the volatility of our rents and occupancy.
Camden's Sunbelt markets have fewer job losses than coastal markets in the U.S. overall.
Our product mix that offers varying price points in urban and suburban locations continues to work for us.
Camden was prepared for the pandemic.
We have a great culture and a flexible workplace and amazing employees that have adapted very, very well to the current work environment.
Our investments in technology, moving to the cloud-based operating systems and our Chirp Access systems have allowed us to not miss a beat when it comes to leasing or operating our portfolio or making payroll and basic things like that.
We have the best balance sheet in the sector and one of the best in REIT land overall.
We were prepared and continue to be prepared to do as well as we can in this environment, and I think we'll do well long term.
I want to give a shout out to our amazing Camden teammates for all that they do for our residents and taking care of each other every single day.
We want to make sure that we're providing you with the information that you find most useful to your ability to understand the current state of affairs in Camden's markets.
At the outset of the COVID storm, we held an all-Camden conference call during which we told our Camden team that our highest priorities were: number one, taking care of our Camden family; and two, taking care of our residents.
During the second quarter, we made good on that promise.
We undertook various initiatives, including a frontline bonus paid to our 1,400 on-site team members, and we provided grants to almost 400 Camden associates from our long-established Camden employee emergency relief fund.
We also established a Camden resident relief fund from which we were able to provide grants to 8,200 residents at a time of maximum financial uncertainty in their lives.
We were pleased to be able to provide this level of assistance to the people who were financially impacted during the early stages of the COVID crisis.
On our first quarter conference call, we were asked when we thought we could reintroduce guidance.
And we said that when we felt like we had reasonable visibility into the next quarter, we would do so.
At that time, based on the confidence level that we had from our operations and finance teams regarding our projected May and June results, on a scale of one to 10, it was probably a two, not good.
As we sit here today, while our confidence level is less than it would be in normal times, we do feel it is sufficiently high to provide guidance for the third quarter, and we've done so.
It's been incredible to behold.
Keep up the great work, and with a little good fortune, for which we are long overdue, we'll see you soon.
For the second quarter of 2020, effective new leases were down 2.1% and effective renewals were up 2.3% for a blended growth rate of 0.3%.
Our July effective lease results indicate a 2% decline for new leases and a 0.2% growth for renewals for a blended decrease of 0.9%.
Occupancy averaged 95.2% during the second quarter of 2020 compared to 96.1% in the second quarter of 2019.
Today, our occupancy has improved to 95.5%.
We continue to have great success in conducting alternative method property tours for prospective residents and retaining many of our existing residents, with only a slight deceleration in total leasing activity year-over-year.
In the second quarter, we averaged 3,855 signed leases monthly in our same property portfolio as compared to the second quarter of 2019 when we averaged 4,016 signed leases.
July 2020 total signed leasing activity is in line with July of 2019.
For the second quarter of 2020, we collected 97.7% of our scheduled rents, with 1.1% of our rents in a current deferred rent arrangement and 1.2% delinquent.
This compares to the second quarter of 2019 when we collected 98.6% of our scheduled rents, but with a slightly higher 1.4% delinquency.
The third quarter is off to a strong start with 98.7% of our July 2020 scheduled rents collected, ahead of our collections of 98.4% in July of 2019.
Last night, we reported funds from operations for the second quarter of 2020 of $110.4 million or $1.09 per share, representing a $0.26 per share sequential decrease in FFO from the first quarter of 2020.
As outlined in last night's release, included in this $0.26 sequential quarterly decrease is $0.142 of direct COVID-19-related charges included incurred during the quarter.
After excluding the impact of this aggregate $0.142 per share, sequential FFO decreased $0.12 in the second quarter, resulting primarily from: approximately $0.05 per share in lower same-store net operating income, resulting from a $0.02 per share decrease in revenue from our 90 basis point sequential occupancy decline; a $0.025 per share decrease in revenue, resulting from an increase in bad debt reserves from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter; and an approximate $0.005 per share sequential increase in expenses; approximately $0.025 in lower non-same-store development and retail NOI, also resulting from a combination of lower occupancy and higher bad debt reserves; and approximately $0.04 per share in higher interest expense resulting from our April 20 $750 million bond issuance.
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 an appropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period.
As previously mentioned, for same-store, our bad debt as a percentage of rental income increased from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter.
During the second quarter, we reserved effectively all of the 1.2% of delinquent rents as bad debt.
Also in the second quarter, we reserved effectively half of the 1.1% of deferred rent arrangements as bad debt.
When a resident moves out owing us money, we have already reserved 100% of the amounts owned as bad debt and there will be no future impact to the income statement.
We reevaluate our bad debt reserves monthly for collectibility.
In the second quarter, for retail, which is not part of same-store, we reserved 100% of all amounts uncollected and not deferred, which totaled approximately $800,000.
Last night, based upon our recent trends, we issued FFO and same-store guidance for the third quarter.
However, given the continued uncertainty surrounding the social and economic impacts from COVID-19, at this time, we will not provide an update to our financial outlook for the full year.
For the third quarter of 2020 as compared to the third quarter of 2019, at the midpoint, we expect same-store revenues to decline by 1.6%, driven primarily by lower occupancy, higher bad debt and lower miscellaneous fee income.
We expect expenses to increase by 4.5%, driven primarily by higher property insurance, higher property tax assessments and large property tax refunds received in Atlanta and Houston in the third quarter of 2019.
As a result, we expect NOI at the midpoint to decline by 5%.
We expect FFO per share for the third quarter to be within the range of $1.14 to $1.20.
The midpoint of $1.17 is $0.08 per share better than the $1.09 we reported in the second quarter.
However, after adjusting our second quarter results for the previously discussed $0.14 of COVID-related charges, our $1.17 midpoint for the third quarter is a $0.06 per share sequential decrease, resulting primarily from: a $0.045 per share sequential decline in same-store NOI as a result of a $0.005 per share decrease in revenue, resulting primarily from lower net market rents; and a $0.04 per share increase in sequential expenses, resulting primarily from the typical seasonality of our operating expenses, the timing of certain R&M costs and the timing of certain property tax refunds and assessments; an approximate $0.005 per share decline in non same-store NOI, resulting primarily from the same reasons; and an approximate $0.005 per share increase in sequential interest expense, resulting from our April 20 bond issuance.
As of today, we have approximately $1.4 billion of liquidity comprised of just over $500 million in cash and cash equivalents and no amounts outstanding on our $900 million unsecured credit facility.
At quarter end, we had $185 million left to spend over the next two and half 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.
And finally, a quick update on technology.
As I discussed, our on-site teams are having great success with virtual leasing, and we just completed our second virtual quarterly close, a task that would have been so much harder, if not nearly impossible, without our investment in a cloud-based financial system.
As mentioned yesterday in the Wall Street Journal, we are continuing our pilot of Chirp, our smart access solution, with great success.
And we are finding even more ways to utilize the Chirp technology.
At our pilot communities for self-guided tours, our leasing teams can use the Chirp Access application to grant a prospect limited access to tour both the community and specific available apartment homes in a completely touchless exchange.
There is no need for the prospect to pick up physical keys or FOBs or ever even enter the leasing office.
Our leasing teams create the prospect a Chirp account, grant them access to the best apartments chosen per their unique wants and needs and then determine when the prospects access will expire.
Additionally, we can utilize Chirp to quickly and automatically control the number of residents to have access to an amenity space, such as a fitness center, at any given time.
Amenity spaces deemed as reservation only will require residents to use the chirp access application to reserve a specific time slot.
Only those residents with confirmed reservations will have access to open the door of the amenity space for the allotted time.
When the reservation expires, so does access to the amenity.
Clearly, in this COVID-19 environment, our Chirp initiative takes on even more importance.
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qtrly ffo $1.09 per share.
sees q3 ffo $1.14 - $1.20 per share.
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These statements are based on currently available information and assumptions, and we undertake no duty to update this information, except as required by law.
These statements are also subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and the recently completed spinoff of the N-able business.
Copies are available from the SEC or on our Investor Relations website.
We completed the spin-off of the N-able business on July 19, 2021, and accordingly have included the results of the N-able business as discontinued operations for the current and historical periods.
Unless otherwise specified, when we refer to the financial measures, we will be referring to the non-GAAP financial measure.
We note also that because there was no impact of purchase accounting on revenue in the third quarter, our non-GAAP total revenue is equivalent to our GAAP total revenue in this period.
Going forward, we will begin to present certain financial measures on a GAAP basis only.
I hope you're doing well and staying safe.
As many of you know, we will hold our annual Analyst Day meeting on November 10, 2021.
During this virtual event, we look forward to then share our vision for SolarWinds and how we plan to retain, evolve, and grow to build an even more successful business.
As we move our discussion of financial and operational highlights for Q3, I've described our performance and continued progress.
I attribute the progress to the dedication of our Celerion, the relevance of our solutions to address our customer needs, and the commitment of our partners and customers to SolarWinds.
For the third quarter, we delivered revenue above the high end of the range of the outlook we provided with total revenue ending the quarter at $181.3 million.
Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding just the high end of our outlook.
As I outlined in the Q4 2020 earnings call, customer retention is a top priority in 2021, and we continue to make great progress toward this goal in Q3.
Our Q3 maintenance and annual rate of 88% was above the low to mid-80% renewal rate we noted we expected in 2021.
Customer retention remains a key priority.
And with our growing portfolio of offerings, we believe we have a great opportunity to continue to grow our LTV and net retention rates with our large customer base.
While we continue to be able to offer flexible pricing, purchasing options to our customers, we are increasing our focus on subscription bookings and we expect to continue to increase the mix of subscription in these upcoming quarters and years.
In Q3, our subscription revenue grew at a 20% year-over-year rate with subscription ARR growing 23% year over year.
Bart will provide more color on how this part of our business will trend in Q4 and beyond, given the skew that the SentryOne acquisition timing creates.
We have completed now the successful spin-off of the N-able business in July, and that has enabled us to plan and execute our stand-alone strategy, the details of which we look forward to sharing with you at Analyst Day.
Our global system integrator and enterprise motions are resulting in larger subscription deals.
Noteworthy here is that customers are investing in our entire solutions offering and taking advantage of our simplified packaging and the pricing.
We will also highlight our views on our [Inaudible] solutions potential to be a growth driver in the coming years through a comprehensive and differentiated approach to observability compared to the alternate.
Our product teams made significant progress in Q3, delivering these new elements within our solutions that are designed to drive additional value to our customers based on their evolving needs, including updates to our database and ITSM solutions as well as Secure by Design initiatives that impact our entire product portfolio.
We have also extended the breadth of our database monitoring portfolio's platform support, which now includes Google cloud extensions and added enhanced integration, including with Microsoft teams to our ITSM solutions.
Increasingly, our application, database, and ITSM offerings will become integral elements of SolarWinds' observability that -- as we create -- as we support customers of all sizes with their IT, Dev, and SecOps requirements.
We believe that this will help differentiate our offerings from all -- from those of the other vendors.
We are expanding our global partner engagement with events in various geographies.
The global partners, including GSIs, cloud service providers, and MSPs, are critical to expanding our GTM reach and to jointly deliver customer success.
Differentiated offerings with rich enablement, incentives, and a spirit of mutual accountability are the underpinnings of our partner strategy.
In September, we celebrated the Seventh Annual IT Professionals Day holiday, which was originally established by SolarWinds here in 2015.
IT Pro Day recognizes and celebrates all IT professionals and the contributions they make to their business every day.
As part of the celebration, we released findings from our IT Pro Day 2021 Survey, Bring It On, which then revealed IT [Inaudible] confidence and [Inaudible] in their roles.
We were also able to recognize four IT professionals nominated by their peers in our second annual IT Pro Day awards.
We also believe that IT professionals showed their true grit under challenging conditions this past year and deserve recognition and appreciation for their efforts, commitment, and resiliency.
We continue to attract excellent talent across all functions of our organization, and we are selectively adding our footprint in international regions, including most recently in South Korea and parts of our EMEA region.
I'll discuss our SolarWinds results on a stand-alone basis.
As most of you know, our spin of the N-able business happened earlier this quarter and was effective on July 19th.
Therefore, these results are reflected as discontinued operations in our third quarter financial results.
Also, a quick reminder that the guidance for the third quarter that I provided in August did not include any impact from N-able as the spin had been completed at that time.
Once again, our public filings will present N-able as discontinued operations in the third quarter as well as in prior periods for a much better comparability.
Our third quarter financial results reflect another quarter of improving execution while demonstrating the resiliency of our model.
That execution led to another quarter of better-than-expected financial results for the third quarter with total revenue ending at $181.3 million, above the high end of our total revenue outlook of about $176 million to $180 million.
For the third quarter of 2021, there was no impact of purchase accounting on revenue, so our non-GAAP total revenue is equivalent to our GAAP total revenue.
Total license and maintenance revenue was $149 million in the third quarter, which is a decrease of 6% from the prior year period.
The maintenance revenue was $120 million in the third quarter, which is up slightly from the prior year.
Our maintenance revenue has been impacted by a combination of year-over-year declines in license sales for the past eight quarters and a reduction in our renewal rate in 2021.
The trend of this lower license sales intensified with the COVID-19 pandemic in the first quarter of 2020 and because of the introduction of subscriptions of our licensed products in Q2 of 2020 as well as the SUNBURST incident in December of 2020 as we focus more for our efforts on longer-term customer success and retention rather than maximizing near-term sales.
Although maintenance renewal rates have remained lower than historical levels since SUNBURST, we are encouraged by the fact that they have improved throughout the year.
Our expectation at the start of the year was that maintenance renewal rates this would be in the low to mid-80s.
On a trailing 12-month basis, our maintenance renewal rate is 89%.
Working with our customers had been a top priority this year.
Also consistent with recent quarters, we want to provide the in-quarter renewal rate for the third quarter, which currently stands at approximately 88%, which again is above our expectations at the start of the year.
For the third quarter, license revenue was $29.2 million, which represents a decline of approximately 26% as compared to the third quarter of 2020.
On-premises subscription sales resulted in an approximately 11-percentage-point headwind to license revenue for the quarter.
The remainder of the decline in license revenue reflects the combination of an impact of that cyber incident and the continuing impact of the COVID-19 pandemic.
That said, our new license sales performance with commercial customers has improved sequentially each quarter during the year.
And while we have continued to sell to customers in the federal government and have had some key wins post-SUNBURST, new sales to customers in the federal space overall has been a challenge this year.
We have an incredibly committed federal team, who's now the primary focus has been on working with customers and maintaining the security and stability of their environment.
Moving to our subscription revenue.
Third quarter subscription revenue was $32.3 million, up the 20% year over year.
This increase is due to the additional subscription revenue from SentryOne products as well as increased sales of our on-premise subscriptions as part of our early efforts to shift more of our business to subscription.
Total ARR have reached approximately $624 million as of September 30, 2021, reflecting year-over-year growth of 9% and is up slightly from our ending Q2 2021 ARR balance of $621 million, which is the corrected amount included in our 8-K filing from earlier this month.
The growth in ARR is that primarily due to the incremental revenue of SentryOne, which we acquired late last year, and our efforts on sales of our products at on-premises subscription.
Our subscription ARR of $130.2 million increased 23% year over year and 9% sequentially from the second quarter.
So we finished the third quarter of 2021 with 786 customers that have spent more than $100,000 with us in the last 12 months, which is a 4% improvement over the previous year.
We are continuing our efforts will build larger relationships with our enterprise customers, which we will talk more about at our upcoming Analyst Day next month.
We delivered a solid quarter of our non-GAAP profitability.
Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding the high end of the outlook for the third quarter despite continuing to invest in our business.
Excluded from the adjusted EBITDA are onetime costs of approximately of the $2.9 million of cyber-related remediation, containment, investigation, and professional fees, net of insurance proceeds.
I do want to clarify that these cyber-related costs not included in adjusted EBITDA are onetime and nonrecurring.
They are separate and distinct from our Secure by Design initiatives, which are aimed at enhancing our IT security and supply chain process.
Costs related to our Secure by Design initiatives are and will remain part of the recurring cost structure as we go forward.
We expect onetime cyber-related cost to fluctuate in future quarters but to be less in future periods.
These onetime cyber costs are, however, difficult to predict.
They not only include the significant cost of the forensic investigation efforts we substantially in May but also costs associated with our ongoing litigation, government investigations, and any potential judgments or fines related and -- as well as related professional fees.
We expect our insurance coverage and offset a portion of these expenses and will be presented net of insurance proceeds.
Net leverage at September 30 was approximately 3.8 times our pro forma trailing 12-month adjusted EBITDA.
We retained the full amount of the $1.9 billion in term debt that the company had at present.
During the third quarter, we completed a two for one reverse stock split and declared a dividend of $1.50 per share on this post-split basis, which was paid in August.
In addition, N-able repaid $325 million of inter-company debt.
As a result of this repayment, our cash balance is $709 million at the end of the third quarter, bringing our net debt to approximately $1.2 billion.
Our plan is to keep that cash of our balance sheet for the foreseeable future.
We believe we have favorable terms on our debt, so we intend to maintain flexibility as it relates to our cash on balance sheet.
Our debt matures in February of 2024 and we expect to revisit our level of gross debt as we get closer to that date.
I will then now walk you through our outlook before turning it back over to Sudhakar for some final thoughts.
We are providing guidance for the fourth quarter of 2021 for total revenue, adjusted EBITDA, and earnings per share, and we will tell you what that means for a full year.
For the fourth quarter of 2021, we expect total revenue to be in the range of $180 million to $184 million, representing a year-over-year decline of negative 3% to negative 1%.
Adjusted EBITDA for the fourth quarter is expected to be approximately $72 million to $74 million, which also implies an approximately 40% adjusted EBITDA margin.
Non-GAAP fully diluted earnings per share is projected to be $0.25 to $0.26 per share, assuming an estimated 160.7 million fully diluted shares outstanding, which reflects the reverse stock split completed on July 30.
And finally, our outlook for the fourth quarter assumes a non-GAAP tax rate of 22%, and that we expect to pay approximately $8 million in cash taxes during the fourth quarter of 2021.
For the full year, we expect total revenue to be in the range of $712 million to $716 million, representing a year-over-year decline of negative 1% to flat with prior year.
So our adjusted EBITDA for the full year is expected to be approximately $297 million to $299 million, which implies an approximately 42% adjusted EBITDA margin for the year.
Non-GAAP fully diluted earnings per share is projected to be $1.14 to $1.15 per share, assuming an estimated 160.5 million fully diluted shares outstanding.
As you think about the components of revenue in the fourth quarter, it is important to remember that we acquired SentryOne last year in late October.
We expect our subscription revenue growth in the fourth quarter to be in the high single digits.
However, looking ahead to 2022 and beyond, we intend to continue to expand our subscription offerings while turning new subscription sales a much higher priority with our sales team.
Based on what we've seen year-to-date, we expect that maintenance renewal rates will be in the high 80s for the fourth quarter and anticipate continued progress throughout 2022.
And in the near term, we expect the maintenance revenue will continue to be relatively flat to slightly down compared to prior year periods.
So as we think about EBITDA margins for the rest of the year and into 2022, the costs associated with our Secure by Design initiatives, investments in transitioning our product portfolio to a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term.
We anticipate that accelerating margins again in the future, but believe that these investments are now necessary.
We will talk more about these initiatives at the Analyst Day on November 10.
Our team's competence, commitment, and attitude continues to be on display as we delivered a strong Q3 performance, exceeding outlook in both total revenue and adjusted EBITDA.
We are executing our mission to help customers accelerate their business transformation via simple, powerful, and secure solutions for multi-cloud environments.
In Q3, we introduced an early adopter program of SolarWinds' observability to select customers.
These customers currently under maintenance has the great opportunity to make an early move to subscribe to our offerings and begin a journey to multi-cloud with SolarWinds as a strategic partner.
By eliminating customer complexity and meeting them where they currently are, we believe we are uniquely positioned to protect investments while increasing our relevance to them over time.
We expect this motion to become a mainstream activity in our upcoming quarters and a significant contributor to our subscription and ARR.
In Q4, we have continued to execute on the initiatives that I outlined during our Q4 2020 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license, and maintenance growth across geographies and sectors.
We hope to see you all on November 10.
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sees q2 non-gaap diluted earnings per share of $0.21.
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We are pleased to report strong financial results again this quarter, which reflects the consistent execution of our strategic priorities as the global markets continue to recover.
As we size up the business climate and how we are managing through the recovery, we can report the GPC team is generating positive momentum in both our sales and operating results.
And we are well positioned for both near and long-term growth.
Despite inflationary pressures, our margins reflect the success of our category management initiatives in cost control efforts which have offset these increases.
And finally, our strategic efforts with our global supplier partners have prevented significant shortfalls and our overall inventory levels allowing us to deliver quality customer service.
Taken a look at our third quarter financial results, total sales were 4.8 billion up 10% from last year and up 11% from Q3 of 2019.
We also produced our 16th consecutive quarter of gross margin expansion.
And we further improved our productivity and customer service capabilities with the ongoing execution of our operational initiatives.
As a result, segment profit increased 14% and our segment margin improved 30 basis points to 9.3%.
This represents our strongest margin in 2 decades and confirms our key initiatives are driving meaningful improvements.
Net income was 229 million or a $1.59 for diluted share and adjusted net income was 270 million or a $1.88 per share.
This is a 15% increase from 2020 and establishes a new record for GPC's quarterly earnings, so just an outstanding job by the GPC team.
Total sales for global automotive also set a new record at 3.2 billion for the quarter.
This represents an 8% increase from Q3 2020, and a 15% increase from Q3 of 2019.
On a comp basis, sales were up 5% from last year and up 7% on a two-year stack, with our strongest year-over-year automotive comps coming from the U.S. business.
In addition, from a cadence perspective, sales held up well through the quarter with the strongest average daily sales volume in each of our geographies coming in September.
The broad strength in our global automotive sales reflects a number of factors.
First, we're proud of our team's efforts to shore up our supply chain amid the difficult backdrop of product delays and logistics challenges.
Supply chain disruptions have been more substantial for U.S. automotive than in our international or industrial operations.
And we continue to work closely with our global suppliers to manage through these issues and ensure we have the right inventory available for our customers.
We are confident in the effectiveness of our global sourcing team and believe we are well-positioned in the industry.
We also continue to benefit from our key growth initiatives and market tailwinds.
Among our growth initiatives, our emphasis on innovative sales programs and sales force effectiveness are positively impacting commercial sales.
As examples, we recently finalized an exclusive partnership in the education space for technician recruitment with over 10,000 active tech students in the process of earning their credentials.
We're also excited that NAPA and AAA have executed an agreement for NAPA to be the exclusive auto parts supplier for the new AAA branded premium battery.
This battery will be available to all consumers with a focus on the over 62 million AAA cardholders and 5,400 approved auto repair centers.
We're also equipping our sales team with incremental resources, training and development, which have led to more productive, customer-facing calls.
In addition, our omni -channel investments continue to drive strong B2B and B2C digital sales.
And finally, the international rollout of the NAPA brand is driving significant growth in both our European and Asia-Pac operations.
So now turning to the market tailwinds, these macro drivers include the following: The ongoing reopening of the economy, and improving miles-driven which generate the need for more repairs and more maintenance.
A robust used car market, that is keeping more cars on the road longer.
And improving the aftermarket fundamentals, such as the growing and aging vehicle fleet, which will continue to benefit the industry over the long term.
Looking next at our automotive highlights by region, total U.S. sales were up 9%.
Comp sales increased 8% from last year and are up 5% on a 2 year stack.
In Canada, total sales were up 1% with comp sales essentially flat both year-over-year and on a two-year stack as lockdowns in major markets have slowed the recovery.
it's been encouraging to see these restrictions of easing of late, which should lead to stronger demand through the final 3 months of 2021.
Our U.S. sales were driven by strong demand for product categories such as exhaust, ride control, brakes, tools, and equipment which all outperformed.
In addition, both retail and commercial ticket and traffic counts were positive for the third consecutive quarter.
By customer segment, sales to both commercial and retail customers held strong, with DIFM sales outperforming DIY for the second straight quarter.
We do remain pleased, however, with the continued strength of our DIY business and believe we can drive additional growth with ongoing initiatives, such as B2C digital investments.
These include new search features, improving catalog functionality, and enhanced payment options, such as, buy now and pay later.
NAPA online, B2C sales continue to grow at a rapid pace, up over 40% from the third quarter, and up 2x from 2019.
The strength in commercial sales in the quarter was driven by several of the initiatives mentioned earlier, as well as the ongoing economic recovery in the U.S..
Sales to our major account partners were strongest with mid-teen growth, followed by sales for our NAPA AutoCare customers, which were up low double digits.
We would add that our NAPA AutoCare membership has surged with the reopening of markets and includes nearly 400 shop upgrades thus far in 2021.
So really terrific momentum for our premier independent garage program.
Rounding out our commercial segments, fleet, and government and other wholesale customers, also posted high single-digit growth for the quarter.
So really strong results across all of our commercial accounts.
These are encouraging trends and as we look ahead, we remain confident in our growth strategy and our key priorities to deliver customer value and ultimately sell more parts for more cars.
Our AAD team in Europe continue to perform well with total Q3 sales up 8%, were up a strong 23% on a two-year stack.
Comp sales increased 2.5% from last year and were up 14% on a 2-year stack.
While the UK and Benelux continue to stand out with really strong results, we were pleased with the solid results in each of our 7 European markets.
A reflection of stable market conditions and execution of our key sales initiatives.
These include the continued roll-out of the NAPA brand and ongoing emphasis on key account development, which are driving market share gains.
Now looking at our Asia-Pac business, total sales were up 2% from 2020 and up 18% on a 2-year stack.
Comp sales were up slightly from last year and up 15% on a 2-year stack.
With both commercial and retail sales up double-digit, driven by positive growth with both the Repco and NAPA brand.
We're really pleased with these results given the severe lock downs and the major markets of Sydney, Melbourne, and Auckland during much of the quarter.
We're energized to see the reopening of these markets is finally getting underway, and we expect a surge in demand in the coming month.
So now let's discuss the Global Industrial segment.
Total sales for this segment were 1.6 billion, a strong 15% increase from last year, and a 5% increase from 2019.
Comp sales were up 13% and up 4% on a 2-year stack.
Through the quarter, average daily sales in July and August were in line with the second quarter, while our strongest results were in the month of September.
This quarter's positive momentum and industrial exceeded our expectations, which is a reflection of the great work by our motion team, and the strengthening of the industrial economy.
Both the PMI and industrial production were positive for the quarter and these indicators correlate closely to the overall healthy state of the industrial sales climate.
For the second consecutive quarter, we had positive sales growth across each of our industries served.
The industry's sectors that stood out with double-digit growth include our largest customers segment, equipment and machinery, as well as iron and steel, automotive, aggregate and cement, lumber and wood, fabricated metals, equipment rental, and oil and gas.
In addition, our newly added fulfillment and logistics industry experienced tremendous growth.
So as you can see, the current growth in our industrial business is quite broad across the markets we serve.
As we have conveyed in our prior calls and in our industrial Deep Dive event on September 15, our Motion business is a market leader in the industrial distribution space in North America and Australasia.
DMI team strive to be the preferred industrial solutions provider in the industries we serve.
We partner with the best manufacturers in the industry to provide Tier 1 brand, our customers demand.
In addition, we are constantly broadening our product offering, as well as our service capabilities to maximize our sales potential and drive market share gains in a very large and fragmented market.
With these fundamentals of our business in mind, our focus on continued profitable growth in this segment remained grounded in 5 key initiatives.
An omni -channel build-out to accelerate e-commerce growth and drive sales with new customers.
As examples, Motion.com and our inside sales center, which has grown from 15 to now, 35 reps in just 6 months continue to drive incremental sales from new motion customers.
The expansion of our industrial services and value-add solutions in areas such as equipment repair, conveyance, and automation.
Strategic M&A to generate significant growth in new markets and new products, and services as an industry consolidator.
Enhanced strategy to create a dynamic pricing environment that provides us a competitive advantage in the marketplace.
And lastly, network optimization and automation to further improve our operating efficiencies and productivity.
We're pleased with the progress from these initiatives, thus far, and we are excited for the opportunities ahead.
Another third quarter highlight, is the publication of our 2021 sustainability report update.
Our initiatives and activities over the past year have lead to continued progress toward our goal of promoting diversity, equity, and inclusion.
We've also taken steps to reduce the environmental footprint of our operations by reducing energy and emissions while increasing recycling opportunities across the globe.
2020 tested all of us and accentuated the importance of supporting our people and our communities.
We're really proud of our GPC teammates around the world for their resilience and contributions to further in our sustainability goals.
We invite you to learn more about these initiatives and our full report which you can find on the GPC website.
So in summary, we made great progress in several important areas during the third quarter.
And we're very pleased with the strong result in our automotive and industrial businesses, and the continued improvement in our sales and operations.
We could not be more proud of the GPC team.
It's always a proud moment to have the opportunity to showcase our global teams hard work, relentless customer service, and winning performance.
It's a challenging environment and teams have done an exceptional job to adjust and deliver results.
We continue to remain focused on our key pillars, including talent, sales effectiveness, digital supply chain, and emerging technology.
Teams are executing initiatives well and consider s strategic initiatives a central part of our operating cadence.
The teams have rigor around measurement and progress visibility.
We measure unique global initiatives and are ahead of our 2021 plan established at the beginning of the year.
As we execute our GPC strategic planning process for the upcoming year, we reflect on learn from and refine our priority initiative execution.
In addition through the year, we share best practices around the globe for common strategies to help us continuously learn and improve as one GPC team.
While our geographies and end markets are diverse, we share similar GPC global initiatives, all designed to deliver profitable growth in excess of market growth, operating leverage, and free cash flow.
Despite a challenging environment, we're pleased to see more normal team activities and customer activities starting to be possible in most of our geographies.
We recently had the opportunity to meet in person with the U.S. Automotive Executive and Field Management team in Atlanta.
We listened to field feedback, shared performance trends, enjoyed team camaraderie, introduced new talent, and collaborated on strategic priorities for the upcoming year.
Similarly, approximately 70 of our motion Executive and field leaders from around the country, recently had the chance to meet in person for the first time since early 2020, to detail business performance and review strategic initiatives priorities.
In Europe, our AAG executive leadership team recently met together in person for the first time in nearly 2 years.
Our Atlanta-based GPC and U.S. NAPA field support teams also hosted an employee appreciation event for 400 teammates, that included a well-received visit from our celebrity NAPA racing teammates, including Chase Elliott.
We're cautiously optimistic our teams in Australasia will soon be able to exit lockdown in November and also return to a more normal in-person routine.
At each of these events, it's energizing to see the positive attitudes, strong team alignment, and visible excitement about our GPC momentum and vision.
It's also reassuring to see our differentiated GPC culture up close and intact.
Paul and I have also had the opportunity to spend time in person with customers and vendors this quarter.
These discussions are critically important as we share our growth visions, listen to feedback, and explore ways to deepen our strategic partnership.
These conversations not only reinforce our GPC core strategic priorities, talent, sales effectiveness, digital and tech, supply chain and emerging tech; b but also always affirm the unique customer value propositions across our GPC businesses.
Growth, technology solutions, supply chain excellence, products and technical expertise, and long-standing local relationships are always key themes.
As an example, we recently visited with an industrial customer who is enjoying exponential growth.
Our Motion teammates co-locate associates at the customer facility to provide real-time expertise on the plant floor to ensure the facility is operating to its potential.
Part of the discussions with this customer explored the use of embedded technology solutions that will make customer ordering from motion easier and faster.
We're building plans to triple the size of this customer relationship over the next few years.
In our customer discussions or recent common theme is the supply chain challenges that face all Company.
We explained, we believe our global scale in-country resources, data and analytics, investments in our supply chain, strategic inventory actions, and proactive daily team approach, position as to navigate the headwinds relative to others.
We're in constant discussion with highest levels of our supplier partners, many of which for whom GPC represents a large and important global customer.
Over the past quarter, we've held numerous top-to-top meetings with our global executive leadership and vendor partners to review progress and jointly problems solved.
It's a challenging environment, but our global teams and partners are proactively acting each day to navigate it.
Turning to our focus on talent, we recently completed an end-to-end strategic review of our global GPC employee value proposition, and talent initiatives.
This disciplined work ensures we have the right capabilities aligned to our current and future business strategies.
The work also ensures we're constantly striving to be an employer of choice in this dynamic and competitive talent environment.
Around the globe, we continue to take deliberate actions to lead, recognize and ensure the well-being of our teams.
For example, we recently streamlined recruiting processes to move faster to attract talent, introduce new wellness incentives, improved holiday schedules, enhance vacation eligibility and flexibility, invested in healthcare costs to reduce the burden on our associates, improve tuition reimbursement programs, and relaxed dress code policies to name a few.
And talent's our most important advantage, we'll always work to take care of and invest in our people.
We also continued to execute well against our broader digital and technology initiatives.
During the quarter, the teams have made exciting progress under leadership of our new Chief Information and Digital Officer, Naveen Krishna.
We're focused on building high performing teams that engineered technology to solve customers problems at scale.
In addition, we'll optimize human and financial resources to focus on the most critical and impactful activities.
Our emerging technology initiatives, including electric vehicles and related technologies also continue to advance.
The global teams are partnering well to execute a disciplined and coordinated strategy.
We're pleased with the team momentum and will continue to dedicate resources to this exciting effort.
Last, the teams are executing our M&A strategy with discipline.
For example, we added several store groups to our North American and Europe an automotive network to increase local market density and we announced the acquisition of J&S Automotive Distributors, a leading automotive parts distributor in Ireland.
This new geography represents the 15th country in which GPC operates.
In addition, we were pleased to recently sign a definitive agreement to acquire AutoAccessoriesGarage, a leading U.S. based digital platform specializing in automotive accessories.
This strategic digital acquisition adds new capabilities and accelerates a strategic product category for the U.S. automotive team.
The acquisition pipeline is active and we remain disciplined to prioritize transactions we believe meet all of our GPC strategic and financial criterion.
Overall, we are really pleased with the record -setting team performance.
Despite uncontrollable headwind, the teams continue to rally together each day to service customers and deliver performance.
We look forward to working hard to close the year strong and build on our solid momentum as we move forward into 2022.
We are very pleased with our third quarter financial performance and we look forward to sharing a few additional details with you.
Recapping revenues, total GPC sales were 4.8 billion in the third quarter, up 10%.
Gross margin improved to 35.5%, an increase of 50 basis points from 35%, last year.
Our improvement in gross margin was primarily driven by the increase in supplier incentives due to improved volumes and the positive impact of strategic category management initiatives.
In the third quarter, we had continued pricing activity with our suppliers as anticipated, resulting in additional product cost inflation.
Our team was positioned to address these increases with effective pricing and global sourcing strategies and price inflation improve neutral to gross margin.
On a total Company basis, we estimate a 3% inflationary impact on Q3 sales, consisting of 3.5% inflation in global automotive, and 1% to 2% in industrial.
Based on current trends, we expect to see additional price inflation in the fourth quarter, and we will utilize our strategies to protect our gross margin as appropriate.
Our total adjusted operating and non-operating expenses were 1.35 billion in the third quarter, up 11% from 2020 and at 28% of sales.
The increase from last year is due to several factors, including the prior-year benefit of approximately 60 million and temporary savings related to the pandemic.
Additionally, our third quarter expenses reflect the increase in variable costs on the 450 million in additional year-over-year sales, as well as cost pressures in areas such as wages, Incentive compensation flight, rent, and health insurance.
We continue to execute on our ongoing initiatives to control expenses and improve our operations.
While pleased with our progress, thus far, we see room for further improvement in the quarters ahead.
Our total segment profit in the third quarter was 447 million up 14%.
Our segment profit margin was 9.3% compared to 9% last year, a 30 basis point year-over-year improvement, and up a 130 basis points from 2019.
So we're really pleased with the continued improvement and the excellent work by our team.
Looking ahead, we raised our margin expectations for the full year and we currently expect segment profit margin to improve 40 to 50 basis points from 2020 or 80 to 90 basis points from 2019.
This would be our strongest full year margin in more than 20 years.
Our tax rate for the third quarter was 24.9% on an adjusted basis, up from 23.4% last year, with the increase in rate primarily related to income mix shift to higher tax jurisdictions.
Our third quarter net income from continuing operations was 229 million, with diluted earnings per share of a $1.59.
Our adjusted net income was 270 million or a $1.88 per diluted share, which compares to 237 million or a $1.63 per adjusted diluted share in the prior year, a 15% increase.
So turning to our third quarter results by segment, our total automotive revenue was 3.2 billion up 8% from last year.
Our segment profit increased 6% to 281 million with profit margin as solid 8.8%.
While down 20 basis points from 2020 due to the prior-year benefit of temporary savings, this represents an 80 basis point margin improvement over 2019 and reflects the underlying progress in our operations.
For the 9 months profit margin is 8.6% up 80 basis points from 2020 and up 90 basis points from 2019, driven primarily by margin expansion in our U.S. and European operations.
Our industrial sales were 1.6 billion up 15% from 2020.
Segment profit of a 166 million was up a strong 32% from a year ago and profit margin improved to a 10.3%.
This is a 140 basis points from 2020 and up 220 basis points from 2019 and the first double-digit margin for industrial since the Fourth Quarter of 2006.
Year-to-date profit margin for this segment is 9.4% up a 120 basis points from 2020 and up a 150 basis points from 2019.
So this group is executing very well and posting excellent operating results through the industrial recovery.
So now, let's turn our comments to the balance sheet.
At September 30th, total accounts receivable is down 3.5%, primarily due to the timing of the 300 million in accounts receivables sold in October of 2020.
Inventory was up 10% in line with our sales increase and a reflection of our commitment to having the right parts, in the right place, at the right time.
Accounts payable increased 20% from last year due to the increase in inventory and favorable payment terms with certain suppliers.
Our AP to inventory ratio improved to 129% from 118% last year.
Our total debt is 2.4 billion down 474 million or 16% from September of last year, and down 245 million from December 31 of 2020.
We closed the third quarter with available liquidity of 2.4 billion and our total debt to adjusted EBITDA improved to 1.5 times from 2.2 times last year.
So our teams continue to do an outstanding job of optimizing our working capital and our capital structure.
We also continue to generate strong cash flow with another 300 million in cash from operations in the third quarter and 1 billion for the 9 months.
For the full year.
We expect our earnings growth and working capital to drive 1.2 billion to 1.4 billion in cash from operations.
And free cash flow of 950 million to 1.15 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures, M&A, share repurchases and the dividend.
For the 9 months we have invested a 138 million in capital expenditures, and we have plans for additional investments to drive organic growth and improve efficiencies and productivity in our operations through the balance of the year.
In addition, we have used approximately a 143 million in cash for strategic acquisitions to accelerate growth.
These investments includes several automotive store groups across our markets, included in the entry into Ireland discussed earlier.
We continue to generate a robust pipeline of additional strategic and bolt-on acquisitions in both automotive and industrial segments.
This would include Auto Accessories Garage as mentioned before, which we expect to close in the fourth quarter.
Consistent with our long-standing dividend policy, we have also paid a total cash dividend of more than 349 million to our shareholders through the 9 months.
The Company has paid a dividend every year since going public in 1948 and has increased the dividend for 65 consecutive years.
And as part of our share repurchase program, we have also been active with share buybacks dating back to 1994.
In the third quarter, we used a $100 million to purchase 800,000 shares, and year-to-date we have used 284 million to purchase 2.2 million shares.
The Company is currently authorized to repurchase up to 12.2 million additional shares, and we expect to remain active in this program in the quarters ahead.
We expect total sales for 2021 to be in the range of +12 to +13%, an increase from our previous guidance of +10 to +12%.
As usual, this excludes the benefit of any unannounced future acquisitions.
By business, we are guiding to +14 to +15 total sales growth for the Automotive segment, an increase from +11 to +13% and a total sales increase of +10 to +11% for the industrial segment.
An increase + plus 6% to +8% On the earnings side, we're raising our guidance for adjusted diluted earnings per share to a range of $6.60 to $6.65, which is up 25% to 26% from 2020.
This represents an increase from our previous guidance of $6.20 to $6.35.
So we're encouraged by the strength in our financial results for the third quarter and the nine months.
And we enter the fourth quarter focused on our initiatives to meet or exceed our outlook for the year.
We look forward to reporting on our financial performance for the fourth quarter in full year in February.
As we close out another strong quarter, we are pleased with our progress in driving profitable growth, strong cash flow, and shareholder We attribute the positive momentum in our business to our global team work and disciplined focus across all of our operations.
Our team has confidence in the strategic plans we have put in place to capture long-term growth and margin expansion.
Our strategic plans combined with an exceptional balance sheet position GPC with the financial strength and flexibility to pursue strategic growth opportunities via investments at organic and acquisitive growth.
While also returning capital to shareholders through the dividend and share repurchases.
So as we look ahead, we are encouraged to see the impact of the global pandemic subsiding.
while the fundamentals of our two global businesses remained rock solid.
Our GPC teams around the world are stepping up under challenging circumstances and taking great care of our customers.
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q3 earnings per share $1.59 from continuing operations.
q3 sales rose 10.3 percent to $4.8 billion.
q3 adjusted earnings per share $1.88 from continuing operations.
raises 2021 outlook for revenue growth, diluted eps, adjusted diluted earnings per share and free cash flow.
sees 2021 total sales growth 12% to 13%.
sees 2021 adjusted diluted earnings per share $6.60 to $6.65.
sees 2021 free cash flow $950 million to $1.15 billion.
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It has now been over a year since the pandemic closed in on us all.
Let me first start with an expression of profound gratitude to the employees of Standex, our executive team and the Board of Directors.
The circumstances of the pandemic required a level of agility and responsiveness that would not have been possible without a high degree of collaboration, trust and a sense of common mission.
I'm proud of what we accomplished together.
As a result, Standex is emerging from the pandemic far stronger than when we entered it.
We had another solid quarterly performance with results ahead of our expectations and expect this momentum to continue with stronger financial performance in fiscal fourth quarter 2021.
At the Electronics segment, nearly half of the 35% year-on-year revenue increase in the third quarter reflected organic growth with solid demand for relays in solar and electric vehicle applications and reed switches for transportation end markets.
Overall, we are seeing strong demand across many of our product lines and all geographies at Electronics.
Our Scientific segment also had an excellent quarter with solid revenue and operating income growth year-on-year.
We continue to expect that revenue from COVID-related storage demand in fiscal 2021 will be at the higher end of our originally indicated $10 million to $20 million range.
At the Specialty Solutions segment, revenue and operating income sequentially increased 18.3% and 32.4%, respectively, as we see the early stages of recovery in our end markets.
From a strategic perspective, we continue to position Standex around products and platforms that optimize our growth and margin profile with strong customer value propositions.
Electronics segment backlog realizable in under one year increased approximately 26% sequentially as the demand in end markets, including electric vehicle and renewable energy, continues to trend positively.
Results and order flow at Renco Electronics were solid as we successfully leveraged their complementary customer base and end markets.
At the end of the third quarter, we also announced the divestiture of Enginetics Corporation.
Our Engineering Technologies segment will now be focused on our core spin forming capabilities with its strong value proposition, reducing material inputs and processing time, ultimately providing higher growth and margin opportunities for the segment.
The sale of Enginetics is also accretive to our margin profile.
ETG will continue to focus on serving the space, commercial aviation and defense end markets.
We are also further leveraging these demand trends and strategic initiatives with ongoing productivity and efficiency actions.
At the Electronics segment, we continue to make progress in the quarter, mitigating material inflation through changes in the reed switch production and material substitution.
We are on track to substantially complete this transition by the end of fiscal 2022.
We continue to allocate production capacity to our highest margin segment opportunities.
For instance, at the Specialty Solutions segment, Hydraulics aftermarket revenue increased 23% year-on-year in the third quarter.
These actions are complemented by a strong balance sheet and liquidity position, giving us the financial flexibility to deploy capital for our active pipeline of organic and inorganic growth opportunities.
Ademir will discuss these metrics in more detail.
In regard to our fiscal fourth quarter 2021 outlook, we expect slight to moderate sequential revenue increase and a more significant operating margin improvement compared to the third quarter of fiscal 2021.
Underpinning this outlook are the following.
Sequentially, we expect revenue growth for the Electronics, Engraving and Specialty Solutions segments.
However, the consolidated revenue increase sequentially will be partially offset by the absence of Enginetics, which contributed approximately $4 million in revenue in the third quarter and was divested at the end of the quarter.
We expect significant operating margin improvement sequentially compared to fiscal third quarter 2021 results.
This improvement will be driven primarily by Electronics, Engraving and Engineering Technologies.
Besides our financial results today, we are also pleased to announce that our Board of Directors has committed to nominating Robin Davenport of Parker-Hannifin for election to the Board of Directors at Standex's 2021 Annual Shareholder Meeting.
In the interim, Ms. Davenport will serve as an observer and advisor to our Board of Directors.
Robin is a highly accomplished and respected executive with comprehensive financial and global industry expertise in the manufacturing sector and significant experience and success in the areas of M&A, capital allocation and corporate strategy.
In my discussions with her, I found her to be very thoughtful and insightful in her views and believe she will be a valuable addition to the current Board of Directors' efforts.
I look forward to working closely with her and the current members of the Standex Board as we further execute our strategic and financial priorities.
Revenue grew approximately $17 million or 35.4% year-on-year with nearly half of the increase due to organic growth.
This growth reflected a broad-based geographic recovery, including a strengthening of demand for relays in solar and electric vehicle applications and reed switch demand in transportation end markets.
The recent Renco acquisition contributed revenue of $6.4 million and is proving to be a highly complementary fit with our magnetics portfolio.
Operating income increased approximately $4.3 million or 54.2% year-on-year, reflecting operating leverage associated with revenue growth, profit contribution from Renco and productivity initiatives, partially offset by increased raw material costs.
The pictures highlighted on slide four are examples of how we can leverage the technological advantages of reed switches to contribute to our growth in end markets such as electric vehicles and solar power.
In particular, reed switches, given their unique physical properties, are well suited to safety isolation testing for electric vehicles and battery management systems.
We also continue to capture attractive new customer wins to support our NBO pipeline.
In this case, we highlighted a magnetic motion system for a defense elevator application, which will contribute more than $11 million over the next three years.
Currently, our new business opportunity funnel has increased to $59 million across a broad range of markets and is expected to deliver $12.4 million of incremental sales in fiscal 2021.
Sequentially, in fiscal fourth quarter 2021, we expect a modest increase in revenue and slight operating margin improvement at Electronics compared to fiscal third quarter 2021.
Our outlook reflects a continued broad-based end market recovery, including further growth for relays in solar and electronic vehicle applications, supported by a healthy order flow with backlog realizable under a year increasing approximately $20 million or 26% sequentially in our third fiscal quarter.
Revenue increased approximately $600,000 or 1.7% year-on-year, and operating income was similar year-on-year, as expected, at $4.5 million.
The revenue increase reflected favorable foreign exchange impact, partially offset by the timing of projects.
Operating income was essentially similar year-on-year due to a less favorable project mix.
Laneway sales of $13.6 million were an approximate 5% sequential increase, reflecting growth in soft trim tools, laser engraving and tool finishing.
The picture on slide five highlights a recent customer win on the Ford F-150 platform for soft trim interiors.
Overall, we are seeing solid demand and backlog trends for our soft trim capabilities, further reinforcing the rationale behind our prior acquisition of GS Engineering, a leading provider of cutting-edge proprietary technology for the production of in-mold grained tools.
Since the acquisition, we have further rolled out GS technology on our global platform, positioning us well in the growing soft surface markets as the auto industry focuses on interior comfort of vehicles and increasingly replaces leather with sustainable materials.
In fiscal fourth quarter 2021, we expect a slight revenue and more significant operating margin increase compared to fiscal third quarter 2021 at the Engraving segment.
The expected sequential financial performance improvement reflects a more favorable geographic mix, project timing and increased soft trim product demand leveraged over productivity and cost initiatives.
Turning to slide six, the Scientific segment.
Revenue increased approximately $9.6 million or 65% year-on-year, reflecting continued positive trends in retail pharmacies, clinical laboratories and academic institutions, mainly attributable to demand for COVID-19 vaccine storage.
Operating income increased $2.6 million or approximately 81% year-on-year, due primarily to the volume increase balanced with investments to support future growth opportunities.
In fiscal fourth quarter 2021, we expect a moderate sequential decrease in revenue due to lower demand for COVID-19 vaccine storage combined with higher freight costs, which we expect to result in a sequential decrease in operating margin, although we still expect an operating margin above 20% in the quarter.
As shown on the picture on slide six, we provide comprehensive solutions with a broad product line.
We can meet customer requirements for different model sizes and temperature ranges across a wide variety of end markets, including pharmaceutical, medical, scientific, biotechnology and industrial.
Picture here is a clinic with a number of different medications in small quantities requiring a variety of our storage solutions.
Finally, I'm pleased with the progress the Scientific team is making in managing the pipeline of new product development projects, which will position the business well with future new sources of revenue.
Turning to the Engineering Technologies segment on slide seven.
Revenue decreased approximately $6.7 million, and operating income was about $1.9 million lower year-on-year, a 25.4% and 59.8% decrease, respectively.
On a year-on-year basis, fiscal third quarter 2021 results reflected the economic impact of COVID-19 on the commercial aviation markets and project timing in space and energy segments, partially offset by growth in defense end markets.
The decrease in operating margin was due to the lower volume, partially offset by productivity and cost initiatives.
In fiscal fourth quarter 2021, we expect revenue on a sequential basis to be similar to the prior quarter with growth in commercial aviation, defense and space, offset by the absence of Enginetics sales due to its divestiture at the end of fiscal third quarter 2021.
We expect a significant increase in operating margin, reflecting a continued broad-based end market recovery and favorable mix complemented by ongoing productivity initiatives.
As pictured on slide seven, we continue to win attractive long-term contracts with industry leaders to develop new platforms and the next-generation hypersonic programs.
Our manufacturing process utilizes spin forming technology, an inherently more efficient process.
We start with a plate as opposed to a large block of titanium and then shape it with less material waste and cost and achieve the same functionality and strength.
Specialty Solutions revenue decreased approximately $3.7 million or 11.9% year-on-year with an operating income decline of about $600,000 or 12.9%.
This decrease primarily reflected the economic impact of the COVID-19 pandemic on the segment's end markets, particularly in food service equipment.
I would like to commend the Specialty team for effectively managing their costs to nearly hold their margin rate despite the significant reduction in revenue.
Sequentially, Specialty Solutions revenue and operating income increased 18.3% and 32.4%.
We believe we are in the early stages of a recovery in food service and refuse end markets that we expect to continue into our fiscal fourth quarter.
In fiscal fourth quarter 2021, we expect a slight sequential increase in revenue, with operating margin expected to slightly decrease sequentially, reflecting material inflation, particularly at Hydraulics, which we are seeking to recover through pricing actions.
Pictured on the slide is a recent new product introduction, the milk and food merchandiser, developed primarily for the school market and offering several advantages, including flexibility to merchandise a wide assortment of products, easy loading/unloading and the product accessibility to young children.
As we return to more normalized patterns of experience outside the home, in-person learning and schools and indoor dining and restaurants, we are seeing a recovery in the school, restaurant and grab-and-go food end markets for products such as the food merchandiser.
First, I will provide a few key financial takeaways from our third quarter 2021 results.
We had solid performance in the third quarter as both revenue and adjusted operating margin increased sequentially and year-on-year.
Revenue increased sequentially at four of our five reporting segments, and we saw a strong recovery in many of our end markets.
From a margin standpoint, adjusted operating margin improved both sequentially and year-on-year, reflecting operating leverage associated with revenue growth and the impact of our cost efficiency and productivity actions.
Our cash generation and leverage statistics remain strong.
We reported a free cash flow of $12.4 million and have generated 92% free cash flow to net income conversion to the first nine months of fiscal 2021.
Also, our net debt to EBITDA, interest coverage ratio and available liquidity all improved sequentially.
We are entering our fiscal fourth quarter with positive demand trends, active pipeline of productivity and efficiency actions and an expectation for continued solid cash generation.
We expect our fiscal fourth quarter 2021 results will be stronger both sequentially and year-on-year.
On a consolidated basis, total revenue increased 10.8% year-on-year from $155.5 to $172.2 million.
Revenue increase mostly reflected strong organic growth at our Electronics and Scientific segments, contribution from our recent Renco acquisition and favorable FX, partially offset by the economic impact of COVID-19.
Renco contributed approximately 4.1%, and FX contributed 2.8% increase to the revenue growth.
As we expected, the COVID-19 economic impact was most evident in the commercial aviation and food service end markets, primarily impacting our Engineering Technologies and Specialty segments.
However, we are seeing signs of sequential recovery in both of these end markets as we enter the fourth quarter of fiscal 2021.
On a year-on-year basis, our adjusted operating margin increased 90 basis points to 12.2%, reflecting operating leverage associated with revenue growth, profit contribution from Renco and readout of our productivity actions, partially offset by increased raw material costs.
Interest expense decreased approximately 28% or $0.5 million year-on-year, primarily due to lower level of borrowings and a decrease in overall interest rate as a result of our previously implemented variable to fixed rate swaps.
In addition, our tax rate was 24.9% in the third quarter of 2021.
For fiscal 2021, we continue to expect approximately 22% tax rate with a rate in the low 20% range for the fourth quarter.
Adjusted earnings per share was $1.19 in the third quarter of 2021 compared to $0.96 a year ago.
We generated free cash flow of $12.4 million in the fiscal third quarter of '21 compared to free cash flow of $7.3 million a year ago, supported by improvements in our working capital metrics.
For the first nine months of fiscal 2021, we have generated 92% free cash flow to net income conversion, inclusive of approximately $8 million in pension payments, with $3 million of that amount paid in the fiscal third quarter of '21.
Standex had net debt of $82.1 million at the end of March compared to $90.9 million at the end of December, reflecting free cash flow of approximately $12.4 million, an additional $11.7 million in proceeds from the Enginetics divestiture.
This was partially offset by $8.6 million of stock repurchases, along with dividends and changes in foreign exchange.
Net debt for the third quarter of 2021 consisted primarily of long-term debt of $200 million and cash and equivalents of $180 million with approximately $82 million held by foreign subs.
Our key liquidity metrics reinforce our significant financial flexibility.
Standex's net debt to adjusted EBITDA leverage was approximately 0.8 at the end of the third quarter with a net debt to total capital ratio of 14.5%.
We had approximately $209 million of available liquidity at the end of the third quarter and continued to repatriate cash with approximately $6 million repatriated during the quarter.
To date, we have repatriated approximately $31 million and remain on plan to repatriate at least $35 million in fiscal 2021.
From a capital allocation perspective, we repurchased approximately 94,000 shares for $8.6 million.
There is approximately $27 million remaining on our current repurchase authorization.
We also declared our 227th consecutive quarterly cash dividend on April 28 of $0.24 per share.
Finally, we have reduced our fiscal 2021 capital expenditures range to between $22 million to $25 million from between approximately $25 million to $28 million.
We expect a slight to moderate revenue increase in the fiscal fourth quarter 2021 as compared to fiscal third quarter of 2021.
Underpinning this outlook is expected sequential revenue increases at Electronics, Engraving and Specialty Solutions, partially offset by the divestiture of Enginetics, which contributed approximately $4 million in revenue in the third quarter.
We expect a significant sequential operating margin increase in the fourth quarter as we leverage demand growth, particularly at Electronics, Engraving and Engineering Technologies as well as the productivity and efficiency actions that we have undertaken companywide.
Both from an operational and financial perspective, we have an active pipeline of initiatives to further strengthen our performance and drive cash generation as we approach fiscal 2022.
Our balance sheet position remains strong, and our liquidity metrics are strengthening.
We are well positioned to pursue an active pipeline of exciting organic growth opportunities, such as electric vehicles, renewable energy, smart grid and space commercialization as well as highly complementary acquisitions like Renco.
We remain focused on further growing our high-quality businesses with attractive growth and margin profiles.
As you saw in the examples shared today, we leverage our strong technical and applications expertise to provide customers a compelling value proposition.
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qtrly diluted earnings per share - adjusted $1.19.
qtrly net sales $172.2 million versus $155.5 million.
expect sequentially stronger fiscal q4 2021 financial performance.
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These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may differ materially.
Factors that could cause results to differ include factors described in our third quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K and other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
I'm pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities.
We continue to drive underwriting excellence across our portfolio.
We're executing on AIG 200 to instill operational excellence in everything we do.
We are continuing to work on the separation of life and retirement from AIG.
And we're demonstrating an ongoing commitment to thoughtful capital management.
I will start my remarks with an overview of our consolidated financial results for the third quarter.
I will then review our results for general insurance, where we continue to demonstrate market leadership in solving risk issues for clients while delivering improved underwriting profitability and more consistent results.
I'll also comment on certain market dynamics, particularly in the property market, as well as recent CAT activity and related reinsurance considerations as we approach year-end.
Next, I'll review results from our life and retirement business, which we continue to prepare to be a stand-alone company.
I will also provide an update on the considerable progress we're making on the operational separation of life and retirement from AIG and our strong execution of AIG 200.
I will then review capital management, where our near-term priorities remain unchanged from those I have outlined in the past: debt reduction, return of capital to shareholders, investment in our business through organic growth and operational improvements.
Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term.
These appointments were possible due to the strong bench of internal talent and significantly augment the leadership team across our company.
Starting with our consolidated results.
As I said, AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021.
Against the backdrop of a very active CAT season and the persistent and ongoing global pandemic, our global team of colleagues continue to perform at an incredibly high level, delivering value to our clients, policyholders and distribution partners.
Adjusted after-tax income in the third quarter was $0.97 per diluted share compared to $0.81 in the prior-year quarter.
This result was driven by significant improvement in profitability in general insurance, very good results in life and retirement, continued expense discipline and savings from AIG 200 and executing on our capital management strategy.
In general insurance, global commercial drove strong top line growth.
And we were especially pleased with our adjusted accident year combined ratio, which improved 280 basis points year over year to 90.5%.
These excellent results in general insurance validate the strategy we've been executing on to vastly improve the quality of our portfolio and build a top-performing culture of disciplined underwriting.
One data point that I believe demonstrates the incredible progress we have made is our accident year combined ratio for the first nine months of 2021, which was 97.7%.
This represents a 770-basis-point improvement year over year, with 600 of that improvement coming from the loss ratio and 170 from the expense ratio.
In life and retirement, we again had solid results primarily driven by improved investment performance and increased call and tender income.
This business delivered a return on adjusted segment common equity of 12.2% for the third quarter and 14.3% for the first nine months of the year.
And we recently achieved an important milestone in the separation process by closing the sale of a 9.9% equity stake in life and retirement to Blackstone for $2.2 billion in cash.
We continue to prepare the business for an IPO in 2022 and we'll begin moving certain assets under management to Blackstone.
We ended the third quarter with $5.3 billion in parent liquidity after redeeming $1.5 billion in debt outstanding and completing $1.1 billion in share repurchases.
Year-to-date, we have reduced financial debt outstanding by $3.4 billion and have returned $2.5 billion to shareholders through share repurchases and dividends.
We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year-end to complete the $2 billion of stock repurchase we announced on our last call.
Through these actions, we've made clear our continuing commitment to remain active and thoughtful about capital management.
Now, let me provide more detail on our business results in the third quarter.
I will start with general insurance, where, as I mentioned earlier, growth in net premiums written continued to be very strong and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio.
Adjusting for foreign exchange, net premiums written increased 10% year over year to $6.6 billion.
This growth was driven by global commercial, which increased 15%, with personal insurance flat for the quarter.
Growth in commercial was balanced between North America and International, with North America increasing 18% and International increasing 12%.
Growth in North America commercial was driven by excess casualty, which increased over 50%; Lexington Wholesale, which continued to show leadership in the E&S market and grew Property and Casualty by over 30%; financial lines, which increased over 20%; and Crop Risk Services, which grew more than 50% driven by increased commodity prices.
In international commercial, financial lines grew 25%, Talbot had over 15% growth and Liability had over 10% growth.
In addition, gross new business in global commercial grew 40% year over year to over $1 billion.
In North America, new business growth was more than 50% and in International, it was more than 25%.
North America new business was strongest in Lexington, financial lines and retail property.
International new business came mostly from financial lines and our specialty businesses.
We also had very strong retention in our in-force portfolio, with North America improving retention by 200 basis points and International improving retention by 700 basis points.
Strong momentum continued with overall global commercial rate increases of 12%.
In many cases, this is the third year where we have achieved double-digit rate increases in our portfolio.
North America commercial's overall 11% rate increases were balanced across the portfolio and led by excess casualty, which increased over 15%.
Financial lines, which also increased over 15% and Canada, where rates increased by 17%, representing the 10th consecutive quarter of double-digit rate increases.
International commercial rate increases were 13% driven by EMEA, excluding specialty, which increased by 22%.
U.K., excluding specialty, which increased 21%.
Financial lines, which increased 24% and Energy, which was up 14%, its 11th consecutive quarter of double-digit rate increases.
Turning to global personal insurance.
We had a solid quarter that reflected a modest rebound in net premiums written in travel and warranty, offset by results in the private client group due to reinsurance cessions related to Syndicate 2019 and non-renewals in peak zones.
Shifting to underwriting profitability.
As I noted earlier, general insurance's accident year combined ratio ex CAT was 90.5%.
The third quarter saw a 150-basis-point improvement in the accident year loss ratio ex CAT and a 130-basis-point improvement in the expense ratio, all of which came from the GOE ratio.
These results were driven by our improved portfolio mix, achieving rate in excess of loss cost trends, continued expense discipline and benefits from AIG 200.
Global commercial achieved an impressive accident year combined ratio ex CATs of 88.9%, an improvement of 290 basis points year over year and the second consecutive quarter with a sub-90% combined ratio result.
The accident year combined ratio ex CAT for North America commercial and international commercial were 90.5% and 86.8%, respectively, an improvement of 370 basis points and 210 basis points.
In global personal insurance, the accident year combined ratio ex CATs was 94.2%, an improvement of 220 basis points year over year driven by improvement in the expense ratio.
Given the significant progress we have made to improve our combined ratios and our view that the momentum we have will continue for the foreseeable future, we now expect to achieve a sub-90% accident year combined ratio ex CAT for full year 2022.
After three years of significant underwriting margin improvement, we believe that the sub-90% accident year combined ratio ex CAT is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years.
As I said earlier, the third quarter was very active, with current industry estimates ranging between $45 billion and $55 billion globally.
We reported approximately $625 million of net global CAT losses with approximately $530 million in commercial.
The largest impacts were from Hurricane Ida and flooding in Europe, where we saw net CAT losses of approximately $400 million and $190 million, respectively.
We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility, including strategic purchases for wind that we made in the second quarter.
Reinsurance recoveries in our International per occurrence, private client group per occurrence and other discrete reinsurance programs also reduced volatility in the third quarter.
We expect any fourth quarter CAT losses to be limited given that we are close to attaching on our North America aggregate cover and our aggregate cover for rest of the world, excluding Japan.
We have each and every loss deductibles of $75 million for North America wind, $50 million for North America earthquake and $25 million for all other North America perils and $20 million for international.
Our worldwide retention has approximately $175 million remaining before attaching in the aggregate, which would essentially be for Japan CAT.
Since 2012 and excluding COVID, there have been 10 CATs with losses exceeding $10 billion.
And nine of those 10 occurred in 2017 through the third quarter of this year.
Average CAT losses over the last five years have been $114 billion, up 30% from the 10-year average and up 40% from the 15-year average.
And through 2021, catastrophe losses exceed $100 billion and we're already at $90 billion through the third quarter.
This will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold.
I'll make three observations.
First, while CAT models tended to trend acceptable over the last 20 years, that has not been the case over the last five years.
Second, over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods.
If you add in wildfire, those numbers dramatically increase.
Third, industry losses compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect the significant increase in frequency in CATs.
To address these issues, at AIG, we've invested heavily in our CAT research team to develop our own view of risk in this new environment.
wind, storm surge, flood as well as numerous other perils in international.
We will continue to leverage new scientific studies, improvements in vendor model work and our own claims data to calibrate our views on risk over time to ensure we're appropriately pricing CAT risks.
Across our portfolio, our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs while aligning within our risk appetite, which takes into consideration terms and conditions, strategic deployment of limits and a recognition of increased frequency and severity.
The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding CATs.
Now, turning to life and retirement.
Earnings continue to be strong and in the third quarter were supported by stable equity markets, modestly improving interest rates relative to the second quarter and significant call and tender income.
Adjusted pre-tax income in the third quarter was approximately $875 million.
Individual retirement, excluding retail mutual funds, which we sold in the third quarter, maintained its upward trajectory with 27% growth in sales year over year.
Our largest retail product, Index Annuity, was up 50% compared to the prior-year quarter.
Group retirement collectively grew deposits 3% with new group acquisitions ahead of prior year but below a robust second quarter.
Kevin and his team continued to actively manage the impacts from a low interest rate and tighter credit spreads environment and their earlier provided range for expected annual spread compression has not changed as base investment spreads for the third quarter were within the annual 8 to 6 points guidance.
With respect to the operational separation of life and retirement, we continue to make considerable progress on a number of fronts.
Our goal is to deliver a clean separation with minimal business disruption and emphasis on speed execution, operational efficiency and thoughtful talent allocation.
We have many work streams in execution mode, including designing a target operating model that will position life and retirement to be a successful stand-alone public company, separating IT systems, data centers, software applications, real estate and material vendor contracts and determining where transition services will be required and minimizing their duration with clear exit plans.
We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter, subject to regulatory approvals and market conditions.
As I mentioned on our last call, due to the sale of our affordable housing portfolio and the execution of certain tax strategies, we are no longer constrained in terms of how much of life and retirement we can sell on an IPO.
Having said that, we currently expect to retain a greater than 50% interest immediately following the IPO and to continue to consolidate life and retirement's financial statements until such time as we fall below the 50% ownership threshold.
As we plan for the full separation of life and retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time.
With respect to AIG 200, we continue to advance this program and remain on track to deliver $1 billion in run rate savings across the company by the end of 2022 against a cost to achieve of $1.3 billion.
$660 million of run rate savings are already executed or contracted, with approximately $400 million recognized to date in our income statement.
As with the underwriting turnaround, which created a culture of underwriting excellence, AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG.
Before turning the call over to Mark, I'd like to take a moment to discuss the senior leadership changes we announced last week.
Having made significant progress during the first nine months of 2021 across our strategic priorities and in light of the momentum we have heading toward the end of the year, this was an ideal time to make these appointments.
I'll start with Mark, who will step into a newly created role, global Chief Actuary and Head of Portfolio Management for AIG on January 1.
As you all know, over the last three years, Mark has played a critical role in the repositioning of AIG.
He originally joined AIG in 2018 as our chief actuary.
And this new role will get him back into the core of our business, driving portfolio improvement, growth and prudent decision-making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program.
Shane Fitzsimons will take over for Mark as chief financial officer on January 1.
Shane joined AIG in 2019 and his strong leadership helped accelerate aspects of AIG 200 and instill discipline and rigor around our finance transformation, strategic planning, budgeting and forecasting processes.
He has a strong financial and accounting background having worked at GE for over 20 years in many senior finance roles, including as Head of FP&A and chief financial officer of GE's international operations.
Shane has already begun working with Mark on a transition plan and we've shifted his AIG 200 and shared services responsibility to other senior leaders.
We also announced that Elias Habayeb has been named chief financial officer of life and retirement.
Elias has been with AIG for over 15 years and was most recently our Deputy CFO and Principal Accounting Officer for AIG as well as the CFO for general insurance.
Elias has deep expertise about AIG.
And his transition to life and retirement will be seamless as he is well known to that management team, the investments team that is now part of life and retirement, our regulators, rating agencies and many other stakeholders.
Overall, I am very pleased with our team, our third quarter results and the tremendous progress we're making on many fronts across AIG.
I am extremely pleased with the strong adjusted earnings this quarter of $0.97 per share and our profitable general insurance calendar quarter combined ratio, which includes CATs, of 99.7%.
The year over year adjusted earnings per share improvement was driven by a 750-basis-point reduction in the general insurance calendar quarter combined ratio, strong growth in net premiums written and earned and a related 280-basis-point decrease in the underlying accident year combined ratio ex CAT.
life and retirement also produced strong APTI of $877 million, along with a healthy adjusted ROE of 12.2%.
The quarter's strong operating earnings and consistent investment performance helped increase adjusted book value per share by 3% sequentially and nearly 9% compared to one year ago.
The strength of our balance sheet and strong liquidity position were highlights in the period as we made continued progress on our leverage goals with a GAAP debt leverage reduction of 90 basis points sequentially and 350 basis points from one year ago today to 26.1%, generated through retained earnings and liability management actions.
Shifting to general insurance.
Due to our achieved profitable growth to date, together with demonstrable volatility reduction and smart cycle management, makes us even more confident in achieving our stated goal of a sub-90% accident year combined ratio ex CAT for full year 2022 rather than just exiting 2022.
Shifting now to current conditions.
The markets in which we operate persist in strength and show resiliency.
AIG's global platform continues to see rate strengthening internationally, which adds to our overall uplift unlike more U.S.-centric competitors.
As you recall, international commercial rate increases lagged those in North America initially.
But beginning in 2021, as noted by Peter in his remarks, International is now producing rate increases that surpass those strong rates still being achieved in North America and in some areas, meaningfully so.
These rate increases continue to outstrip loss cost trends on a global basis across a broadband of assumptions and are additive toward additional margin expansion.
In fact, for a more extensive view, within North America over the three year period, 2019 through 2021, product lines that achieved cumulative rate increases near or above 100% are found within excess casualty, both admitted and non-admitted.
Property lines, both admitted and non-admitted and financial lines.
We believe these levels of tailwind will continue driving earned margin expansion into the foreseeable future.
In the current inflationary environment, it's important to remember that products with inflation-sensitive exposure bases, such as sales, receipts and payroll, act as an inflation mitigant and furthermore are subject to additional audit premiums as the economy recovers.
Last quarter, we provided commentary about U.S. portfolio loss cost trends of 4% to 5% and in some aspects were viewed as being near term.
We believe that this range still holds but now gravitates toward the upper end given another quarter of data.
And in fact, our U.S. loss cost trends range from approximately three and a half percent to 10%, depending on the line of business.
From a pricing perspective, we feel that we are integrating these near-term inflationary impact into our rating and portfolio tools.
And we are not lowering any line of business loss cost trends since lighter claims reporting may be misconstrued as a false positive due to COVID-19 societal impacts.
It's also worth noting that all of our North America commercial Lines loss cost trends, with the exception of workers' compensation, are materially lower than the corresponding rate increases we are seeing.
This discussion around compound rate increases and loss cost trends collectively give rise to the related topic of current year loss ratio picks or indications and the result in bookings.
The strong market that we now enjoy, in conjunction with the significant underwriting transformation at AIG, has driven other aspects of the portfolio that affect loss ratios.
In many lines and classes of business, the degree that cumulative rate changes have outpaced cumulative loss cost trend is substantial.
And these lead to meaningfully reduced loss ratio indications between 2018 and the 2021 years.
Unfortunately, this is where most discussions usually cease with external stakeholders.
However, in reality, that is not the end of the discussion but merely the beginning.
Some other aspects that can have material favorable implications toward the profitability of underlying businesses are, one, terms and conditions, which can rival price in the impact.
Two, a much more balanced submission flow across the insured risk quality spectrum, thereby improving rate adequacy and mitigating adverse selection.
Three, strategic capacity deployment across various layers of an insurance tower, which can produce preferred positioning and ongoing retention with the customer.
And fourth, reinsurance that tempers volatility and mitigates net losses.
Accordingly, even if modest loss ratio beneficial impacts are assigned to each of these nuances, they will additionally contribute to further driving down the 2021 indicated loss ratio beyond that signaled by rate versus loss trend alone.
And these are real and these are happening.
So why are product lines booked at this implied level of profitability by any insurer?
Well, there is at least four reasons.
First, insurers assume the heterogeneous risk of others and each year is composed of different exposures, rendering so-called on-level projections to be imperfect.
Second, most policies are written on an occurrence basis, which means the policy language can be challenged for years, if not decades, potentially including novel series of liability.
Third, many lines are extremely volatile and even if every insured is underwritten perfectly -- even if every insured is underwritten perfectly.
And fourth, booking an overly optimistic initial loss ratio merely increases the chance of future unfavorable development.
Therefore, these types of issues require prudence in the establishment of initial loss ratio picks for most commercial lines of business.
Shifting now to our third quarter reserve review.
Approximately $42 billion of reserves were reviewed this quarter, bringing the year-to-date total to approximately 90% of carried pre-ADC reserves.
I'd like to spend a little time taking you through the results of our quarterly reserve analysis, which resulted in minimal net movement, confirming the strength of our overall reserve position.
On a pre-ADC basis, the prior-year development was $153 million favorable.
On a post-ADC basis, it was $3 million favorable.
And when reflecting the $47 million ADC amortization on the deferred gain, it was $50 million favorable in total.
This means that our overall reserves continue to be adequate, with favorable and unfavorable development balanced across lines of business, resulting in an improved yet neutral alignment of reserves.
Now, before looking at the quarter on a segment basis, I'd like to strip away some noise that's in the quarter so we don't get overly lost in the details.
One should think of this quarter's reserve analysis as performing all of the scheduled product reviews and then having to overlay two seemingly unrelated impacts caused by the receipt of a large subrogation recovery associated with the 2017 and 2018 California wildfires.
The first of these two impacts is the direct reduction from North America personal insurance reserves of $326 million, resulting from the subrogation recoveries.
As a result, we also had to reverse a previously recorded 2018 accident year reinsurance recovery in North America commercial Insurance of $206 million since the attachment point was no longer penetrated once the subrogation recoveries were received.
These two impacts from the subrogation recovery resulted in a net $120 million of favorable development.
So excluding their impact restates the total general insurance PYD as being $70 million unfavorable in total rather than the $50 million of favorable development discussed earlier.
This is a better framework to discuss the true underlying reserve movements this quarter.
This $70 million of global unfavorable stems from $85 million unfavorable in global CAT losses together with $50 million favorable in global non-CAT or attritional losses.
The $85 million unfavorable in CAT is driven by marginal adjustments involving multiple prior-year events from 2019 and 2020.
The $15 million non-CAT favorable stems from the net of $255 million unfavorable from global commercial and $270 million of favorable development, predominantly from short-tail personal lines businesses within accident year 2020, mostly in our International book.
Consistent with our overall reserving philosophy, we were cautious toward reacting to this $270 million favorable indication until we allow the accident year to season.
North America commercial had unfavorable development of $112 million, which was driven by financial lines' strengthening of approximately $400 million with favorable development and other lines led by workers' compensation with approximately $200 million, emanating mostly from accident years 2015 and prior and approximately $100 million across various other units.
North America financial lines were negatively impacted by primary public D&O, largely in the more complex national accounts arena and within private not-for-profit D&O unit, in addition to some excess coverage mostly in the public D&O space, with 90% emanating from accident years 2016 to 2018.
International commercial had unfavorable development of $143 million, which was comprised of financial lines' strengthening in D&O and professional indemnity of approximately $300 million led by the U.K. and Europe, but the accident year impacts are more spread out.
Favorable development was led by our specialty businesses at roughly $110 million with an additional favorable of approximately $50 million stemming from various lines and regions.
Now, as Peter noted, the changes we've made to our underwriting culture and risk appetite over the last few years, coupled with strong market conditions, are now showing through in our financial results.
U.S. financial lines, in particular, through careful underwriting and risk selection has meaningfully reduced our exposure to securities class actions or SCA lawsuits over the last few years.
Evidence of this underwriting change is best seen through the proportion of SCAs for which the U.S. operation has provided coverage.
In 2017, AIG provided D&O coverage to 67 insurers involved in SCAs, which represents 42% of all U.S. federal security class actions in that year.
Whereas in 2020, that shrunk to just 18% and through nine months of 2021 is only 15 insurers or 14%.
This is significant because roughly 60% to 70% of public D&O loss dollars historically emanate from SCAs.
The North America private not-for-profit D&O book has also been significantly transformed.
The policy retention rate here between 2018 and 2021, which is a key strategic target, is just 15%.
And yet it should also be noted that the corresponding cumulative rate increase over the same period is nearly 130%.
This purposeful change in risk selection criteria away from billion-dollar revenue large private companies and nonprofit universities and hospitals to instead a more balanced middle market book will also drive profitability substantially.
International financial lines has implemented similar underwriting actions with comparable three year cumulative rate increases, along with a singular underwriting authority around the world as respect U.S.-listed D&O exposure through close collaboration with the U.S. Chief Underwriting Office.
In summary, our reserving philosophy remains consistent in that we will continue to be prudent and conservative.
This is evidenced by our slower recognition of attritional improvements in short-tail lines from accident year 2020 and from the sound decision to strengthen Financial Line reserves, even though there are some interpretive challenges stemming from a difficult claims environment, changes within our internal claims operations over the last couple of years and potential COVID-19 impacts on claim reporting patterns.
All of these underwriting actions we've taken over the last few years make us even more confident in our total reserve position across both prior and current accident years.
Moving on to life and retirement.
The year-to-date ROE has been a strong 14.3% compared to 12.8% in the first nine months of last year.
APTI during the third quarter saw higher net investment income and higher fee income, offset by the unfavorable impact from the annual actuarial assumption update, which is $166 million pre-tax, negatively affected the ROE by approximately 250 basis points on an annual basis and earnings per share by $0.15 per share.
The main source of the impact was in the Individual retirement division associated with fixed annuity spread compression.
life insurance reflected a slightly elevated COVID-19-related mortality provision in the quarter.
But our exposure sensitivity of $65 million to $75 million per 100,000 population deaths proved accurate based on the reported third quarter COVID-related deaths in the United States.
Mortality exclusive of COVID-19 was also slightly elevated in the period.
Within Individual retirement, excluding the Retail Mutual Fund business, net flows were a positive $250 million this quarter compared to net outflows of $110 million in the prior-year quarter largely due to the recovery from the broad industrywide sales disruption resulting from COVID-19, which we view as a material rebound indicator.
Prior sensitivities in respect to yield and equity market movements affecting APTI continue to hold true.
And new business margins generally remain within our targets at current new money returns due to active product management and disciplined pricing approach.
Moving to other operations.
The adjusted pre-tax loss before consolidations and eliminations was $370 million, $2 million higher than the prior quarter of 2020, driven by higher corporate GOE primarily from increases in performance-based employee compensation, partially offset by higher investment income and lower corporate interest expense resulting from year-to-date debt redemption activity.
Overall net investment income on an APTI basis was $3.3 billion, an increase of $78 million compared to the prior-year quarter, reflecting mostly higher private equity gains.
By business, life and retirement benefited most due to asset growth, higher call and tender income and another strong period of private equity returns.
general insurance's NII declined approximately 6% year over year due to continued yield compression and underperformance in the hedge fund position.
Also, general insurance has a much higher percentage allocation to private equity and hedge funds, which is likely to change moving forward.
As respect share count, our average total diluted shares outstanding in the quarter were 864 million and we repurchased approximately 20 million shares.
The end-of-period outstanding shares for book value per share purposes was approximately 836 million and anticipated to be approximately 820 million at year-end 2021 depending upon share price performance, given Peter's comments on additional share repurchases.
Lastly, our primary operating subsidiaries remain profitable and well capitalized, with general insurance's U.S. pool fleet risk-based capital ratio for the third quarter estimated to be between 450% and 460%.
And the life and retirement U.S. fleet is estimated to be between 440% and 450%, both above our target ranges.
Operator, we'll take our first question.
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compname reports qtrly adjusted after-tax earnings per share $0.97.
qtrly total general insurance net premiums written increased 11% to $6.6 billion from prior year quarter.
qtrly total general insurance underwriting income was $20 million compared to an underwriting loss of $423 million in prior year quarter.
qtrly earnings per share $1.92; qtrly adjusted after-tax earnings per share $0.97.
as of sept 30, 2021, book value per common share was $77.03, an increase of 1% fromdecember 31, 2020.
repurchased $1.1 billion of aig common stock and redeemed $1.5 billion of debt in quarter.
as of sept 30, 2021, adjusted book value per common share was $61.80, an increase of 8%from december 31, 2020.
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I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section.
The company has explained some of these risks and uncertainties in its SEC filings, including the Risk Factors section of its annual report on Form 10-K and quarterly report on Form 10-Q.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer; and Andy Long, our Executive Vice President and Chief Financial Officer.
I would like to start with a high-level recap of the strategic priorities that the Owens & Minor leadership team and I outlined during our Investor Day meeting in late May.
I spoke about our transformation based on our business blueprint that focused on; one, our culture, a culture that is based on hard work, stellar execution and an unrelenting focus on our customer, while being anchored by our mission and our ideal values.
Next our discipline, which is based upon the Owens & Minor business system that is laser focused on continuous improvement.
And third, our investments, our investments that are implemented in a disciplined manner enabling us to achieve our strategic priorities.
These three elements are ingrained in our corporate DNA, have set the foundation of our business blueprint, and have enabled us to ignite long-term profitable growth.
As committed during the Investor Day meeting, I will provide periodic updates.
Today let me start with an update on some of our investments, which we spent time at our Investor Day detailing.
These investments remain on track and are designed to provide attractive returns for our stakeholders.
Let me remind you of a few; one, we continue to expand our own manufacturing capability for nitrile gloves in our existing facility in Thailand.
This will put us in an advantaged position allowing us to have greater control and improved cost structure.
Our new capacity is expected to go live in early 2022.
Two, we remain focused on leveraging our manufacturing strength and brand value through the expansion of our product portfolio.
During the second quarter, we doubled our wound care product line and we remain on track to expand our incontinence care portfolio later this year.
Furthermore, we continue to identify additional product category opportunities to expand our proprietary product offering in the future.
Three, we are also diversifying into new verticals to sell specialty higher-margin products into new end markets.
For instance, we expanded into cleanroom glove market space under the HALYARD PUREZERO brand.
In addition, we recently launched our Safeskin consumer brand of gloves.
Next, we continue to invest in technology-based offerings that provide our customers with actionable data through our service solutions.
And finally, we are focused on the balance between technology and touch in our distribution centers, with continued investment in automation, AI and human capital, all of which expand our leading ability to be flexible and scalable to provide best service for our changing customer demands.
These initiatives are just a few examples of how we are investing to generate long-term profitable growth, while providing significant benefits for our customers.
In addition to having the Owens & Minor business blueprint in place and the investments that I just discussed, I'm equally proud of our focus on corporate social responsibility.
We are committed to delivering on both our financial and our corporate social responsibility obligations.
So far this year, we have launched the Owens & Minor Foundation, which is committed to improving our communities in which we operate and live.
Two, we released our first sustainability report, detailing the advancement that Owens & Minor has made in ESG.
And three, we undertook a first step in reducing our carbon footprint, with our electric fleet pilot initiative.
Our ESG efforts, just like our business blueprint, are part of who we are and that good corporate citizenship is fundamental to our mission and values.
Let me now shift gears to our second quarter performance.
I am extremely pleased to report another strong quarter that continues to build upon the solid performance from 2020.
A year ago, we were in uncharted waters due to the pandemic, but our ability to be flexible and adjust to meet the critical needs of our customers and the nation help to establish momentum that is carried into the second quarter.
Additionally, we continue to find ways to keep driving efficiency and be more productive, as markets begin to return to pre-pandemic form.
Now let me update you on the segments and I will start with our Global Solutions segment.
Within this segment, the medical distribution business performed well and posted much improved results.
We continue to bring in net positive wins, as a result of our market-leading service, combined with the trust we gained during the pandemic.
In addition, we saw volumes associated with elective procedures return to pre-pandemic levels during the second quarter.
Related to our patient direct business, we continue to grow through new patient capture in this rapidly growing patient direct markets.
And finally, our ongoing investments in our Global Solutions segment are expected to provide continued growth in an attractive long-term outlook.
Moving on to the Global Products segment.
This segment produced significant top line growth, as sales of our surgical infection and prevention products, including PPE, remained strong.
The strong sales are a result of our increased output of previously added capacity to fulfill continued high usage, share gains made during the pandemic, stockpile fulfillment and increased elective procedures.
In addition, we saw favorable timing for cost pass-through on gloves adding to the top line growth.
In addition to the solid performance in our two reporting segments, our balance sheet remains strong, with net leverage at 1.8 times and total net debt of less than $1 billion.
This gives us the latitude to continue to make well thought-out investments to improve our operations and drive growth.
Moving from the second quarter and looking to the rest of 2021 and beyond.
We are excited about the long-term future.
We expect the rest of the year to be driven by S&IP utilization, elective procedures, opportunity pipeline and continued strength of our patient direct business.
In addition to this, we will continue to have a tenacious focus on operational excellence and continuous improvements.
As we have said, we believe that the usage for S&IP products, including PPE, will be defined by the new normal; the new normal in the healthcare industry.
We continue to believe that usage for many PPE categories will settle somewhere below the peak of the COVID-19 outbreak, but in excess of the pre-pandemic levels as a result of established healthcare protocols, stockpile requirements and our share gains obtained during the pandemic.
In addition, we expect the expansion of our PPE into new markets like clean room and consumer to provide incremental opportunity.
However, as the year progresses, we expect moderation in both pricing and demand for PPE.
But let's not forget another factor to consider.
That is the elimination of PPE emergency use authorization which will create opportunity for our Americas-based, manufactured medical-grade PPE.
Let me give you a few examples.
First, most recently the FDA revoked emergency use authorization for non-NIOSH-approved disposable respirators, which will prohibit the use of these devices in the healthcare setting.
Second, the CDC has recommended that healthcare facilities return to conventional practices, and no longer use crisis capacity strategies like bringing in non-medical grade supplies.
And third, the EUA for Decontamination and Bioburden Reduction System has been revoked.
All of these actions by the federal agencies bring to light the significance of authorized medical-grade PPE in the healthcare setting.
Our unique value chain of vertically integrated Americas-based manufacturing footprint and supply chain will remain a distinct advantage for us, as we continue to work closely with the government and industry to help address the current and future needs for PPE requirements.
Next, on elective procedures, by the end of the second quarter we saw elective procedures return to pre-pandemic levels.
And we expect this to continue through the second half of the year.
This expectation is consistent with our customers' outlook and assumes COVID rates don't get markedly worse across the country.
Moving on to our pipeline, our medical distribution continues to provide best-in-class service and is backed by our complete suite of products and services.
These together provide one of the industry-leading offering to best serve our customers.
We will continue to advance with a large pipeline of opportunity, while capturing net new wins.
Again, our medical distribution continues to provide market-leading operational performance and stability, that supports our customers' need for continuity supply and supply chain resiliency.
And lastly, our patient direct business, our patient direct business enjoys a leading national presence as the partner of choice for referral sources.
We are uniquely positioned to meet the needs of our customers in this fast-growing home health space.
We expect this business to continue to grow across our major product categories with an annuity-like recurring revenue model.
I'd like to conclude by underscoring the success we've achieved during the quarter.
Our strong second quarter gives us the confidence to affirm the range of our 2021 guidance for adjusted earnings per share and of $3.75 to $4.25 and adjusted EBITDA of $450 million to $500 million as well as affirm our previously issued 2022 guidance.
We continue to be excited about, what's ahead.
We have one of the strongest value chains in the healthcare solutions market while having the ability to be flexible and scale, along with the financial flexibility to invest as appropriate.
And finally, we have our great teammates that exemplify our high deal values everyday and live our humble mission to empower our customers to advance healthcare, as we continue to deliver on our commitments to our stakeholders.
Today I'll review our financial results for the second quarter and the key drivers for our quarterly performance.
And then, I'll discuss our expectations and assumptions for the balance of the year.
I'd like to start by saying that, we're delighted to report a record second quarter with solid growth in revenue, EBITDA and earnings per share.
We're maintaining our expectations for adjusted earnings per share in 2021 to be in a range of $3.75 to $4.25 and adjusted EBITDA in the range of $450 million to $500 million.
Also we are affirming our previously announced guidance for 2022.
I'll provide additional color on this later in my remarks.
Let's begin with the results for the second quarter.
Starting with the top line, revenue for the second quarter was $2.5 billion, compared to $1.8 billion for the prior year.
This represents 38% growth with strong performance in both of our segments.
Top line growth in the quarter was driven by ongoing recovery of elective procedures glove cost pass-through and higher levels of PPE.
Gross margin in the second quarter was 16.1%, an improvement of 117 basis points over prior year due to revenue mix from higher margin sales in the Global Products segment and patient direct business, timing of the pass-through of glove costs and improved operating efficiency.
These were partially offset by higher commodity prices in Global Products and transportation costs across the business.
Also compared to Q1, gross margin was lower by nearly 300 basis points due to margin compression in gloves as anticipated and discussed last quarter.
We also began to see commodity and transportation inflationary pressures in the beginning of the quarter and expect this to continue through Q3.
Distribution, selling and administrative expense of $294 million in the current quarter was $52 million higher compared to the second quarter of 2020.
The increase represents higher variable cost to support top-line growth, funding of ongoing investments across all business lines and higher incentive compensation, driven by our financial performance.
This performance coupled with the efficiency gains from enterprisewide continuous improvement led to adjusted operating income for the quarter of $116 million, which was $77 million higher or three times the same period last year.
Adjusted EBITDA for the second quarter was $128 million, which increased by $76 million or over two times year-over-year.
Interest expense of $12 million in the second quarter was down 47% or $10 million compared to last year, driven by lower debt levels and effective interest rates.
On a GAAP basis, income from continuing operations for the quarter was $66 million or $0.87 a share.
Adjusted net income for the second quarter was $80 million, which yielded an adjusted earnings per share for the quarter of $1.06, which was over five times our performance from Q2 of last year.
The year-over-year foreign currency impact in the quarter was unfavorable by $0.02.
In the second quarter, the average diluted shares outstanding were 14.7 million higher year-over-year as a result of our equity offering in the fourth quarter of prior year and the impact of restricted shares for compensation.
Now I'll review results by segment for the second quarter.
Global Solutions revenue of $1.98 billion was higher by $429 million or 28% year-over-year.
The segment experienced continued growth, driven by ongoing recovery in volumes associated with elective procedures of approximately $300 million along with higher sales of PPE as well as continued strong growth in our patient direct business.
During the quarter, elective procedures continued to move toward pre-pandemic levels, while we recognize that a number of COVID hotspots remain throughout the country.
Global Solutions operating income was $18.5 million, which was $29 million higher than prior year as a result of higher volumes coupled with productivity and efficiency gains in our medical distribution business.
In our Global Products segment, net revenue in the second quarter was $689 million, compared to $370 million last year, an increase of 86%, which was led by higher S&IP sales particularly PPE volume as we benefited from our previous investments to expand capacity and the previously discussed impact of passing through higher acquisition costs of approximately $200 million.
Operating income for the Global Products segment was $95 million, an increase of 84% versus $52 million in the second quarter last year.
This was driven by higher PPE sales, favorable timing of cost pass-through on gloves, productivity initiatives and improved fixed cost leverage.
These were partially offset by higher commodity prices and elevated transportation costs.
Next, let's review cash flow, the balance sheet and capital structure.
In the second quarter, our cash flow was negatively impacted by our investment in working capital to support top line growth, inventory build to ensure supply given numerous supplier issues, global transportation delays and continued unfavorable payment terms with glove manufacturers.
We expect working capital to improve throughout the second half of the year as global supply chain issues subside and as payment terms to glove manufacturers return to historical levels.
As a result, we continue to expect 2021 cash flow to be back half loaded.
Total net debt at the end of the second quarter was $964 million and total net leverage was 1.8 times trailing 12-months adjusted EBITDA.
I'd like to highlight that despite our working capital consumption, we maintained our leverage profile below two times adjusted EBITDA.
Still the improvements we've made to enhance our capital structure provide us with the operational flexibility and put us in a strong financial position to implement our growth strategy.
Our achievement in this regard was recently rewarded with another credit upgrade from S&P last month.
Finally, turning to the outlook.
Earlier today, we affirmed our guidance for 2021 and 2022.
The confirmation of our guidance range for 2021 is a result of our strong Q2 performance and improved visibility into the second half of the year.
Let me provide some context on the assumptions for our outlook.
Our recently installed PPE-related capacity has been fully deployed and our previously announced glove manufacturing capacity expansion is on track to begin contributing to our financial results in early Q1 of next year.
We now expect the full year top line impact of glove cost pass-through to be in the range of $675 million to $725 million.
Any sudden unforeseen declines in the market price of gloves could result in downside to our revenue and adjusted earnings per share projection.
In addition, we believe our patient direct business will continue to perform above market and demonstrate attractive patient capture and retention rates.
As I mentioned earlier, elective procedure-related volumes are at or very close to pre-pandemic levels in much of the country, and we expect the trend to continue in the second half of the year.
As experienced in Q2, we are now including a headwind from elevated commodity pricing and transportation costs and expect this to continue through Q3.
Guidance for adjusted earnings per share is based on 75.5 million shares outstanding.
The increase in our dilutive share count is related to the treatment of certain performance share grants and incremental restricted stock grants driven by our strong financial results.
Even with the 6% increase in shares and new inflationary headwinds, we are confirming our outlook for 2021, 2022 and targets for 2026.
In terms of the calendarization of our guidance, starting with revenue, we expect Q3 revenue to decline slightly from Q2 as the pass-through of glove cost begins to ease.
The 2021 quarterly earnings pattern is contrary to our typical seasonality with most of the year's profitability weighted toward the first half of the year.
Specifically, we continue to expect Q3 earnings to be softer than Q2 due to the timing of glove cost pass-through.
However, we expect Q4 to improve due to the seasonal impact of healthcare utilization across our businesses.
Also, remember that cash flow is expected to improve in the back half of the year, as working capital headwind soften as previously discussed.
Please note that these key modeling assumptions for full year 2021 have been summarized on supplemental slides filed with the SEC on Form 8-K earlier today and have been posted to the Investor Relations section of our website.
In closing, I'm delighted with another strong quarter and proud of the efforts of our teammates around the world.
As we further embed our business blueprint into our day-to-day activities, we'll be well positioned to deliver on our long-term objectives.
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sees fy adjusted earnings per share $3.75 to $4.25.
q2 gaap earnings per share $0.87.
qtrly adjusted earnings per share $1.06.
affirms previously announced 2021 and 2022 guidance.
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In particular, we expect that the continued impact of COVID-19 on our business remains uncertain at this time.
During today's call, we will discuss GAAP and non-GAAP financial measures.
As for the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our first and second quarter 2021 outlook, and Kevin will finish with a discussion of the business.
I hope everyone is doing well.
Our Q4 revenue was above our guidance, but we are still down on a year-over-year basis and that reflects the ongoing impact of the pandemic.
So let's go through the numbers.
Fourth quarter revenue was $271 million, compared to $247 million in Q3 and $299 million in Q4 of last year.
Our revenue guidance coming into the fourth quarter was a range of $225 million to $255 million.
So compared to guidance, revenues were better than what we projected as we had a true-up of about $25 million in the quarter related to Q3 shipments, which was about $15 million higher than the true-up that we had last quarter, and with most of that improvement coming from TVs and set-top boxes, and PCs.
Total company revenue in Q4 increased sequentially by $24 million compared to Q3, as we benefited from higher unit volumes in TVs, set-top boxes, DMAs and PCs, along with the higher true-up that I just discussed.
And all of this was partially offset by lower revenue from mobile due to timing under contracts, and I will discuss that in a second.
Now looking at Q4 on a year-over-year basis, total company revenue is down by $28 million from last year's Q4 and we can attribute that mainly to COVID-19, especially in products and services, which were down by about $20 million or nearly 60% below last year.
The composition of Q4 revenue was $257 million in licensing and $14 million in products and services.
So let's break down licensing revenue by end market, starting with broadcast.
Broadcast represented about 47% of total licensing in the fourth quarter.
Broadcast revenues increased by about 2% year-over-year, helped by the higher true-up related to the Q3 shipments and also driven by higher adoption in TVs and set-top boxes.
And then this was then offset partially by lower recoveries in the quarter.
On a sequential basis, broadcast was up by about 35% due to higher volume in TVs and set-top boxes along with higher recoveries and the higher true-up.
Mobile represented approximately 15% of total licensing in Q4.
Mobile was down by about 13% over last year due to lower recoveries, but partially offset by higher adoption of Dolby Technologies.
For the sequential comparison, I should point out that last quarter Q3, Mobile was about 33% licensing, which was higher than normal, and that was due to timing of revenue under customer contracts, so we came into Q4 expecting Mobile revenue to decline this quarter and return to a more normalized percentage of revenue, which is what it did.
So accordingly Mobile revenue was down sequentially by about 50%, and that was primarily due to timing of revenue under customer contracts.
Consumer electronics represented about 13% of total licensing in the fourth quarter.
On a year-over-year basis, CE licensing was down by about 8%, mainly due to lower recoveries.
On a sequential basis, CE was about 68% higher than Q3.
And as a reminder, Q3 was lower than usual and only 9% of licensing because of timing under contract.
And so, the sequential increase from Q3 to Q4 was mostly a return to a more normal level.
PC represented about 12% of total licensing in Q4.
PC was higher than last year by about 26%, helped by the higher true-up and also because of the increased adoption of Dolby Technologies.
And sequentially, PC was up by about 32% that's for similar reasons.
Other markets represented about 13% of total licensing in the fourth quarter and they were down by about 19% year-over-year due to significantly lower Dolby Cinema box office share and that's because of the COVID restrictions and lack of big titles, and also because of lower revenues from gaming due to console life cycles and/or recoveries in automotive.
On a sequential basis, other markets was up by about 32%, driven by higher revenue from gaming and from via admin fees and that's the patent pool that we administered.
Beyond licensing, our products and services revenue was $14.3 million in Q4, compared to $11.8 million in Q3 and $34 million in last year's Q4.
Our guidance had anticipated the large year-over-year decrease because most of this revenue comes from equipment that we sell to cinema exhibitors and these customers continue to be negatively affected by the pandemic.
And speaking of products and services revenue, going forward into Q1, we're winding down and exiting conferencing hardware sales, as we will now be fully focused on expanding the availability of the Dolby Voice experience through software solutions, such as interactivity APIs on our developer platform.
So later on, when I cover the outlook for FY '21, my comments on products and services revenue and gross margin will reflect the fact that we are exiting the conferencing hardware arena.
Now I'd like to discuss Q4 margins and operating expenses.
Total gross margin in the fourth quarter was 84.3% on a GAAP basis and 85.1% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $15.5 million in the fourth quarter and a large portion of that consisted of charges for excess and obsolete inventory associated with conferencing hardware and that relates back to what I just said a minute ago, about our plans in that space.
Going forward into Q1, we anticipate that products and services margin will still be negative, but more along the lines of around minus $3 million or minus $4 million.
I'll cover this again in the outlook section in a few minutes.
Products and services gross margin on a non-GAAP basis was minus $14.1 million in the fourth quarter, and my comments here are similar to what I just said for GAAP gross margins.
Operating expenses in the fourth quarter on a GAAP basis were slightly above the high-end of the range that we had guided, coming in at a $198.7 million, compared to $182.9 million in Q3.
And remember that Q3 was particularly low for us, because that was the first full quarter of reacting to COVID-19 and lots of our activities have been temporarily halted or pushed out.
Operating expenses in the fourth quarter on a non-GAAP basis were $176.5 million, which is within our range and that was compared to $159.2 million in the third quarter, and basically the same comments that I made in GAAP apply here as well.
Operating income in the fourth quarter was $30.1 million on a GAAP basis or 11.1% of revenue, compared to $51.2 million or 17.1% of revenue in Q4 of last year.
Operating income in the fourth quarter on a non-GAAP basis was $54.3 million or 20% of revenue, compared to $77.6 million or 26% of revenue in Q4 of last year.
Income tax in Q4 was 21.8% on both the GAAP and non-GAAP basis.
The effective tax rate was slightly higher than guidance, and that was due mainly to the mix of our income between different tax jurisdictions.
Net income on a GAAP basis in the fourth quarter was $26.8 million or $0.26 per diluted share, compared to $43.9 million or $0.43 per diluted share in last year's Q4.
Net income on a non-GAAP basis in the fourth quarter was $45.8 million or $0.45 per diluted share, compared to $67.6 million or $0.66 per diluted share in Q4 of last year.
For both GAAP and non-GAAP, net income in Q4 was above the guidance that we gave at the beginning of the quarter, and that was primarily due to revenue being above the high-end of our range, offset partially by the lower product and services gross margin that I mentioned a minute ago.
During the fourth quarter, we generated about $113 million in cash from operations, which compares to about $130 million generated in last year's fourth quarter.
We ended the fourth quarter with nearly $1.2 billion in cash and investments.
During Q4, we bought back about 640,000 shares of our common stock and ended the quarter with about $187 million of stock repurchase authorization still available to us.
We also announced today a cash dividend of $0.22 per share.
The dividend will be payable on December 4, 2020 to shareholders of record on November 24, 2020.
Before I go into the outlook for FY '21, let's summarize the results for the full-year FY '20.
Total revenue in FY '20 was $1,162 million that compares to $1,241 million in the prior year with a year-over-year decline due to the impact from COVID-19.
Within total revenue, licensing was $1,079 million, which was down about $28 million from last year due to lower consumer activity because of the pandemic, while products and services revenue was $83 million for the year, down about $51 million from last year due mainly to lower demand from the cinema industry because of restrictions brought on also by the pandemic.
Operating income for the full-year FY '20 was $219 million on a GAAP basis or about 19% of revenue and operating income on a non-GAAP basis was $318 million or about 27% of revenue.
Net income on a GAAP basis was $231 million or $2.25 per diluted share and net income on a non-GAAP basis was $305 million or $2.97 per diluted share.
And cash flow from operations for the full-year was $344 million and that's slightly up from the previous year, where cash flow from operations was $328 million.
So now let's discuss the full-year outlook.
First, let me say that we'll be facing some interesting dynamics in FY '21 with our year-over-year comparisons.
Because we have a September year-end, the first two quarters of FY '20 were mostly unaffected by COVID-19, while the last two quarters of FY '20 were fully affected by COVID.
And as we head into FY '21, COVID continues to persist and visibility is very limited, even more so the further out you tried to look.
So today, I'm going to provide an outlook scenario for the first half of the year, including our perspective on what Q1 and Q2 revenue could be and for the second half of the year because visibility is limited, we are not providing guidance at this time, but I will provide some color on some of the factors that could affect the second half.
So let's discuss the first half.
In the first half of FY '21, we currently anticipate year-over-year growth in licensing revenue, and that could be offset by year-over-year decline in products and services revenue.
The anticipated growth that we could get in licensing would come mainly from higher adoption of our technologies as industry analysts currently are projecting market TAM to be flat to slightly down in the first half.
And also, we anticipate Dolby Cinema licensing revenue to be significantly down year-over-year in our first half because of that COVID versus pre-COVID factor of comparison in the cinema industry.
And then for that same reason, we are anticipating cinema product sales to be down year-over-year.
Now within the first half of the year, based on what we currently see, here is the scenario we are assuming for Q1 and then Q2.
In the first quarter of FY '21, we anticipate that total revenue could range from $330 million to $360 million.
Within that, we estimate that licensing could range from $320 million to $345 million, while products and services is projected to range from $10 million to $15 million.
At the midpoint of the range, we anticipate growth in lights seem to be driven by a higher adoption of our technologies across a range of devices.
In addition, the Q1 licensing outlook is benefiting from timing of revenue under customer contracts, as well as potentially higher recoveries.
Now we are not anticipating as much revenue from these items, namely the timing of the recoveries in our second quarter.
And by the way, last year, it was Q2 not Q1 that benefited more from timing of recoveries.
So with that in mind, and based on what we currently see and having just gone over the Q1 revenue outlook, we currently see our Q2 revenue scenario looking like a range of about $270 million to $300 million.
And doing the math for you on the first half of FY '21 by combining the Q1 and Q2 figures that I just went over, our current outlook scenario assumes a first half FY '21 revenue range of $600 million to $660 million.
We will plan to update you on how this picture has evolved after Q1 is completed.
As for the second half, like I said, we are not giving guidance for the second half, but here are some points to consider.
On a sequential basis in our licensing revenue, we typically see second half revenue is lower than the first half because of lower seasonality in consumer device shipments and also because of the timing of revenue on the customer contract.
On a year-over-year basis, while we do expect to see continuing benefit from increased adoption of Dolby Technologies, it's worth noting that with respect to market TAM, current industry analysts reports are projecting markets like PC and TV TAM to be down on a year-over-year basis in the second half.
And that's because of an uptick in unit shipments that happened in the latter part of FY '20 that might not repeat in that same timeframe next year.
So, of course, it's much too early to know if that will be true, but that's what the current reports currently suggest.
And as for Dolby Cinema and cinema products, the year-over-year comparison should be favorable in the second half, but we don't know to what extent or at what pace.
So those are a few things to think about for the second half and we thought it was worth providing you that color.
So let me now finish up by providing the outlook on the rest of the P&L for Q1, already highlighted the revenue range scenario of $330 million to $360 million.
So Q1 gross margin on a GAAP basis is estimated to range from 90% to 91%, and the non-GAAP gross margin is estimated to range from 91% to 92%.
Within that, products and services gross margin is estimated to range from minus $3 million to minus $4 million on a GAAP basis, and from minus $2 billion to minus $3 million on a non-GAAP basis.
As I mentioned earlier, we are winding down and exiting the conferencing hardware space, and the demand for cinema products continues to be weak because of the industry conditions.
And as a result, we are reducing certain resources in manufacturing, as well as other areas that were connected with conferencing hardware and cinema products.
We anticipate that it will take several months to complete, various activities to smoothly transition our conferencing hardware partners and then customers.
With respect to the impact on our products and services gross margin, we estimate that we could start to see savings in our cost of goods sold by around the end of fiscal Q2, and that's because of these transitioning activities that we have to undertake.
Operating expenses in Q1 on a GAAP basis are estimated to range from $207 million to $219 million.
Included in this range is approximately $7 million to $9 million of restructuring charges for severances and related benefits that are being provided to employees that are impacted by the actions that I just mentioned a minute ago.
Operating expenses in Q1 on a non-GAAP basis are estimated to range from $175 million to $185 million, and this range excludes the estimated restructuring charge.
Other income is projected to range from $1 million to $2 million for the quarter, and our effective tax rate for Q1 is projected to range from 20% to 21% on both the GAAP and non-GAAP basis.
So based on a combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.70 to $0.85 on a GAAP basis and from $0.97 to $1.12 on a non-GAAP basis.
So that's it for me.
Over to you, Kevin.
I want to focus my comments on three main areas today.
I will start by highlighting our continued progress, increasing the number of Dolby Vision and Dolby Atmos experiences around the world.
I'll then spend a few minutes on the changes we have made in our cinema and conferencing hardware business to adjust to the evolving conditions in certain markets.
And then I will share some thoughts on the exciting opportunity for Dolby to address a new world of content through our developer platform and related initiatives.
In a year where we all face challenges and disruptions, we have continued to bring more Dolby experiences to more people around the world, and they are the driving force behind the Dolby magic.
So let me start with the Dolby Vision and Dolby Atmos ecosystem that continues to grow.
With the launch of the iPhone 12, consumers are now able to see the benefits of Dolby Vision when they record video and share it.
We are excited about the opportunity to support this ecosystem so the Dolby Vision content can be enjoyed on social media, video sharing sites and more.
This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology and creating new opportunities for Dolby.
During 2020, we continued to grow the presence of Dolby Vision and Dolby Atmos across the many ways that people enjoy movie and TV content.
At the beginning of the year we saw the launches of Disney+ and Apple TV+ with the combined Dolby experience.
Google Play, Showtime and PBS all began streaming in Dolby Vision this year.
In this quarter, Watcher a streaming service in Korea began supporting content in Dolby Vision and Dolby Atmos.
The momentum of Dolby Vision and Dolby Atmos within movie and TV content continues to drive an expanding lineup of devices within the home.
The adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew significantly year-over-year.
Our partners like TCL, Sony, Panasonic and Skyworth added support for the Dolby Vision and Dolby Atmos experience deeper within their TV lineups and have also broadened the global reach of their offerings, including this year into India.
Xiaomi launched their first TV that supports Dolby Vision and Dolby Atmos just this year.
And we continue to bring new innovations to market, like Dolby Vision IQ, which optimizes the picture on your TV by adjusting to the surrounding line and to the type of content being viewed.
Our continued innovation brings new value to our partners and consumers and adds to the reasons for deeper adoption.
Dolby Vision and Dolby Atmos continue to grow across a broader range of devices.
Apple recently began enabling support for Dolby Atmos to the HomePod.
Earlier this year, Sonos launched its first Dolby Atmos product with the Sonos Arc and Roku began supporting Dolby Vision and Dolby Atmos with the Roku Ultra.
We are also beginning to see increasing adoption of the combined experience within set-top boxes, including the latest offerings from Free in France and Deutsche Telekom in Germany.
Within Mobile and PC, Apple highlights the adoption of the Dolby Vision and Dolby Atmos playback with support throughout their iPad, MacBook and iPhone lineups.
We also have strong initial adoption of Dolby Atmos within the latest flagship mobile phones from Samsung, OPPO and Sony.
Lenovo launched several new PCs that support the combined experience and Dell began shipping Dolby Vision enabled PCs earlier this year.
We see significant growth opportunities within both Mobile and PC as we gain new wins, drive deeper adoption within our partners' device lineups and expand the types of content that can be enjoyed with Dolby Vision and Dolby Atmos.
In the same way, the Dolby Vision and Dolby Atmos enabled great movie and TV content, we see a significant opportunity to create immersive experiences within music and gaming.
These are important forms of entertainment that expand our current value proposition and grow the number of devices that can benefit from the Dolby experience.
Let me start with music.
A year ago, we launched Dolby Atmos for music with Amazon Music HD and the Amazon Echo Studio.
The music in Dolby experience has been met with deep and passionate engagement from artists.
For example, those that we highlighted in the stories from Lizzo, Post Malone, Coldplay and J Balvin.
Tidal became the second streaming service to support Dolby Atmos Music, enabling millions of Dolby Atmos devices within mobile and in the home.
Our increasing presence in music will create opportunities to grow adoption in mobile, automotive, smart speakers and headphones.
In gaming, Microsoft announced their new Xbox to be the first gaming console to support the combined Dolby Vision and Dolby Atmos experience for gaming.
We are also seeing a growing number of gaming PCs adopt the Dolby experience, including new products from Lenovo and ASUS this year.
As we grow the presence of Dolby Vision and Dolby Atmos within gaming content, we add to the value proposition for broader adoption within PCs, gaming consoles and mobile phones.
Our momentum for Dolby Vision and Dolby Atmos across content, services and devices is strong and at the same time, we still see much of the opportunity ahead of us.
We continue to grow our presence throughout devices within the home, and we made it even earlier stages of adoption within mobile and PC.
We are focused on accelerating that adoption by increasing the amount of content and by broadening our presence in categories like music and gaming.
Let me shift now to talk about the areas where we have made some changes to adjust to the evolving conditions in certain markets.
The cinema environment remains challenging as the time of recovery is uncertain and the landscape is evolving.
As Lewis discussed, we have made some adjustments to operations and manufacturing here to reflect a lower outlook for demand.
At the same time, we remain confident that studios will continue to create great content that audiences will continue to want to experience these movies in the cinema and that they will take out the best experiences.
Let me spend a few -- just a few moments on Dolby Voice.
We entered the communication space with the goal of enabling higher quality and more natural meeting experiences.
Our value proposition of enabling higher quality interactions remains as strong and relevant as ever and we see significant opportunities to broaden the reach of our technologies.
As we move forward, we are winding down the sales of our conferencing hardware to focus all of our efforts on the larger opportunity to enable the Dolby Voice experience through our enterprise partners and our developer platform.
And that brings me to the opportunity to bring the Dolby experience to the vast and growing amount of content that are a part of our everyday lives, from user-generated content to social media and casual entertainment to everyday virtual interactions.
Today, developers can access our technology through Dolby.io to improve media and interactivity within their applications.
We have seen growing engagement from developers across a variety of industries and use cases from improving audio quality in podcast, media production and online marketplace videos to enabling interactivity in online education, social media, and live streaming applications.
This quarter, we began partnering with SoundCloud to enable artists to improve the quality of their tracks using our mastering APIs and have seen nearly 200,000 tracks mastered through our APIs in the few months since launch.
We are also working to integrate our media APIs onto the box platform this quarter to enable their customers to enhance content with our media APIs right within the box experience.
Additionally, we recently enabled our interactivity APIs to include the benefits of Dolby Voice and we have drawn strong engagement from developers since its release.
As we look ahead, we will continue to expand our offerings to address more audio and video features.
For example, now that consumers can create Dolby Vision with the iPhone 12.
We see opportunities to support content platforms seeking to make the most of this expanding world of Dolby Vision content.
While we are just at the beginning of these new opportunities, we are learning quickly from our early engagement with developers and evolving our offering to bring the Dolby experience to everyday applications and services.
So to wrap up, the momentum of Dolby Vision and Dolby Atmos with movies and TV content is strong as our partners continue to bring new devices and services to market.
Our opportunity remains ahead of us and we are enabling more content experiences in music and gaming that can accelerate the adoption across device categories.
Consumers can now capture and edit in Dolby Vision for the first time, expanding the Dolby experiences into the growing world of user-generated content.
And we are excited by the opportunity to bring the Dolby experience to new use cases and industries through our developer platform.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
I look forward to updating you next quarter.
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compname reports q3 non-gaap earnings per share of $0.71.
sees fy revenue $1.28 billion to $1.31 billion .
q3 non-gaap earnings per share $0.71.
q3 gaap earnings per share $0.52.
board of directors has approved increasing size of its stock repurchase program by $350 million.
h2 total revenue is estimated to range from $570 million to $600 million.
fy diluted earnings per share is anticipated to range from $2.79 to $2.94 on a gaap basis and from $3.57 to $3.72 on a non-gaap basis.
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I'd like to give you a sense for how Church & Dwight has reacted to the pandemic.
The virus disrupted just about everything.
Consumer behavior, retailer operations, our supply chain and how we work.
We pivoted every aspect of our business to meet the new challenges.
Initially, we had a daily huddle at 8:00 a.m. seven days a week to address employee safety, production levels, co-packer operations and shipment patterns.
Today, we meet five days a week.
We increased our communications with retailers and changed our marketing messages.
We moved people to focus on the online class of trade to create and upload new content.
To speed up our reaction time, we created new data feeds of POS data and retailer in stock levels.
We added more co-packers to our supply chain network.
We conduct weekly surveys of our consumers.
And all of our efforts are paying off.
The agility and resilience of the Church & Dwight team shows up in our results.
Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands.
Our plant, warehouse and laboratory employees have done an exceptional job in keeping safe, which has contributed to our ability to operate our supply chain.
The rest of our employees are working remotely and doing a super job running the company.
We have been supporting our communities through monetary and product donations, including the contribution of personal protective equipment.
In June, we began producing hand sanitizer in our U.K. plant for both donations and employee usage.
With respect to consumers and retailers, we are taking steps to increase both short and long-term manufacturing capacity, and we continue to work closely with suppliers and retail partners to keep pace with increased demand.
A good example is our installation in Q2 of a new liquid laundry line in our York plant, which was quite a feat given the obstacles presented by COVID.
And as I mentioned before, we've added more co-packers to ensure steady supply for other categories.
Now let's talk about the results.
Q2 was an exceptional quarter.
Reported sales growth was 10.6%.
Gross margin expanded by 220 basis points, and adjusted earnings per share was $0.77.
Revenue, gross margin, earnings and operating cash flow were all significantly higher than Q2 last year, driven by the increase by a significant increase in demand for many of our products.
Organic sales grew 8.4%, driven by higher consumption, restocking of retailer inventories and lower couponing.
Our exceptional first half is a testament to the diverse set of categories that we compete in and the strength of our brands.
Regarding e-commerce, even more consumers have moved online.
Our online sales increased by 75% in Q2 as all retailer.coms have grown.
We began the year targeting 9% online sales.
In Q1, 10% of our sales were online.
In Q2, it was 13%, and we expect second half online sales to be equally strong.
We continue to conduct research on the purchasing habits of U.S. consumers.
Of the categories that we are following, there is continued consumer worry about the ability to leave the house and concern that stores and websites will run out.
Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.
Similar to last quarter, I now want to talk about consumption and shipments.
Year-to-date shipment and consumption patterns are back in balance for our brands in the 15 categories that we compete.
We do have some additional opportunities in gummy vitamins and ARM & HAMMER baking soda as shipments are still well behind consumption.
In Q2, we saw a double-digit consumption growth in gummy vitamins, women's hair removal, cleaners and baking soda.
On the other hand, restrictions on consumer mobility drove double-digit consumption declines for WATERPIK, TROJAN condoms and BATISTE dry shampoo.
People are just not socializing due to government restrictions under mobility, which has a big effect on some personal care categories.
July consumption for the U.S. business is tracking to be over 10%, led by our gummy vitamin brands, OXICLEAN additives and baking soda.
1/3 of our July consumption growth is attributed to our gummy business.
In July, and I think this is important, only two of our 15 brands, that would be BATISTE and TROJAN, showed negative consumption.
In contrast, in the month of May, eight of our 15 key product lines showed negative consumption.
So consumption is trending positively.
July shipments for the U.S. business are tracking to be up high single digits.
Shipments of gummy vitamins, OXICLEAN additives, baking soda and WATERPIK are all up double-digit in July.
Our gummy vitamins have been on fire.
Consumption for May, June and July has been averaging up over 40%.
And there is an increased consumer focus on wellness, and it is likely that we will reach a permanently higher level of consumption.
We are looking at third parties to supplement our existing capacity right now.
You may recall that we announced our exit from private label early in Q1, and that turned out to be a timely decision because it helped free up capacity for our brands.
Regarding our laundry and litter businesses, consumption is recovering.
You will recall that there was massive pantry loading in laundry and litter in the month of March.
The laundry pantry loading appears to be absorbed as our consumption improved from being down low single digits in the quarter to up approximately 10% in July year-over-year.
Similarly, ARM & HAMMER litter improved from negative consumption in Q2 to up approximately 5% in July.
So our two big categories are recovering nicely.
In the water flosser category, WATERPIK is starting to recover from the steep decline in April when consumption was down 55%.
Q2 consumption was down significantly due to retailer closures, deprioritization of water flossers by some retailers and closure of dental offices.
Remember that dental professionals are an important source of water flosser recommendations, which influences first-time buyers.
The most recent surveys indicate that 95% of dental offices are now open, although most are at a reduced capacity.
The good news is monthly consumption of WATERPIK water flossers is now positive.
Although our Lunch & Learn activity continues to be significantly curtailed, we intend to address this with incremental advertising in the second half.
The FLAWLESS brand has had strong consumption growth in May, June and July due to reduced consumer access to salons.
The launch of our new full-body device, NU RAZOR, was perfectly timed.
FLAWLESS is one of our brands that could benefit from the at-home grooming trend, and we tend to strongly support FLAWLESS with advertising in the second half.
Private label shares is something we track closely.
As you know, our exposure to private label is limited to five categories, and the private label shares were generally unchanged in Q2, and it was also true in Q1.
Because of the virus, consumer trends are emerging, which affect our business, including a focus on cleaning, personal wellness and new grooming routines.
These consumer trends may endure over the long term, and if they do, we believe we are well positioned.
Our international business came through with slightly positive organic growth in the quarter, driven by strong growth in our GMG business, that stands for Global Markets Group.
In particular, China and Asia-Pacific turned in a remarkably strong performance in the second quarter.
And in July, our GMG business is off to a strong start.
And we're seeing strong POS recovery in Canada and Europe as well is starting to recover.
Our Specialty Products business has had three straight quarters of organic growth, and we expect continued organic growth for our Specialty Products in the second half.
Now turning to new products.
Innovative new products will continue to attract consumers even in this economy.
In Q2, we launched a new ARM & HAMMER laundry detergent called CLEAN & SIMPLE, which has only six ingredients plus water and this compares to 15 to 30 ingredients for the typical liquid detergent, and has the cleaning power comparable to our best-selling consumer favorite, which is ARM & HAMMER with OXICLEAN.
However, because of retailer stocking issues in the second quarter, we eliminated advertising, trade and couponing support that we had planned, and we pushed it to the second half.
We're excited to report today that we have another big product launch this year.
The second launch is in the clumping litter category.
This month, we began shipping ABSORBx, which is a revolutionary new ARM & HAMMER lightweight litter made from desert dry materials.
It absorbs wetness in seconds to trap and seal odors fast.
ABSORBx is 15% lighter than our existing lightweight, and it's 55% lighter than our regular clumping litter.
We have a significant amount of advertising, trade and couponing planned for the second half to get behind this exciting new launch.
And by the way, here's a fun fact, our friends at Clorox just posted to their website a new litter variant called Ultra Absorb.
And we'll take that as a complement.
Imitation is the greatest form of flattery.
Now let's turn to the outlook.
We had an exceptional first half, and we were running well ahead of our original full year earnings per share outlook.
We reinstated our earnings per share outlook with 13% growth, which is far above our evergreen target of 8% annual earnings per share growth.
As in prior years, when we find ourselves in this position, we use the opportunity to invest in our future, which we intend to do in the second half.
You may recall that just last year, we had this exact same opportunity to invest, and our earnings per share was down 4% in Q4 2019 as a result.
This year, we just got to a similar point much earlier.
It's important to note that we continue to take the long view in running Church & Dwight.
Now in conclusion, there are lots of reasons to have confidence in Church & Dwight.
The great thing about our company is we are positioned to do well in both good and bad economic times.
The categories in which we play are largely essential to consumers.
We have a balance of value and premium products.
Our power brands are number one or number two in their categories, and we have low exposure to private label.
We're coming off one of the best first halfs we've ever had and are entering this downturn in a position of strength and with a strong balance sheet.
And with a strong balance sheet, we continue to be open to acquire TSR accretive businesses.
And finally, we have the resources, the common sense and the ambition to ensure that our brands perform well in the future.
And next up is Rick to give you details on the second quarter.
We'll start with EPS.
Second quarter adjusted EPS, which excludes an acquisition-related earn-out adjustment, grew 35% to $0.77 compared to $0.57 in 2019.
The earnings per share increase was largely driven by higher sales due to continued high consumer demand for our products and higher gross margins.
As we discussed in previous calls, the quarterly earn-out adjustment will continue until the conclusion of the earnout period.
Reported revenue was up 10.6%, reflecting a significant increase in consumer demand for our products due to COVID.
Organic sales were up 8.4%, driven by a volume increase of 4.9% and positive product mix and pricing of 3.5%.
Organic sales growth was driven by higher consumption, lower couponing and recovery of retailer and stock levels.
Now let's review the segments.
Organic sales increased by 10.7% due to higher volume and positive price mix.
We typically try to break down the organic growth for you.
6% is consumption growth, reflecting strong, tracked and untracked in e-commerce growth, 1% from lower couponing, and then approximately 3.5% from improving retail and stock levels.
Overall, growth was led by ARM & HAMMER liquid laundry detergent, VITAFUSION and L'IL CRITTERS gummy vitamins, ARM & HAMMER clumping cat litter and baking soda and OXICLEAN stain fighters.
Consumer International delivered 0.6% organic growth due to positive price and product mix offset by lower volume.
Growth was driven by BATISTE Dry shampoo, FEMFRESH feminine hygiene portfolio and ARM & HAMMER liquid laundry detergent, launch detergents in the Global Markets Group business, partially offset by Europe and Mexico domestic market declines.
Of note, Asia-Pacific had strong performance in the quarter.
For our SPD business, organic sales increased 3% due to higher volume, offset by lower pricing.
And demand for our products continues to grow in the poultry industry.
Turning now to gross margin.
Our second quarter gross margin was 46.8%, a 220 basis point increase from a year ago due to a reduction in trade, couponing and improved productivity.
In terms of the gross margin bridge versus year ago, positive price and volume and mix contributed 220 basis points.
Productivity added 140 basis points, offset by higher manufacturing costs of 110 basis points which was driven by 110 basis points related to COVID supply chain costs and then improved commodity costs were offset by higher manufacturing costs.
Finally, a drag of 20 basis points from the prior year FLAWLESS accounting impact and a 10 basis point drag from FX is how we get to 220 up for the quarter.
Moving now to marketing.
Marketing was down $6.8 million year-over-year.
Marketing expense as a percentage of net sales decreased 180 basis points to 10.2%.
Due to retailer out of stocks, marketing spend was significantly reduced and shifted to the back half to support new products.
For SG&A, Q2 adjusted SG&A increased 30 basis points year-over-year, primarily due to higher incentive comp, intangible costs related to acquisitions and investments in R&D and IT.
And for net operating profit, the adjusted operating margin for the quarter was 21.5%.
Other expense all in was $14.7 million, a slight decline due to lower interest expense resulting from lower interest rates.
And for income tax, our effective rate for the quarter was 19.6% compared to 18.7% in 2019, an increase of 90 basis points, primarily driven by lower stock option exercises.
And now turning to cash.
For the first six months of 2020, cash from operating activities increased 70% to $599 million due to higher cash earnings and a decrease in working capital.
This includes deferring an $81 million income tax payment in line with the CARES Act.
Within the quarter, we fully repaid the revolving credit line that was accessed in Q1 during the early days of COVID.
As of June 30, cash on hand, was $452 million.
Our full year capex plan has gone from $80 million to $100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.
And now turning to the outlook.
Company is now reinstating the 2020 outlook, given we have half the year behind us and strong sales growth in July.
However, due to quarterly volatility in retailer orders and consumer consumption, we will only provide a full year outlook.
We now expect approximately 9% to 10% full year 2020 sales growth and approximately 7% to 8% organic sales growth.
Adjusted earnings per share growth is expected to be 13% above the high end of our original 7% to 9% outlook.
This implies a front-end loaded year and flat earnings per share in the second half as the company has shifted promotional and advertising dollars from the first half to the second half in support of new products.
Turning to gross margin.
The first half gross margin expanded 150 basis points.
We expect that second half will contract by a similar amount.
Half of it is simply the year-over-year impact of acquisition accounting.
The balance reflects incremental COVID costs as well as WATERPIK tariffs, new product support that Matt mentioned, incremental manufacturing and distribution capacity investments.
And so net, that means we'll be slightly below our original full year margin outlook.
As you heard from Matt, we intend to make incremental investments in the back half of 2020.
Some examples here include a new third-party logistics provider, outside storage to handle surge inventories.
Preliminary engineering on capacity decisions.
VMS outsourcing costs as well as other investments around automation, consumer research and analytics.
Lastly, consistent with how we've been managing throughout the crisis, our outlook may continue to adapt, and we may continue to defer trade couponing in advertising even into next year, depending on consumption, the resurgence of COVID-19 or supply constraints.
And with that, Matt and I would be happy to take any questions.
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compname reports full year 2020 net earnings of $317 mln.
compname reports full year 2020 net earnings of $317 million, ebitda of $1,316 million, adjusted ebitda of $1,350 million.
projects capital expenditures for full year 2021 will be in range of $450 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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q3 ffo per share $1.36.
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You will hear prepared comments from each of them today.
Jim will cover high-level financials and provide a strategic update, John will cover an operating overview and Devina will cover the details of the financials.
John will discuss the results of the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume.
During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons, unless otherwise stated, will be with the first quarter of 2020.
Net income, EPS, operating EBITDA margin and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations.
These adjusted measures, in addition to free cash flow are non-GAAP measures.
wm.com for reconciliations to the most comparable GAAP measures and additional information of our use of non-GAAP measures and non-GAAP projections.
Time-sensitive information provided during today's call, which is occurring on April 27, 2021, may no longer be accurate at the time of a replay.
It was said many times last year that 2020 was a year like no other.
For many reasons, it was an incredibly difficult and trying year, yet our positive message internally was that great companies use tough times to better themselves, and that's precisely what WM did and the first quarter of 2021 showed that with an exclamation point.
We had an exceptionally strong start to the year as we kept our focus on those fundamentals that have always been great.
Our people first, then our customers and then we focus on the details of our business, and that order inevitably produces the best results.
In Q1, it sure did as we achieved record operating EBITDA of $1.16 billion and robust cash from operations of $1.12 billion.
Typically, during our first-quarter earnings call, we reaffirm our full-year guidance.
However, as we view these strong results, in addition to our confidence in the transformative changes we're making to our business model and the fact that we have yet to see a full recovery in our critical landfill, commercial and industrial volumes, it became clear that we're on track to outperform our guidance from only two months ago.
Combine this with the broader economic trends and all indicators show that our full-year revenue, adjusted operating EBITDA and free cash flow are on track to meet or exceed the upper end of the guidance ranges we provided in February.
Devina will discuss our updated guidance, but it's safe to say we're very excited about our performance for the first quarter and we expect to show continued strength throughout the year.
We're seeing tangible benefits from the investments that we've made in recycling and renewable energy.
In our recycling line of business, we've developed a model for all new plants which, with the addition of sophisticated technology, produces far better returns through a combination of added efficiencies, a higher quality of saleable material and less residual material for disposal at the end of the process, all while our basket of recycled commodity prices have climbed back nicely to historical average price levels.
Additionally, three years ago, we made the decision to close the loop between our natural gas fleet and the gas produced at our landfills by investing in the renewable energy business.
We're now seeing those investments pay healthy dividends with approximately two to three-year paybacks on our four plants, in tandem with greater stability and higher pricing in the renewable energy markets.
As we discussed last quarter, WM is also well positioned to leverage our ESG leadership, and particularly our focus on environmental sustainability to help our customers meet their own climate goals through recycling and other beneficial uses such as renewable energy generation.
We're in a unique position to help key stakeholders rise to the challenge.
And we can do this while growing our business at the same time, collaborating with our stakeholders to find new ways to create value together.
Continuing to integrate environmental sustainability into our strategic business framework for long-term sustainable and profitable growth requires a strong focus, which is why we've taken a step to dedicate a member of our senior team to this effort.
I'm pleased to announce that Tara Hemmer, senior vice president of operations, will be taking this new role as senior vice president, chief sustainability officer reporting directly to me effective July 1.
With Tara's move, our Area vice president leading the Greater Mid-Atlantic area, Rafa Carrasco, will be promoted to a member of the senior leadership team as senior vice president of Operations.
We've also launched a new exciting education benefit for our team members this month that will provide development and upskilling opportunities for our workforce.
These changes underscore how the tenets of ESG are embedded into our broader business strategy.
As digital transformation sweeps across nearly every industry in the wake of the pandemic, we're making strides in differentiating our customers' experience through end-to-end digital transformation.
Today, our customers can manage their relationship with us through online -- through our online WM -- My WM platform, which is connected operationally through our smart truck technology and supported by our customer analytics and data management tools.
Our newly automated setup process streamlines customer orders and accelerates the speed at which we can deliver on our commitments, while also reducing our cost to serve.
These developments, combined with the continued growth of our e-commerce channel, give us confidence that our decision to accelerate technology investments was the right one, and we will emerge from the pandemic a stronger, more agile company.
WM is well positioned to benefit from the continued reopening as more states and provinces emerge from the pandemic, and we expect our commercial, industrial and landfill businesses, our three most profitable lines of business, to benefit from further volume recovery and produce robust financial results with high incremental margins over the remainder of the year.
Before reviewing the terrific operating results that we achieved in the first quarter, I want to provide an update on the integration of ADS.
Over the last six months, we've made significant progress on combining the two businesses, and we've been able to accelerate some of our integration plans.
The teams have worked tirelessly to make sure that this combination goes smoothly.
And based on the success of the integration so far, we are increasing our synergy expectations to $150 million of total annual run rate synergies, $130 million coming from operating costs and SG&A savings and $20 million coming from capital savings.
For 2021, we now expect synergies of between $75 million and $85 million, all coming from cost savings.
With approximately $15 million of annualized synergies captured in 2020, we expect to exit 2021 on an annual run rate synergy level of around $100 million.
The remaining $50 million is expected to be captured in 2022 and 2023 from a combination of operating costs, SG&A and capital expenditures.
Now turning to our first-quarter results.
Organic revenue grew 2.1% as disciplined pricing and improved recycling results overcame modest volume declines.
Pricing performance for the quarter was very solid with both core price of 3.4% and collection and disposal yield of 2.8%, outpacing our expectations.
Notably, our commercial yield rebounded sequentially from 3.1% -- to 3.1% from 1.9% in the fourth quarter.
As economic reopening progressed during the first quarter, collection and disposal volumes improved again sequentially to a decline of 2.3% from 2.7% in the fourth quarter.
In the first quarter, net new business turned positive, churn improved meaningfully to 8.2% and service increases expanded.
While volumes have recovered meaningfully from the second quarter of 2020 collection and disposal decline of 10.9%, as Jim pointed out, WM is positioned to benefit from further improvements in North American economies.
For example, at the end of the first quarter, we have recovered about 72% of the commercial yards lost due to COVID, providing room for considerable improvement in commercial volumes as we progress through the year.
Similarly, our other highest-margin businesses, industrial and landfill, have volume upside opportunity as visibility into the economic reopening continues to improve and more event work is scheduled and completed.
Looking at the lines of business, we're making improvements with the help of a very delivery pricing focus, residential, landfill and recycling, I'm happy to report that we have had standout in each of these areas during the quarter.
Residential yield doubled year over year to 4.2% as we made strides to improve the profitability in this line of business.
This is the highest residential yield we have achieved since 2008 and it showcases our success in demonstrating the value of our service and pricing it appropriately.
The increased yield drove operating EBITDA margins in the residential line of business to the highest level in the past 12 months despite still elevated residential container rates.
Landfill core price was 3.2%, a strong result when you consider the impact of lower volumes related both to the pandemic and severe winter weather.
In recycling, operating EBITDA doubled year over year to achieve earnings that rank in our top five best quarters ever.
These results are truly a reflection of our work to improve the business model while creating a sustainable solution for our customers and not simply the result of an increase in recycled commodity prices.
While our other top recycling quarters had an average commodity price of $127 per ton, we achieved our strong first-quarter results with a price of $79 per ton.
Finally, turning to costs.
First-quarter operating expenses as a percentage of revenue improved 130 basis points to 61.1%, demonstrating that we are maintaining our cost discipline as volumes recover.
In the first quarter, we saw a 40-basis-point improvement in our labor costs as we continue to manage overtime spending.
We also saw efficiency improvements in both the commercial and industrial lines of business, which we were able to identify and capture as our investments in technology help make us nimble.
As you've heard from both Jim and John, we had a fantastic start to 2021 and we forecast continued strength our business as local economies emerge from the pandemic.
These strong results and our confidence in our outlook for the remainder of the year have led us to raise our full-year financial guidance.
Revenue growth is expected to be 12.5% to 13%, with combined internal revenue growth from yield and volume in the collection and disposal business of four and a half percent or greater.
The increased outlook is underpinned by our disciplined pricing programs and strong outlook for continued volume recovery.
For adjusted operating EBITDA, we now expect to generate between $4.875 billion and $4.975 billion, a $100 million increase at the midpoint from our prior guidance.
The improved outlook for adjusted operating EBITDA translates directly into incremental free cash flow, and we now expect that we will generate between $2.325 billion and $2.425 billion of free cash flow for the year.
Our team members on the frontline continue to deliver and the investments we are making in our people, technology and customer experience are generating strong results.
Turning to our first-quarter results.
Net cash provided by operating activities grew $355 million.
The contribution from operating EBITDA growth accounted for a little less than half of that increase, with the remainder coming from lower incentive compensation payments and an increase in cash collections from customers, and favorable timing of some of our payables.
While we expect some of the timing differences experienced in the first quarter to reverse for the year, the remaining contributors to our strong cash flow from operations results position us for a very strong year.
In the first quarter, capital spending was $270 million, a $189 million decrease from the first quarter of 2020.
Capital expenditures were lower in the quarter, primarily due to timing, but the timing of fleet purchases, which we had intentionally front-loaded in 2020 and steps we took in late 2020 to accelerate some of our 2021 capital given our confidence in the pace of volume recovery.
We continue to prioritize the investments in the long-term growth of our business, including recycling, renewable energy and technology investments that we have previously discussed.
For the full year, we expect capital spending to be at the high end of our $1.78 billion to $1.88 billion guidance range as we invest in our business to support growth, reduce our cost to serve and extend our environmental sustainability efforts.
Putting it all together, our business generated free cash flow of $865 million in the first quarter.
The operating EBITDA growth, lower capital expenditures and favorable working capital changes that I discussed drove the significant year over year free cash flow increase.
This sets us up very well to achieve our increased free cash flow outlook.
In the first quarter, we used our free cash flow to pay $247 million in dividends and allocated $250 million to share repurchases.
Turning to SG&A costs.
SG&A was 10.7% of revenue in the first quarter.
That's a 20-basis-point increase over 2020.
We remain focused on managing our discretionary costs, optimizing our structure for the ADS acquisition and using SG&A dollars to enhance our business.
Our deliberate increased level of investment in technology as well as higher incentive compensation accruals are the driver of SG&A as a percentage of revenue being above our long-term target of less than 10% of revenue, but we are committed to ensuring we return to that optimized cost structure in the near term.
Our first-quarter leverage ratio of 3.04 times has improved from the fourth quarter due to our strong operating EBITDA growth.
This leverage ratio remains well within the financial covenant of our revolving credit facility and right at the top of our long-term targeted range of two and a half to three times.
Our strong first-quarter results and increased expectations for current year operating EBITDA and free cash flow, position us to purchase at least $1 billion of our shares in 2021, and at the same time, achieve our target leverage of 2.75 times by the end of the year.
Our capital allocation priorities continue to be a strong balance sheet, prudent investment in the growth of our business and strong and consistent shareholder returns.
With the strength of our collection and disposal business, expectations for continued recovery and improved market backdrop for recycling, effective cost control and even better-than-expected integration synergies from the ADS acquisition, cash flow converges conversion is strong.
And as a result, we expect to increase cash allocated to shareholder returns from our initial plans.
Our strong results are a testament to their commitment, and we're excited about what we will achieve together over the remainder of the year.
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quarterly ecommerce sales grew 1% and 70% on a two-year stack.
q4 inventory up 26% globally; 28% in u.s., affected by higher cost of goods, mix, and higher in-transit shipments.
quarterly walmart u.s. comp sales, without fuel, up 5.6%.
membership income increased 9.1%.
sees fy 2023 walmart u.s. comp sales growth, excluding.
fuel, slightly above 3%.
sees fy 2023 consolidated net sales, excluding divestitures, increase about 4%.
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My name is Matt McCall.
I'm Vice President, Investor Relations and Corporate Development, for HNI Corporation.
Actual results could differ materially.
Let me start by saying our members did a great job of managing through challenging second quarter conditions.
We aggressively managed costs and drove productivity, offsetting much of the impact from lower volumes.
We kept our focus on our customers and also played offense, generating and seizing market opportunities where we could.
Moreover, through this experience, we have developed new and better ways to operate our businesses that will benefit us in the future.
We delivered solid profitability in the second quarter.
Our cost containment efforts, combined with the top line benefits from our diversified revenue streams, the breadth of our price points, our channel reach and our ability to quickly pivot, all contributed to the better-than-expected results.
While we told you in the first quarter call that we expected a loss in the second quarter, the combination of these items helped us deliver a quarterly profit.
Moreover, given our solid results in the second quarter, our year-to-date earnings per share is actually up slightly versus the first half of 2019.
This is a great accomplishment given the many headwinds we are facing and it demonstrates, again, what is unique about HNI.
Last quarter, we told you we had two priorities when it comes to our pandemic response.
First is the health and well-being of all HNI members.
Second is the success is to successfully navigate the pandemic in the short term by supporting cash flow and maintaining our strong balance sheet, while remaining focused on our long-term strategies.
So far, we have successfully navigated both priorities.
We quickly adjusted our facilities and were able to operate safely and effectively to serve our customers.
In addition, as we began returning to our offices, we implemented multiple safety measures to ensure a safe process for all members.
Our members' safety remains paramount.
We also further strengthened our balance sheet.
We generated free cash flow in excess of prior year levels and significantly lowered our already modest debt level.
We have the financial strength and cost structure to successfully weather this crisis and any aftershocks for a prolonged period.
Our financial strength and demonstrated ability to flex costs, we are making two changes.
First, we are restoring salaries to their pre-pandemic levels, 60 to 90 days earlier than initially anticipated.
If you recall, we implemented temporary salary reductions as part of our balanced approach to the pandemic.
Our members overdelivered on multiple fronts in the second quarter.
I'm grateful for their efforts and happy that we are able to restore salary levels about a quarter earlier than originally anticipated.
Second, we are accelerating our investment levels.
I would like to note that these actions are a direct result of our financial position and the efforts of our members.
That notwithstanding, we see opportunities and are using our strong financial position to invest.
I will now share some thoughts on the demand picture across our businesses; what we experienced in Q2, what we are experiencing currently and how we view the future.
First, our Q2 year-over-year order activity.
Here is what we have been seeing recently.
Orders in domestic Workplace Furnishings, excluding our e-commerce business, were down 36% in Q2.
Over the past five weeks, they are down 33%.
We are generally seeing a seasonal uptick in orders, but our year-over-year declines have remained relatively constant and are in line with what we have experienced in previous recessions.
E-commerce orders were up 114% in Q2 and up 87% over the past five weeks.
We are confident this business will still deliver strong growth both in the near and long term.
Residential Building Products orders were up 2% in Q2, and we continue to see positive growth rates over the past five weeks.
We believe the secular trends discussed last quarter, which I will detail again in a moment, are providing consistent tailwinds.
We are keeping an eye on land and labor shortages for builders, which could slow down production.
However, indications are encouraging thus far.
Again, [Technical Issues] revenue streams, price point breadth and channel reach are unique to HNI.
And our recent growth rates reflect these benefits.
Next, as we discussed last quarter, we are seeing several positive trends that should provide near-term and post-pandemic revenue support.
In our Workplace Furnishings segment, we see the potential for multiple supportive secular trends.
First, increased office floor plate resets as organizations work to adjust to the new social distancing environment; second, increased demand for our architectural products platform, which can quickly create physical separation with minimal construction time while maintaining natural life; and third, more demand tied to work from home and from increased smaller satellite office locations.
HNI is uniquely positioned to benefit from these trends given the value orientation of many of our brands.
Generally, these trends will take some time to gain momentum.
Most of them will require a broader and more meaningful return to the office than we are currently seeing.
Customers are generally assessing their options right now and are still in a mode of figuring out next steps.
These trends won't be enough to offset near-term cyclical pressure, especially with the new growth in COVID cases nationally.
However, HNI is particularly well positioned to take advantage of these secular opportunities as they develop.
In our Residential Building Products segment, the positive order trends reflect our strong competitive position in the market and specifically with large national builders.
In addition, trends tied to de-urbanization, elevated nesting and work-from-home trends, record low mortgage rates and low housing inventory, all support positive demand patterns and should provide cyclical and secular support going forward.
We are excited about the cyclical strength, secular opportunities and company-specific initiatives within our Residential Building Products segment.
I will then come back and give some concluding thoughts.
Consolidated non-GAAP net income per diluted share was $0.20.
That was down from the $0.38 we reported in the second quarter of 2019.
Second quarter consolidated organic sales decreased 21.2% versus the prior year.
Including the benefit of acquisitions, sales were down 20.6%.
Consolidated non-GAAP operating income declined $9.4 million versus prior year on a sales decline of $109 million, which means our deleverage rates or decremental margin was 8.6%.
That's well below our targeted range of 25%, which includes the benefits of cost actions.
Given the circumstances, our members did a great job of limiting the impact of declining volume.
In the Workplace Furnishings segment, first quarter sales decreased 24.8% year-over-year.
Despite the top line pressure, we were able to generate $7.8 million of non-GAAP operating income in the segment.
While that is down from the $19.7 million in the prior year quarter, the decremental margin was only 11%.
Sales in our Residential Building Products segment decreased 8.6% year-over-year organically and 6.1% when including acquisitions.
Within the segment, new residential construction revenue declined 5% organically, and sales of remodel and retrofit products were down 15% year-over-year.
Despite the year-over-year sales pressure in Q2, we delivered higher operating profit and expanded operating margin versus the prior year.
Operating profit totaled $14.4 million compared to $13.4 million in the prior year period, and operating margin was 13.1%, up from 11.5% in the second quarter of 2019.
For HNI, overall, second quarter gross profit margin was 36.1%.
This is down 50 basis points year-over-year, primarily due to volume.
Our second quarter non-GAAP tax rate was 32.5%.
This was abnormally high, driven by changes to our full year earnings outlook.
We expect the tax rate to return to more normalized levels moving forward.
I should note that the only difference between second quarter GAAP and non-GAAP earnings per share was tax.
Non-GAAP earnings per share excludes the tax impact from onetime charges that we recorded in the first quarter of 2020.
So overall, our second quarter results again demonstrated the strength of our operating platform.
Let's shift and now talk about our liquidity and debt levels.
At the end of the second quarter, we had $183 million in total debt, which was down $47 million from the first quarter and was $103 million lower than the prior year quarter.
Our gross leverage or gross debt-to-EBITDA ratio was 0.8.
This remains well below the 3.5 times gross leverage covenant in our existing loan agreements.
From a net debt perspective, our leverage ratio of 0.7 is down from 0.8 last quarter and 1.2 in Q2 of last year.
Our teams have done a nice job of managing the balance sheet and generating cash flow.
Free cash flow for the second quarter was $54 million, more than double the $23 million we generated in the second quarter of 2019.
Given our low leverage ratio, free cash flow levels and ability to quickly adapt our cost structure, we expect to maintain our strong financial flexibility in a variety of scenarios.
This means we will remain well within our debt covenants.
We expect to reduce year-end net debt below last year's level, and we project free cash flow will be significantly above our $52 million dividend.
So as we look forward to the rest of the year, the pandemic has limited our visibility and our ability to provide sales and earning guidance.
However, we will share a few thoughts on what we expect.
First, as I just covered, we do feel confident in our ability to generate strong free cash flow and maintain our strong balance sheet under a variety of scenarios.
Second, we expect third quarter sales and profit to track ahead of second quarter 2020 levels, primarily due to seasonality.
Third, we continue to believe 25% is the appropriate deleverage or decremental margin estimate over time.
That's higher than what we just achieved in the second quarter.
We're expecting the impact of salary restorations, investment acceleration and less favorable business mix to pressure decrementals in the second half.
As a result, we expect decrementals to be in the range of 20% for the full year 2020.
In the quarters leading up to the pandemic, investments made in recent years were delivering returns.
You can see evidence in our recent revenue, margin and cash flow trends.
Then this past quarter demonstrated more of what is great about HNI.
Not only were we able to quickly adjust our cost structure to support cash flow on our balance sheet as our Q2 results indicate but we also took additional actions during the pandemic that will be additive to our pre-COVID strategic momentum and support our profitable growth strategic framework.
Our members remain optimistic, nimble and thoughtful, and our pandemic-driven successes will help our businesses going forward.
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q1 non-gaap earnings per share $0.21.
q1 sales fell 2.2 percent to $468.7 million.
gaap operating profit was impacted by intangible impairments and one-time charges related to covid-19 crisis of $37.7 million in quarter.
base salaries for salaried exempt members were reduced by 10 percent; executive salaries were reduced by 15 percent.
ceo jeff lorenger's salary was reduced by 25 percent.
members have been furloughed.
reduced its capital expenditure budget for 2020 from approximately $65 million to $35 million.
board of directors reduced its cash and equity retainers by 25 percent.
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Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer.
I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the bank's financial performance.
The continued growth in Western Alliance's national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021.
Barring the company's strong fourth quarter performance and underlying fundamental trends, WAL earned net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4.
Net revenue expanded 4.5 times the rate of expense as improvement in asset quality and economic conditions drove a $32.4 million relief in loan loss reserve this quarter.
Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million while marginally lower than last quarter due to two fewer days.
Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule.
While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the paydown of external credit lines.
Additionally, we signed agreements with the sale of approximately $750 million of mortgage servicing rights to strong counterparties that will allow Western Alliance to retain substantially all the custodial deposits.
We expect this to be completed in early May.
AmeriHome was an attractive strategic acquisition, expanding Western Alliance's fee income and lowering the company's reliance on spread income while providing growth optionality to our commercial portfolio of businesses.
Turning to the first quarter balance sheet trends, outstating quarterly loan and deposit growth of $1.7 billion and $6.5 billion respectively, lifted total assets to $43.4 billion, up 49% from the prior year.
Our near-term focus on growing loans in low-risk asset classes was on display as loan growth was primarily driven by warehouse funding, residential loan purchases and increased activity throughout our traditional banking and regional footprint.
Our deposit growth was broad-based across our franchise, which pushed down our loan-to-deposit ratio of 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition.
The continued excess liquidity from our improving deposit franchise is at the expense of short-term NIM compression, but it's a trade-off we are willing to accept for long-term value creation.
This impressive loan growth drove net interest income of $317.3 million, or $2.5 million higher than last quarter and up 18% on a year-over-year basis.
Quarterly net interest margin was 3.37%, down 47% from the fourth quarter as we continued to deploy excess liquidity into loans and investment securities.
Non-interest income totaled $19.7 million for the quarter, aided by $7.3 million of warrant income from Bridge Bank.
Asset quality remained stable this quarter as the economic recovery gained steam.
For the quarter, net loan charge-offs were $1.4 million or 2 basis points on an annualized basis.
Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact consumer spending habits and many businesses were provided the liquidity to weather the pandemic.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $33.02, or 23.5% year-over-year -- or 23.5% year-over-year growth.
We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.93% and 24.2%, respectively.
This strong momentum, coupled with economic reopening, positions Western Alliance well for an industry-leading 2021.
At this time, I'll let Dale take you through the financial performance.
For the quarter, Western Alliance generated net income of $192.5 million or $1.90 per share, each down about 1% from the prior quarter.
This is inclusive of a reversal of credit loss provisions of $32.4 million due to continued improvement in economic forecasts relative to year-end 2020 and continued loan [Phonetic] -- in [Phonetic] loan segments with historically very low loss rates.
Additionally, merger expenses related to the AmeriHome acquisition of $400,000 were recognized.
We expect total merger charges to be approximately $15 million, preponderance of which will be incurred in Q2 as integration continues.
Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth.
However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower-yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher-yielding commercial loans.
Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4 as we proactively look to grow low-cost deposits as dry powder for future loan growth.
Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in the warrant income.
Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances.
Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago.
Turning now to net interest drivers.
As our strong core deposit growth continued throughout the quarter, we look to redeploy excess liquidity into the investment portfolio and loans.
Total investments grew $2.4 billion for the quarter or 43% to $7.9 billion compared to an average balance of $6.5 billion.
Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment.
Similarly, on a linked-quarter basis, linked -- loan yields declined 8 basis points following ongoing mix shift toward residential loans and asset class with generally lower yields than the remainder of the portfolio and lower credit risk.
This was partially offset by modestly higher PPP fees, strong loan growth and liquidity deployment toward the end of the quarter.
Significantly, quarter-end balances for loans and investments were $3.3 billion higher than the average balances and yielded 3.5% more than our Fed account.
Higher income from this already-deployed liquidity positions us well for Q2.
Interest-bearing deposit costs were reduced by 3 basis points in Q1 to 22 basis points, due to ongoing repricing efforts and maturities of higher cost CDs.
The spot rate for total deposits, which includes non-interest-bearing, was 11 basis points.
We expect funding costs have generally stabilized at these levels.
Net interest income increased $2.5 million to $317.3 million during the quarter or 18% year-over-year as higher loan and investment balances offset net interest margin compression.
NIM declined 47 basis points to 337 basis points as our purposeful strong deposit growth in advance of closing the AmeriHome acquisition negatively impacted the margin by 43 basis points.
To put this in perspective, average securities and cash balances to interest-earning assets increased meaningfully in Q1 32% from 22%.
Given our higher end of quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into higher-yielding earning assets, we expect this margin drag to moderate while net interest income declines [Phonetic].
Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points, which was similar to the fourth quarter benefit.
Cumulatively, over the remainder of 2021, we expect to recognize $15.4 million of BBB fees.
Our efficiency ratio rose 90 basis points to 39.1%, an increase from 38.2% in Q4.
This higher efficiency ratio was driven by a modest decline in non-interest income and an increase in expenses, partially offset by increased net interest income.
Non-interest expense linked quarter growth increased by 2.1%, driven by higher deposit fees related to the 82% annualized rise in deposit balances.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%.
Inclusive of AmeriHome, we expect the efficiency ratio to rise to the mid-40s this quarter.
Pre-provision net revenue declined $4.4 million or 2.1% from the prior quarter, but increased 31% from the same period last year.
This results in PPNR and our ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year-ago period, partially impacted by a much larger asset base.
This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands.
Balance sheet momentum continued during the quarter as loans increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion brought balances to $38.4 billion at quarter end.
Inclusive of the second round of PPP funding, loans grew 24% year-over-year, while deposits grew approximately 55% year-over-year, with our focus on low loan loss segments and DDA.
In all, total assets have grown 49% year-over-year as we approach the $50 billion asset level, including AmeriHome.
Finally, tangible book value per share increased $2.12 over the prior quarter to $33.02, an increase of $6.29 or 23.5% over the prior year, attributable to both net income and the common stock offering of 2.3 million shares completed during Q1 in anticipation of the AmeriHome acquisition.
Our strong loan growth continues to benefit from flexible national commercial business strategy.
The majority of the $1.7 billion in growth was driven by an increase in C&I loans of $746 million.
Loan growth was also strong in residential real estate loans of $675 million, supplemented by construction loans of $337 million and CRE non-owner-occupied loans of $27 million.
Residential and consumer loans now comprise 10.9% of our loan portfolio, an increase from 9.9% a year ago.
Within the C&I growth for the quarter and highlighting our focus on low-risk assets, mortgage warehouse loans grew $562 million and Round 2 3P [Phonetic] loans, originations were $560 million, which were nearly offset by $479 million from Round 1 of payoffs.
We continue to believe our ability to grow core deposits from diversified funding channels is our key to firm's long-term value creation.
Given the ability to deploy funds into attractive assets in the near term, we purposefully looked to expand balance sheet liquidity in Q1.
Deposits grew $6.5 billion or 20% in the first quarter driven by increases in non-interest-bearing DDA of $4.1 billion, which now comprise 46% of our deposit base and the savings in money market of $2.9 billion.
Market share gains in mortgage warehouse continued to be a significant driver of deposit growth during the quarter, along with robust activity in tech and innovation and seasonal inflows from HOA banking relationships developed during 2020.
Our asset quality remains strong, and borrowers are stable, liquid and supported by strong sponsors.
Total classified assets increased $57 million in Q1 to $281 million due to migration of a few borrowers and COVID-impacted industries, such as travel, leisure and entertainment as reopening continues but at an uneven pace.
We see the potential for these credits to be upgraded as travel and events increase in the coming quarters.
Our non-performing loans plus OREO ratio declined to 27 basis points to total assets and total classified assets rose 4 basis points to total assets up to 0.65% compared to the ratio at the end of 2020.
Special mention loans increased $23 million during the quarter to 1.65% of funded loans.
As we've discussed before, SM loans are a result of our credit [Indecipherable] litigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out.
We do not see credit losses emerging from special mention volatility.
Regarding loan deferrals, as of quarter end, we had $68.5 million of deferrals, all of which are in low LTV residential loans.
Quarterly net credit losses were modest to $1.4 million or 2 basis points of average loans compared to $3.9 million in the fourth quarter.
Our loan ACL fell $36 million from the prior quarter to $280 million due to improvement in macroeconomic forecast loan growth in portfolio segments with low expected loss rates.
In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding PPP loans.
For comparison purposes, the loan ACL to funded levels was 84 basis points at year-end 2019 before CECL adoption.
We continue to generate capital and maintain strong regulatory ratios with tangible common equity to total assets of 7.9% weighed down this quarter by strong asset growth, and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low-risk assets.
Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.02, an increase of 23% in the past year.
I'll now hand the call back over to Ken.
Western Alliance is one of only a handful growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer-leading ROA and return on average tangible common equity with steady asset quality and low net charge-offs.
Going forward, based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth.
We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes.
One of the characteristics of AmeriHome that we found very attractive is that it provides a natural solution to WAL's excess liquidity.
AmeriHome will be expanding its product ray to include higher-yielding non-QM and jumbo loans that fit our established credit box.
Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and is a worthy credit solution for the swift deployment of excess liquidity.
To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment.
There will be no drag on PPNR or earnings per share from these investments.
Inclusive of AmeriHome, the efficiency ratio will rise to the mid-place [Phonetic].
Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecast incorporating risk for tail economic events, which is consistent going forward, could imply a steady reserve balance.
Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migrations into substandard.
We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that have implied material losses are on the horizon.
To conclude, Western Alliance is well positioned for balance sheet growth with steady asset quality.
PPNR should continue its upward trajectory from Q1, along with industry-leading return on assets and equity.
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q1 earnings per share $0.83.
will pause its stock repurchase program for remainder of q2.
western alliance - q1 results were affected by current economic environment resulting from covid-19, contributing to $51.2 million provision for credit losses.
offering flexible repayment options to current customers and a streamlined loan modification process, when appropriate.
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This is Allison Lausas, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows: we will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance and our 2022 outlook.
Bill will then discuss our fourth quarter and full year 2021 financial results, and we'll conclude with our outlook for the first quarter and full year 2022.
Lastly, Eric will close with comments around our focus areas for 2022.
Before we begin, a brief reminder.
I'm on Slide 6.
2021 was another record year for IDEX.
We hit all-time highs on most of our key metrics.
Demand for our differentiated technology remains strong.
This underlying momentum, combined with our targeted growth initiatives and ability to capture price, drove a strong rebound from 2020.
Across most of our portfolio, we saw an expansion beyond pre-pandemic revenue levels.
In the fourth quarter, we achieved a record for orders and sales, and our backlog position is very strong as we enter 2022.
We expanded our margins in a highly inflationary environment.
We levered well on the previous investments we made to optimize our cost position and executed on our productivity funnel.
We maintained positive price costs, albeit at a compressed level versus historic performance.
We remain diligent in controlling our discretionary spend and used our 80/20 principles to allocate resources to our most promising opportunities.
Our strategic focus, purposeful resourcing, and strong operating cash flow enabled us to deploy record capital.
We acquired ABEL Pumps and Airtech and made a collaborative investment in a technology company driving advancements in connected products.
We also invested across the portfolio to support growth and productivity.
We optimized our cost position within our fluid and metering technology segment through a consolidation of our Italy facilities and our energy businesses and delivered on operational productivity projects across the segment.
All of this drove a record year in order sales, margins, earnings, and capital deployment.
We've said in the past that we built IDEX to outperform through a cycle, and we continue to find ourselves in a very challenging one, characterized by supply chain disruptions and labor scarcity exacerbated throughout the year by the emergence of new COVID-19 variants.
Our view continues to be that we don't see gradients of bad.
Rather, the supply chain environment is very tough and numerous challenges persist.
As pockets of issues improve, they tend to be replaced by new obstacles.
The agility of our teams adjusting to new issues almost every day has been and continues to be outstanding.
As we look forward to 2022, we do not see any near-term signs of diminishing supply chain-related headwinds, and the impact of COVID-19 remains highly variable.
In the short term, these conditions have and will impact our ability to efficiently ramp production and have created significant pockets of disruption for our customers and suppliers as well.
We expect that these challenges will remain at a high level at least through the first half of 2022.
Regardless of the near-term challenges, our overall IDEX strategy remains focused on the horizon.
The core of what makes IDEX strong, highly engineered specialized products used in mission-critical applications, remains a solid driver for long-term success.
We'll continue to deploy capital and invest in the resources necessary to drive organic growth in order to capitalize on a robust demand environment.
Our balance sheet has ample capacity, and we will leverage its strength to continue to play offense in M&A.
To that end, we expect to close on the acquisition of Nexsight later this quarter.
With that, I'll turn to our outlook for our segments on Page 7.
In our fluid and metering technology segment, we anticipate growth in our industrial day-rate businesses in 2022 with a return of larger projects toward the latter half of the year.
In the short term, large projects continue to lag as our customers have limited capacity to execute larger upgrades or expansions.
Agriculture is expected to perform well due to high crop prices, strong farmer sentiment, and limited availability of new equipment driving aftermarket demand.
Our municipal water business is stable.
We see improved optimism in the market and project planning activities increasing.
We are expecting an uptick in the energy and chemical markets.
The North American mobile truck market is improving due to a strong construction market in home-heating oil prices, and North American pipelines are reporting modest increased capital budgets for 2022.
We see international oil and gas quote activity outpacing domestic demand, an opportunity we are well-positioned to capitalize on.
FMT continues to be in a strong position to realize price, and we expect this to drive improved margins in 2022.
Likewise, the projects we completed last year to optimize our cost position, as well as new operational productivity projects, will yield strong flow-through in 2022, tempered by a discretionary spending rebound and continued resource investment in this segment.
Moving to the health and science technologies segment.
We expect the strongest growth in HST of all our three segments, and we plan to make the largest resource investments in HST to support that growth.
We anticipate margin improvement driven by volume leverage, partly offset by these resource additions.
HST continues to have robust demand across all their major end markets.
Semiconductor, food and pharma, analytical instrumentation, and life sciences are all expected to perform well.
Next-gen sequencing instrument demand is growing with research and clinical applications outpacing COVID detection and surveillance.
Our ability to execute in the current environment continues to distinguish us from our competition and improve our share position.
On the semiconductor side, we continue to capitalize on tailwinds generated from global broadband and satellite communication trends.
In auto, supply chain issues at our customers, especially around semiconductors, mute our growth.
Underlying market demand remains favorable, and we expect our results to improve as supply chain issues ease.
The industrial businesses within the segment faced similar trends to FMT. Finally, we expect that our fire and safety/diversified products segment will be our most challenged next year.
In fire and safety, North American OEMs are experiencing significant supply chain constraints around chassis and component availability, which limit their production.
On the rescue side, we anticipate that larger tenders will lag, compounded by China localization policies that are driving delays.
We do not anticipate near-term easing of these conditions and see the potential for recovery toward the latter part of 2022.
In our BAND-IT business, like in HST, we see auto supply chain issues dampening current demand.
Despite this pressure, our business continues to outperform the broader market due to our content on key vehicle models.
Lastly, in the near term, we expect continued momentum within our dispensing business as customer capital investments are deployed in early 2022.
However, for the year, we will see a non-repeat of North America projects as we reach the end of the replenishment cycle this year as composed to last year.
We anticipate that the unfavorable price cost position we experienced last year will rebound this year as annual contracts are renewed at current pricing.
We see this improvement tempered a bit by some mix pressure as dispensing volumes reduce and we make some targeted investments.
we see favorable conditions across the majority of our end markets.
However, the degree to which our customers and our facilities will be impacted by rolling supply chain and COVID-related disruptions remains highly variable.
We'll continue to monitor conditions and be as prepared as we can be for potential interruptions.
Despite these short-term headwinds, we are optimistic about our growth potential and the trajectory of our end markets.
I'll start with our consolidated financial results on Slide 9.
fourth quarter orders of $795 million were up 17% overall and up 13% organically.
Organic orders increased across each of our segments.
For the year, orders were up 26% overall and up 21% organically.
We experienced a strong rebound in demand for our products across all our segments and steadily built our backlog in each quarter of 2021 totaling $266 million for the year.
Relative to full year 2019, organic orders were up 15%.
Q4 sales of $715 million were up 16% overall and up 11% organically.
We experienced a strong demand rebound from 2020, but our results were tempered by supply chain and COVID production limitations.
full year sales of $2.8 billion were up 18% overall and up 12% organically.
We saw favorable results across all our segments and again, strong performance relative to full year 2019 with organic sales up 4%.
fourth quarter gross margins expanded 20 basis points to 44%.
For the full year, gross margins expanded 60 basis points, and adjusted gross margins expanded 80 basis points to 44.7%, primarily driven by strong volume leverage.
Q4 operating margin was 22.7%, up 10 basis points compared to prior year.
Adjusted operating margin declined 60 basis points, driven by a rebound in discretionary spending, targeted resource investments, and the dilutive impact of acquisition-related intangible amortization, partially offset by volume leverage.
full year operating margin was 23%, up 90 basis points compared to the prior year.
Adjusted operating margin was 23.9%, up 110 basis points compared to prior year.
I'll discuss the drivers of adjusted operating income on the next slide.
Our fourth quarter effective tax rate was 22.5%, relatively flat compared to the prior-year ETR of 22.2%.
Our full year effective tax rate was 22.5% compared to 19.7% in the prior year due to lower tax benefits associated with executive compensation and the nonrepeat of benefits associated with the finalization of the global intangible low-income tax regulations in 2020.
Q4 net income was $119 million, which resulted in earnings per share of $1.55.
Adjusted net income was also $119 million with adjusted earnings per share of $1.55, which was up $0.18 or 13% over prior-year adjusted EPS.
full year net income was $449 million, which resulted in earnings per share of $5.88.
Adjusted net income was $482 million, resulting in an adjusted earnings per share of $6.30, up $1.11 or 21% over prior-year adjusted EPS.
The tax rate movement I mentioned drives a $0.23 differential in earnings per share as compared to the prior year.
Said differently, our earnings per share would have expanded by $1.34 or 26%, had 2021 been taxed at the 2020 rate.
Finally, free cash flow for the quarter was $136 million, 115% of adjusted net income.
For the year, free cash flow was $493 million, down 5% versus last year, and was 102% of adjusted net income.
This result was impacted by a volume-driven working capital build and higher capex, partially offset by our higher earnings.
We spent over $70 million on capital projects this year, an increase of over $20 million versus 2020.
Moving on to Slide 10, which details the drivers of our adjusted operating income.
Adjusted operating income increased $125 million for the year compared to 2020.
Our 12% organic growth contributed approximately $106 million flowing through at our prior year gross margin rate.
We levered well in this volume increase, and our teams drove operational productivity to help mitigate the profit headwinds we experienced from increased supply chain costs and the associated inefficiencies.
Although we have maintained positive price/cost for the year, inflation continues to ramp, and we saw compressed price/cost spread versus historic levels, which pressured our op margin rate and flow-through percentages.
The positive mix is primarily a result of the portfolio and business mix normalizing to pre-pandemic levels that had a negative impact on our results last year.
We reinvested $35 million back into the businesses, taking the form of a partial rebound in discretionary spending to pre-pandemic levels, higher variable compensation expenses, and targeted reinvestment and resources to drive growth.
Despite this incremental spend and a challenging supply chain environment, we achieved a solid 38% organic flow-through for the year.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to a reported flow-through of 30%.
With that, I'd like to provide an update on our outlook for the first quarter and full year 2022.
I'm on Slide 11.
As a reminder, going forward, we will be adjusting earnings per share for acquisition-related intangible amortization in both our guidance and results.
Our fourth quarter adjusted earnings per share under this definition would have been $1.71 per share, while our full year 2021 adjusted earnings per share would have been $6.87 per share.
Under this new definition, for the first quarter of 2022, we are projecting GAAP earnings per share of $1.57 to $1.60 and adjusted earnings per share to range from $1.73 to $1.76.
We expect organic revenue growth of 6% to 7% for the first quarter and operating margin of approximately 23%.
Q1 expected results incorporate headwinds arising from COVID-driven apps and theism and supply chain production constraints.
The first quarter effective tax rate is expected to be approximately 22.5%.
We expect FX to be unfavorable to our topline by 1% and acquisitions to provide a 4% benefit.
Corporate costs in the first quarter are expected to be around $19 million.
Turning to the full year 2022.
We project GAAP earnings per share of $6.70 to $7 and adjusted earnings per share to range from $7.33 to $7.63.
We expect full year organic revenue growth of 5% to 8% and operating margins to be around 24%.
We expect FX to be unfavorable to our topline by 1% and acquisitions to provide a 2% benefit.
The full year effective tax rate is expected to be around 22.5%.
Capital expenditures are anticipated to be around $90 million, an increase over 2021 as we continue to identify opportunities to reinvest in our core businesses.
Free cash flow is expected to be approximately 105% of adjusted net income, and corporate costs are expected to be approximately $80 million for the year.
Our earnings guidance excludes impacts from future acquisitions and any future restructuring charges.
Nexsight is excluded from the figures above as the transaction has yet to close.
Next, I will provide some additional details regarding our 2022 guidance for the full year.
I'm on Slide 12.
On an operational basis, we expect supply chain constraints to mitigate our output for the first half of the year, muting an otherwise strong demand environment.
Therefore, we are projecting organic revenue for the year to be up 5% to 8%, which translates to an earnings per share impact of $0.60 to $0.95 depending on the topline results.
This range also assumes improving price/cost.
We continue to drive operational productivity across the portfolio and expect to see benefits from our 2021 restructuring actions.
This will drive $0.20 to $0.25 of favorability next year.
We also continue to invest in the resources required to grow in the current year end and beyond.
These investments will reduce earnings per share by $0.20 to $0.25 and are funded by the productivity gains I mentioned previously.
Our discretionary spend partially recovered to pre-pandemic levels in 2021, and we expect this spending to be fully recovered by the end of 2022.
The unfavorability impacts earnings per share by $0.20 to $0.25.
I'll note that we are ramping spend to pre-pandemic levels, but with 20% higher revenues.
ABEL has one partial quarter and Airtech has two-quarters inorganic results included in our guidance.
We expect the acquisitions to contribute $54 million of revenue and $0.08 of EPS.
The incremental amortization that we see in 2022 versus 2021 is largely related to these acquisitions and will provide an additional $0.05 of EPS.
Now let's take a look at a couple of nonoperational items.
First, our guide assumes no impact from tax as our guided rate is flat year over year.
Second, we expect a 1% headwind from FX, providing $0.07 of earnings per share pressure.
So in summary, we are projecting organic revenue growth of 5% to 8% for the year, adjusted earnings per share expectations in the range of $7.33 to $7.63, a 7% to 11% growth over 2021.
Implied in our guidance is mid- to high 20s year-over-year flow-through on the low end and 30% on the high end.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 13.
In an environment characterized by uncertainty and disruption, it's important not to lose sight of who we are as a company.
First and foremost, we are a portfolio of great businesses that leverage 80/20 with an obsessive focus to serve our customers.
We refer to that simple model as the IDEX difference.
We're committed to navigating the challenges of the short-term landscape, but remain focused on the longer term.
We must continue to utilize our 80/20 toolkit to create efficient, innovative, value-creating businesses.
In a world with this level of variability, the simpler you are, the more successful you'll be.
We remain committed to investing in the resources needed, so our businesses are poised to take advantage of the growth potential in front of us.
We're a company committed to its core values, and we'll continue to develop top-performing teams as part of an inspiring company culture.
Diversity, equity, and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work every day.
Our strong operating cash flow and balance sheet put us in a great position to continue to put capital to work, and we've already identified several high-return organic investment opportunities across the company that will push us past our 2021 capex record levels.
We have invested in new industrial automation that will improve efficiency and expand capacity for growth.
We're supporting focused digitalization efforts across our installed base to solidify our superior positions and expand share of wallet.
Our facility expansions in China and India are well underway, effectively doubling future capacity to support growth across Asia.
Lastly, our M&A opportunity pipeline continues to be strong, and we look forward to deploying additional capital in 2022, welcoming new businesses to the IDEX family.
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idex q4 sales up 16% to $714.8 mln.
q4 sales rose 16 percent to $714.8 million.
sees fy adjusted earnings per share $7.33 to $7.63.
sees q1 adjusted earnings per share $1.73 to $1.76.
sees fy gaap earnings per share $6.70 to $7.00.
sees q1 gaap earnings per share $1.57 to $1.60.
q4 adjusted non-gaap earnings per share $1.55.
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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 posts q4 ffo per share $0.31.
q4 ffo per share $0.31.
sees 2021 nareit ffo per diluted share of $1.18 to $1.24.
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We have slides for our conference call.
You can find them in the Investor Relations section at our website at www.
Bfore I provide an overview of our business in the third quarter.
I do want to introduce Andy Tometich, who will become CEO on December 1 Andy joined Quaker Houghton on October 13 and we are in the midst of a detailed transition process over the seven week period until we become CEO.
Andy has over 30 years of experience in the specialty chemicals industry with a strong track record of accomplishments and a passion for the customer intimate business model.
Andy, please feel free to say a few words.
I'm very pleased to now be a Quaker Houghton and to be with you here today.
Over Mike's very successful tenure, he and the Quaker Houghton team have developed a business model with customer experience as it's true differentiator and that truly resonates with me.
After three decades and specialty chemical companies that focused on customer-based solutions, I'm really looking forward to building on the strong foundation at Quaker Houghton.
Especially as we look to grow in areas where our model add sustainable value for our customers and our stakeholders.
For now, I'll just wrap up my brief comments by saying, I'm excited about the opportunities for Quaker Houghton, Mike.
I really appreciate everything you are doing to support our seamless transition including your continuation as Chairman and I look forward to working with our analysts, investors and stakeholders, including those who are with us on the call today.
Mike back to you.
And I'm highly confident Andy will take Quaker Houghton to new heights.
And now onto the quarter, our results for the third quarter where we were, where we expected in the base.
Although how we got there was different than our original expectations.
The major headwind for the quarter was raw material costs.
They increased nearly 10% from the second quarter to the third quarter, which was considerably higher than our expectations.
However, we also had good sales growth and continued our efforts around cost control, which helped offset the raw material headwinds.
Let me now dive deeper into our performance and I'll start with sales.
Overall, our topline revenue was up percent from the prior year, with all segments showing strong growth.
We saw good organic volume growth between 7% and 9% for our three largest segments, which was the Americas, EMEA and Asia Pacific.
Higher prices of around 10% were also a major factor in our sales growth.
In addition, we saw a benefit from acquisitions of 4% and from foreign exchange of 2%.
On a sequential basis, our sales volumes were relatively flat.
While we did see growth in some of our end markets, sequential growth was muted by both seasonality and certain segments as well as the semiconductor shortage which we estimate cost us approximately 2% points of growth in the quarter.
I also want to point out that our ability to gain new piece of the business and take market share continued to contribute to our strong performance as we estimate total organic sales growth due to net share gains was approximately 3% in the third quarter of 2021 versus the third quarter of 2020.
So we continue to feel good about our ability to deliver on our historical performance of consistently growing 2% to 4% points above the market due to share gains and looking forward, we continue to feel good about delivering these levels given the opportunities we have recently won or are actively working on.
So in summary, the big picture on organic volume growth for us was approximately 3% was due to market share gains.
About 4% due to growth in our underlying markets, which we estimate would have been 2% higher, if it wasn't for the semiconductor shortage.
While sales were a positive for us in the quarter, a clear negative was the continued increase in our raw material costs.
While we knew raw materials were trending up, the last time we talked, the increases have continued longer and at a higher level than we expected.
Overall, our cost of raw materials have increased nearly 10% sequentially in the third quarter.
Further, the availability of raw materials has impacted us at times, but I'm proud to say that we've navigated this so far and have ensured that all our customers have continue to operate their business.
The increase in raw material costs did put downward pressure on our gross margins in the third quarter and the increases in raw materials will continue into the fourth quarter, although at a slower projected rate.
We have, continue to implement price increases and we will be implementing more of the next two months.
Our expectation is that we will see sequential improvement in our product margins in the fourth quarter as we make strides to offsetting raw material increases.
For the fourth quarter, we should start to see some improvement in our product margins, but we expect to have a larger improvement in the first quarter of 2022.
Our goal still remains to exit the year with enough price increases in place that we will offset raw material inflation from 2021 as we enter into 2022 and we believe this is achievable.
So overall we are pleased with the quarter, especially considering the challenges we faced with raw material pricing as well as the headwinds from the semiconductor shortage.
Our trailing 12 months adjusted EBITDA of $279 million is an all-time high as 25% higher than our $222 million from last year.
So we are experiencing a step change in our profitability that we projected as we entered into the year.
Related to our liquidity, our net debt in the quarter was relatively flat due to increases in our working capital, primarily related to raw material cost increases and availability.
However, our leverage ratio of net debt to adjusted EBITDA continues to be at 2.7 which is the low point since the combination two years ago, and down from 3.4 one year ago.
Each of them expands our technology capabilities and our geographic expansion in certain product lines.
In total, they're adding 15 million in revenue and $2 million in EBITDA.
While maybe not that meaningful given the size each provide another building block in our strategic portfolio.
This also continues our trend of buying smaller companies for an attractive multiple of approximately seven to eight times EBITDA.
As we look forward to the fourth quarter, we expect short-term headwinds from high higher raw material costs.
The power restrictions in China and the continued impact from the semiconductor shortage on the global automotive market.
But as I mentioned earlier, we expect to see some sequential improvement in our product margins.
Overall, we expect our adjusted EBITDA in the fourth quarter to be similar to the third quarter and be somewhere in the '60s.
And stepping back and looking at the year as a whole, I am more optimistic about our business now than I was at the beginning of the year.
While we will likely end up with our profitability in 2021 in the same place as we originally expected.
The way we are getting there is different.
Essentially, we are seeing higher demand in our products in most end-markets.
But at the same time this higher demand was largely offset by the very large rising input costs, which negatively impacted our margins due to the lag effect of getting price increases.
However, we are making headway in our price increases, and as I mentioned before, we remain committed to our goal of exiting the year with product margins back to our targeted levels.
So as to recover the past years raw material inflation as we enter into next year.
I believe this scenario was better than we expected entering the current year as we will exit with better demand in our end markets, coupled with getting our margins and a better place going into 2022.
As we enter 2022, the headwinds in the fourth quarter caused by high raw material costs and the semiconductor shortage, as well as the power restrictions in China are likely to last into the first part of the year, but become less of a headwind over time.
For the full year, we believe 2022 will be a strong year for us with net sales and earnings growth to be above our long-term trends.
We expect this to be driven by one good growth in our end markets as our markets continue to rebound.
Two continued market share gains and three sequential improvement in our product and gross margins over the course of the year as we recapture the raw material inflation from 2021.
I am so proud of how our team has performed in servicing our customers, meeting their needs and successfully continuing with our integration execution, which is both critical and difficult for us given the conditions we faced this year.
People are everything in our business and by far our most valuable asset and ensuring their safety and well-being is and will continue to be a top priority for us.
So I can't help but emphasize my pride in our Quaker Houghton team and what we have and will be able to accomplish for our customers and investors both now and going forward.
And also there are reconciliations between US GAAP measures and non-GAAP measures provided in our call charts on pages 11 to 22 for reference.
Getting into our third quarter performance, the story was pretty consistent with our previous quarters this year, and that it was really a tale of a positive solid top-line performance tempered by a negative higher input costs due to the global supply chain disruption that we and the rest of the world are currently facing.
As I begin to discuss our quarterly performance, I'll point you to slide six, seven and eight in our call charts, which provide a further look into our financials.
Our record net sales of $449.1 million increased 22% from the prior year, driven by 6% organic volumes, 10% from our pricing initiatives, 4% percent from acquisitions and 2% from foreign exchange.
When looking sequentially, we were up 3% from the second quarter, largely due to increases from our pricing initiatives on flat volumes.
Turning to our gross margin trend.
Our third quarter margin ended at 32.3%, given the upward trend of generally all input costs in the world, we knew this quarter would declined compared to the 35.5% level we had in second quarter and also signaled that this quarter would be the lowest of the year.
That said, the pace of the raw material cost increases were more than we expected and our sequential gross margin declined as such.
Looking ahead to the fourth quarter, margins, as Mike mentioned, we expect to see sequential increases in our product margins on a dollar profit basis.
However, the impact of the price increases to our top line will naturally impact our overall gross margin level on a percentage basis, as we are putting in price increases to offset raw material inflation initially and retain our product margins on a per kilo basis to ensure we maintain our levels of gross profit in dollars.
We expect to achieve this by the end of the year on a going forward basis once our price increases offset raw material inflation and we protect our gross profit dollars going forward, we will then begin to put in place additional initiatives to return our gross margin more to targeted levels over time.
SG&A was up $7 million compared to the prior year, as we add additional direct selling costs due to our increase in sales and related margin higher labor and other costs that were directly impacted by COVID last year and additional costs associated with our recent acquisitions.
Sequentially, we benefited from $5 million of lower SG&A costs, which were primarily due to lower incentive compensation and some lower professional and other similar fees.
The Company also benefited from other higher income due to FX transaction gains in the current quarter compared to losses in the prior year, which was partially offset by lower performance from our equity investments, primarily in Korea.
The net of this performance resulted in adjusted EBITDA of $66.2 million for the quarter, which was up 3% compared to the prior year of $63.9 million.
As you can see in chart nine, this increased our trailing 12 month adjusted EBITDA to a record $279 million.
From a segment effective, these results were driven by significant net sales increases in each of the Company's segments year-over-year, while gross margins and higher SG&A negatively impacted all segments.
The net of these impacts resulted in a 16% increase in EMEA earnings compared to prior year generally flat performances in Americas and GSP and a decline in Asia-Pacific earnings which was due to a solid performance last year as China was less impacted by COVID 19 in the prior year, as well as a decline in gross margin in the current quarter due to the continued increases in raw material costs.
When looking at our segments sequential performance, each segment's topline was other above the second quarter, a relatively consistent, largely due to global pricing initiatives on flat volumes, which were offset by lower gross margins in all segments.
Due to continued increases in raw material costs that exceeded our pricing initiatives.
From a tax perspective, we had low effective tax rates in the current and prior year quarters of 2.6% and 8.1% due to various one-time non-cash related items.
Excluding these items in each period, our tax rate would have been relatively consistent at 25% for the current quarter compared to 24% in the prior year.
To note, we expect our fourth quarter effective tax rate to be a little higher in the range of 26% to 28%.
But our full year effective tax rate will be more consistent with past estimates in the range of 24% to 26%.
Our non-GAAP earnings per share of $1.63 grew 5% compared to the prior year as our solid adjusted EBITDA coupled with over a million of interest savings due to lower borrowing rates and average borrowings were partially offset by a slightly higher tax expense.
As we look to the company's liquidity summarized on chart 10, our net debt of $759 million was flat compared to the second quarter.
This was primarily driven by $12 million of operating cash flow, offset by $7 million of dividends paid and $6 million of additional investments in normal capital expenditures.
The quarter's low operating cash flow was driven by further investment in the company's major cash requirement, working capital.
Specifically the company, continue to see cash outflows from accounts receivable due to higher net sales and also had considerable increases in inventory, which were due to higher raw material costs, as well as restocking and bulk purchases to ensure safety stock given the disruption in the global supply chain.
The company's liquidity and leverage still remain healthy with a reported leverage ratio at 2.7 times as of the third quarter compared to 3.2 times entering the year.
I want to emphasize we are committed to prudent allocation of our capital and remain committed to reducing leverage to our target of 2.5 times, which we still are targeting to be near by year-end.
This commitment includes prioritizing debt reduction, but also continuing to pay our dividends as well as investing in acquisitions that provide growth opportunities which makes strategic sense.
This is evidenced by our most recent tuck-in acquisitions of [Indecipherable] and industries, which were acquired for 13 million or a rough multiple of seven times EBITDA and bring with them a wealth of opportunity in technology and product reach.
So to summarize Quaker Houghton had a solid quarter, that was relatively consistent with our expectations but a little different than initially expected due to continued strength in demand and good market share gains, which were partially offset by higher input costs.
Our liquidity remains very healthy, and we remain committed to our overall capital allocation and deleveraging strategy.
Before I conclude my remarks.
I just wanted to take a moment to note that this is the last call for Mike during his incredibly successful tenure as CEO.
Under his guidance Quaker Houghton has reached new heights and grown in areas that some believe could never been achieved.
And I appreciate those remarks, it's really been an honor and a privilege to work for Quaker Houghton for 23 years and to work with such a great people throughout this company that really deliver solutions for our customers every day and really make this a very special place to work.
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sees fy adjusted earnings per share $7.10 to $7.30 excluding items.
q3 earnings per share $1.65.
raises full year 2021 financial outlook.
fy 2021 net sales is now expected to increase in mid-twenties percentage range.
fy 2021 adjusted earnings per share is now expected to be in range of $7.10 to $7.30.
plans to repurchase $1.3 billion of shares in 2021.
ended quarter in a strong financial position with $1.9 billion in cash.
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I'm Mark Chekanow, Director of Investor Relations at SWM.
Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.
In particular, the extent to which the COVID-19 pandemic continues to impact our business is uncertain and depends on numerous evolving factors which are difficult to predict, including the duration and scope of the pandemic and actions taken in response to it.
Unless stated otherwise, financial and operational metric comparisons are to the prior-year period and relate to continuing operations.
These continue to be interesting times around the world.
I've seen in news reports, COVID is moderating somewhat, but also not retreating as fully as everyone had hoped.
At the same time, dramatic demand increases have caused widespread supply disruptions with rapid and sometimes unprecedented price increases on many input costs, coupled with shortages of key raw materials.
In mid-2020, while many companies dealt with weak sales results and lengthy production outages from COVID-related stay-at-home orders, SWM's performance was quite strong, with several AMS markets proving resilient to COVID pressures and our Paper business exceeding expectations.
SWM's global teams were agile and our portfolio robust with good demand across many end markets, resulting in outstanding 2020 third quarter earnings.
We were expecting a similar story this year by building on an already strong portfolio, combined with the additional capabilities offered by our acquisition of Scapa in April.
We have high conviction that the fundamental story remains positive as demonstrated by the strong top line growth continuing in AMS. However, 2021 has seen global supply chains in disarray and rapid inflation and challenges accelerated throughout the third quarter, with higher input costs compounded by limited availability of some key raw materials and global shipping bottlenecks; these headwinds are clearly impacting our bottom line results.
While we continue to successfully implement price increases with the latest round becoming effective October 1, we have still been lagging in many cases, pressuring margins and resulting in us delivering adjusted earnings per share of $0.82 for the third quarter.
But we do see some early signs of moderation.
We expect these conditions to continue at least through the fourth quarter before our actions deliver better margin recovery.
Given our results to date and near-term view, we expect that our full year 2021 adjusted earnings per share will be below our original guidance for the full year, but do expect sequential improvements throughout 2022.
As you will see in the following commentary, our overall portfolio remains very good -- remains strong with very good demand, and we are confident that the actions we have and will continue to take will return us to the levels of profitability expected from our company.
As demonstrated by our agile teams last year, we are well positioned to continue to execute against our long-term strategic plans despite these shorter-term disruptions.
In AMS, overall sales nearly doubled, including the benefit of Scapa acquisition, with underlying organic sales increasing a strong 10% in the quarter.
Demand remains positive in several of our most strategic product lines, particularly in transportation and filtration end markets.
Transportation was up approximately 25%.
Fundamentals remain very strong and consumers are driving rapid growth for our high-value paint protection films.
As we noted in last quarter's call, that despite being the world's largest supplier of these base films, our sales could have been even higher if not for raw material scarcity.
Year-to-date, we have missed tens of millions of dollars in sales due to this midterm constraint.
To address this, we have expanded our supplier network and qualified additional suppliers' resins with our customers and secured additional supply for 2022.
Though still constrained, access to more raw materials should support our ability to deliver even greater than 10% growth next year on top of what will be already rapid growth in 2021.
We further expect our recent acquisitions to allow us to continue to innovate by expanding our offerings in this key product area, thereby executing against our stated strategy of offering our customers greater solutions to their needs.
We also continue to invest in capacity worldwide to capitalize on increasing consumer awareness and adoption of paint protection films and continued middle-class growth in many countries.
Filtration also grew approximately 25% in the quarter as the need for cleaner and purer continues to drive positive trends.
Water and process materials led the way.
Again, echoing comments from the second quarter call, our water customers continued to relay bullish outlooks to our commercial teams as they restock from depleted inventory levels, see increased activity at processing sites and convey positive outlooks for additional capacity coming online in emerging markets.
Process filtration also remained strong, albeit somewhat constrained by the semiconductor shortage, but we see continued momentum as chip makers work to fulfill unmet demand.
On the air filtration side, sales nearly matched third quarter of last year when our sales grew more than 60% on widespread COVID-driven HVAC system upgrades.
And we are encouraged that this business is maintaining such a high level of activity.
Notably though, our overall filtration sales have been impacted by labor challenges that constrained our growth.
We estimate the total impact to be in the range of $4 million to $5 million per quarter in lost sales, implying our total filtration business could have been up nearly 40% in the third quarter compared to last year.
Though there is limited visibility on when labor markets will reach equilibrium, we are taking multiple actions at various plants to address the issues in the meantime and are seeing increased interest in open positions.
These actions are a combination of increasing rate wages where needed to assure we are competitive; increasing our focus on supporting those currently in roles; and investing in automation to reduce our reliance on labor and improve efficiencies.
AMS' legacy healthcare business faced a tough year-on-year comparison as last year we benefited from the unprecedented demand in face mask materials.
Outside of that, we saw good gains in both consumer and higher-margin specialty wound care categories.
Regarding Scapa's performance, we are pleased that it is in line with our sales expectations.
Excluding currency fluctuations and GAAP accounting conversions, the overall business rebounded strongly versus 2020 and is nearing pre-COVID levels on the top line.
On the healthcare side, we are seeing good growth in consumer wellness products, whereas products more reliant on hospital foot traffic remain below pre-COVID levels.
In Industrial, we again saw a strong growth versus 2020.
Those sales are performing well.
Scapa is experiencing similar inflationary and supply chain pressures as the rest of our businesses.
Although we are disappointed that inflationary pressures, material sourcing challenges and labor availability negatively impacted the bottom line, top line performance for AMS has been strong.
Though we have successfully increased prices multiple times, these actions quite simply were not sufficient to keep pace with rapidly increasing raw material prices.
Customers are generally accepting these increases, and we will continue these actions as needed.
On a positive note, we do see early signs of resin pricing easing during the fourth quarter, and if that trend continues, should put us in an improved price cost position in 2022.
It is also important to note that while we have been addressing the above challenges, we have continued to drive our innovation process and invest in capacity and efficiency improvements across many of our segments.
These efforts will allow us to continue to position ourselves for continued growth.
Switching to Engineered Papers.
Quarterly top and bottom line results were softer than last year, though this was to be expected as last year's third quarter was the highest quarterly segment of operating profits we have achieved over the past 5 years.
While we were very happy with this performance last year as many businesses were suffering from weak demand, we knew that the inventory builds our customers took to handle the pandemic would reverse in time.
As you may recall, when we outlined our 2021 annual guidance, our expectation was to return to a more historical EP segment profit level given the large '22 benefit -- 2020 benefit of several large customers building LIP inventory to derisk their supply chains.
Unfortunately, while the decline in sales of 12% on a 10% volume decrease was generally anticipated, EP was not an exception to the inflationary pressures seen across global manufacturing.
Higher input costs for wood pulp, freight, and most recently, escalating energy and natural gas prices have far exceeded our expectations to date.
But just as with AMS, we have been actively raising prices to recoup higher wood pulp costs.
Due to the more standard contractual obligations, these increases lagged the pace of inflation, although we expect to catch up in the coming quarters.
We have also been able to negotiate additional volumes as a further offset to pricing constraints.
Just as with resin, we do believe we have seen peak pulp prices and expect modest near-term relief.
Importantly, we are not slowing our investments in innovation and finding ways to improve our cost structure.
Heat-not-Burn sales demonstrated continued momentum as our customers invest heavily in reduced-risk products.
Our hemp products are also going commercial, and we are in the process of finalizing our first meaningful commercial contract for hemp filler products to be used in non-tobacco, non-nicotine-based alternative smoking products.
This customer alone could become a multimillion-dollar customers within 2 years.
Our investments in hemp processing technologies and botanicals are beginning to bear fruit.
And like all new innovations, these product lines deliver an attractive margin profile.
I reiterate that despite grappling with the current supply chain headwinds and inflation, it is critical for our long-term outlook to continue to drive innovation and partner with current and potential new customers to drive growth in new product categories.
Regarding our cost structure, we have announced that we will be closing our Winkler site in Manitoba, Canada, at the end of the year.
This site primarily processed materials for our recently closed Spotswood, New Jersey site.
Though always a difficult decision to close facilities, we believe it was the prudent decision given the Spotswood shutdown.
Starting with AMS, third quarter sales increased 87% with organic growth at 10%.
As mentioned, sales could have been even higher if not for supply chain disruptions with some of our specialty resins, coupled with understaffing at some of our sites due to a tight labor market.
Directionally, it is possible AMS organic sales could have been up 20% without some of the constraints that we are dealing with.
We had excellent sales performance, particularly in transportation and filtration, each growing about 25% despite those limitations.
Adjusted operating profit increased 9%, reflecting the high organic sales growth and the incremental profits from Scapa.
However, significant inflationary costs, particularly with raw materials, along with supply chain issues pressured margins.
Segment adjusted operating margin contracted 750 basis points to 10.5%, in large part due to higher input costs.
Higher resin costs, mostly for polypropylene, had a negative effect on operating profits of approximately $5 million, net of the price increases that were effective in the period.
We recouped about half of the resin cost inflation, similar to the second quarter recovery ratio.
We've continued to raise prices and are actively engaged with our customers as we continue to catch up to a market that has seen rapidly escalating prices that reached record levels during the third quarter.
For context on the recent price escalation, during the second quarter, polypropylene prices increased to about $1.20 per pound, up 150% year-over-year.
Due to the 1 quarter lag from when we purchase, produce and sell, we felt that impact during our third quarter.
In the third quarter, prices continued to rise sharply to an average price of approximately $1.40 per pound, which will flow through the P&L during the fourth quarter.
We are, however, very encouraged to see some pullback in the polypropylene market in October.
And industry projections show continued softness of these record high levels during the fourth quarter and throughout next year.
Current projections call for pricing to reach under $1 by the second half of 2022.
While polypropylene is the single biggest variance driver, other factors such as higher costs for other materials and freight also contributed to margin contraction of the base business.
Regarding Scapa's profit contribution, the acquisition boosted AMS segment adjusted operating profits by over $9 million, similar to the second quarter.
However, as noted in our release, approximately $2.5 million of Scapa's SG&A costs were booked in our unallocated costs, not within AMS. So please be cognizant of that when assessing our segment financial results.
The transaction was slightly dilutive to adjusted earnings per share in the quarter, with elevated costs and supply chain disruptions causing the variance to our original expectations.
Outside of these external factors, we are pleased with how the business is performing and are confident in Scapa's progress with rebounding to pre-COVID sales and profit levels and our ability to deliver cost synergies in the near term and commercial synergies in the longer term.
Simply put, we expect to drive significantly improved results in 2022 and beyond as supply chain conditions normalize and our pricing catches up to the elevated raw materials environment.
For Engineered Papers, second quarter sales were down 12% on a 10% volume decline.
As Jeff detailed, we knew this would be a very challenging comparison to prior year, in large part due to a normalization of LIP volumes.
This carries an inherent negative mix impact on our profits as well, which was compounded by higher costs for wood pulp and other inputs.
Pulp costs alone were approximately a $3 million negative impact compared to last year, net of the price increases effective during the quarter.
While we've executed price increases to some customers, this business is more contract based, so our recovery rate has been less than half.
For context, the NBSK wood pulp index was up 40% to nearly $1,200 per ton in the second quarter compared to last year, which flowed through the P&L in the third quarter, and the third quarter index was up 60% to nearly $1,340 per ton, which will impact fourth quarter results.
The index appears to have peaked at this elevated level in recent months and industry projections are for some more modest relief in the coming quarters.
Regarding adjusted unallocated expenses, we saw an increase of $4 million during the quarter.
However, as noted, $2.5 million of the increase was Scapa's unallocated costs booked in our unallocated costs.
The remainder of the increase related to higher third-party consulting fees as well as higher IT expenses to support the growth of the business.
On a consolidated basis, sales for the quarter increased 37% to $384 million but decreased 1% on an organic basis.
Adjusted operating profit decreased 24% to $40 million.
Third quarter 2021 GAAP earnings per share was $0.38 versus $0.78.
The most material GAAP earnings per share items that are excluded from adjusted earnings per share were higher purchase accounting expenses of $0.29 per share compared to $0.15 last year due to the Scapa acquisition.
In addition, integration expenses were $0.08 per share.
Normalizing for those and other items, adjusted earnings per share was $0.82, down from last year's $1.16 per share.
To put some of the supply chain and cost headwinds into perspective, we estimate that cost inflation on resins and pulp alone that we did not recoup through price increases had an impact of over $0.20 per share on earnings per share in the quarter.
And the lost sales on transportation films alone was more than a $0.10 impact.
When combined with the other inflationary items like freight and energy and other constraints on growth, we could have very well seen adjusted earnings per share growth this quarter despite the difficult LIP comparisons we had anticipated.
To reiterate our comments from last quarter, these are our best directional estimates and indications, but they are clearly -- they clearly convey the magnitude of the financial impacts.
Though the costs and challenges are real, we see signs of relief on several of them, which should put us up for improving results as we move past the fourth quarter with comparisons getting easier throughout next year.
To recap, we have secured additional specialty resins for our transportation films business.
Our price increases will continue to catch up to input costs.
We see fourth quarter costs of resin and pulp easing, that are expected to be realized in 2022.
And we have visibility on cost and commercial synergies in Scapa for next year.
We are disappointed that this year's earnings will finish below our original expectations.
However, we firmly believe many of the challenges are temporary and are currently turning the corner.
With respect to the fourth quarter, we expect adjusted earnings per share to be down approximately 20% from $0.77 in the prior-year quarter, implying full year adjusted earnings per share could finish about 10% below the low end of our original guided range.
This reflects the high-cost raw materials purchased during the third quarter flowing through the P&L, continued lost sales due to material scarcity and some understaffing in our sites, with other key variables being joint venture results and final year tax rate.
We're still assessing next year's outlook, and we'll issue guidance in February.
But at this stage, we see strong operating profit growth in 2022.
This could mean potentially exiting 2022 on a run rate approaching $4 of adjusted EPS, assuming the current tax rate, which is generally consistent with our original 2021 guidance we issued before many of these challenges escalated.
Regarding cash flows, year-to-date operating cash flow was approximately $28 million, down from $108 million in the prior year.
Year-to-date adjusted operating profits were lower by $6 million.
We incurred $14 million of cash costs related fees and expenses in connection with the Scapa acquisition.
And we saw a $50 million increase in working capital outflows.
In addition to robust sales growth, which would naturally drive working capital outflows related to higher receivables, the inflationary environment is pushing our cash cost of inventories still on the balance sheet significantly higher.
This inventory factor alone accounts for approximately $30 million of higher cash outflows compared to last year.
Although sales growth and higher costs have impacted our typically strong second half cash flows, we would expect to resume more historically strong cash flow generation as working capital levels normalize during the fourth quarter and into 2022.
Net debt finished the second quarter just over $1.2 billion.
Net debt to adjusted EBITDA for the terms of our credit agreement was 4.8x at the end of the third quarter.
Despite leverage increasing, we remain comfortably below our 5.5 covenant level and have approximately $160 million in liquidity, consisting of our current cash balance of $73 million and $86 million of availability on our revolving credit facility.
In addition, we are in the process of closing the sale of assets related to discontinued operations, which is expected to be completed during the fourth quarter.
Now, back to Jeff.
As we close out 2021, we want to keep the ups and downs of the past 18 months in perspective.
Our global teams overcame many challenges and uncertainties last year to deliver strong operational and financial performance in 2020.
And while we are grappling with supply chain headwinds this year, though very different issues, these 2 will ultimately normalize.
We remain laser-focused on addressing those issues within our control, with price increases to offset higher costs, sourcing projects to combat raw material scarcity, and initiatives to improve staffing levels at our production sites to meet demand.
We are confident we can return to a run rate of $4 in earnings per share later in 2022 with the stage set for sustained growth in the years to follow.
Despite the all-hands-on-deck approach required to address current challenges, we have not lost sight of the strategic imperatives to position us for long-term growth.
These imperatives include innovation of new products, offering expanded solutions, realizing the synergies of our recent acquisitions and leveraging manufacturing 4.0 technology to improve operations.
And underscoring all those initiatives is a cultural foundation based on unwavering commitments to each other and our customers as we navigate these unprecedented times.
We are excited about our portfolio and the future growth it portends.
That concludes our remarks.
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schweitzer-mauduit international inc - qtrly total sales were $383.6 million, up 37.3%, but down 1% on organic basis.
schweitzer-mauduit international inc - qtrly gaap earnings per share was $0.38.
schweitzer-mauduit international inc - qtrly adjusted earnings per share was $0.82.
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Leading today's discussion are Vince McMahon, WWE's Chairman and CEO; Nick Khan, WWE's President and Chief Revenue Officer; Stephanie McMahon, WWE's Chief Brand Officer; and Kristina Salen, WWE's Chief Financial Officer.
Their remarks will be followed by a Q&A session.
Actual results may differ materially, and undue reliance should not be placed on them.
Additionally, the matters we will be discussing today may include non-GAAP financial measures.
You should note that all financial comparisons are versus the year ago quarter, unless otherwise described.
I'll talk some generalities here as weigh into the specifics later on Kristina and Stephanie and everyone.
But nonetheless, I think that I've never felt as confident as I currently do in terms of this -- of our new management.
It's really extraordinary what this has done for the entire business and other executives and much further below.
There's a new spirit, a new vibrance.
And I don't know if you find this anywhere, there's a view of optimism, not just for optimism stake, but when you look at where we're going to go in the future and use the resources that we have as well as other things like, this is a fun, exciting place to be.
And of course, that new management team is, as you mentioned, Nick Khan, who is the President and, of course, CRO, Kristina Salen, new CFO, was mentioned and, of course, other individuals that are here, that have been here before, they now feel the same way.
The interaction is reinvigorating, it really is.
And Stephanie, who's Head of Brand Management, does now have a enhancive position to enhance growth with Nick and others as well.
And there are many other things going on here.
But I just want to -- whether we're going through a whole bunch of numbers of stuff that you already have and going through the ThunderDome, COVID, and all those, I just want to say how I really feel about our new management team.
And quite frankly, that's all that I say.
As an introduction, I wanted to share some of my background and motivation with you, our analysts and investors.
As a co-head of television at Creative Artists Agency, otherwise known as CAA, I had the good fortune of working with some of the top talent in the media business as well as the Southeastern conference, Tiger Woods and Phil Mickelson and their teams and putting together the head-to-head event a match, top rank boxing and, of course, WWE.
I was a practicing litigator prior to that, and perhaps more importantly, as a student, I was an usher at Wrestlemania IX in my hometown of Las Vegas WWE Studios.
Let's talk about that first, if we could.
We're in development of various new content.
A few shows that were already announced and I'm going to announce to you here today that we happen to find really interesting.
Total Bellas, season six, premiering this November.
A&E, a show currently titled The Quest for Lost WWE Treasurers, hosted by Paul Livek, otherwise known as HHH; and Stephanie McMahon, our Chief Brand Officer, who you will be hearing from shortly.
This is a multi-episode order that will take viewers on the ultimate hunt to find some of WWE's most iconic, lost memorabilia.
This deal furthers our relationship with Hearst Communications through A&E.
A&E has also ordered additional episodes of our soon-to-be-released documentary series, which features stand-alone documentaries on legendary superstars like Stone Cold Steve Austin, The Ultimate Warrior and many others.
If you recall, the Andre the Giant documentary from 2018 was not only the highest-rated sports documentary on HBO in the last 15 years, but was the highest-rated documentary on HBO in the last 15 years.
Produced by WWE Studios in association with HBO Sports and executive producer, Bill Simmons, founder of The Ringer.
With that said, I'm happy to share with you that in a groundbreaking deal, we have sold a multipart documentary to Netflix on the life of none other than our very own Vince McMahon.
By groundbreaking, I mean one of the highest budgeted docs in Netflix's history.
Bill Simmons, as previously mentioned, will executive produce.
Chris Smith, the amazing Director of Netflix' Fyre Festival documentary will direct and produce alongside WWE Studios.
As I mentioned when I first joined the company, it's rare to have an opportunity to work at a company that's not only legendary in what it has already accomplished, but also uniquely poised to expand across all lines of business to maximize current opportunities and find new paths to higher growth.
This includes exploring an alternative strategic option for WWE Network, realizing greater economics from WWE's international markets and cultivating new business opportunities.
Let's discuss WWE Network for a moment.
Even with potential partners impacted by COVID-19, conversations have resumed for alternative strategic options to our current model.
We're currently unable to estimate when that alternative option will be completed, but we still believe in the potential for a transaction that enables WWE to reach a larger audience and realize a greater economic return.
In the interim, we continue to capitalize on the growth in digital consumption, promoting content sampling and subscription with a free version of WWE Network.
Since the pandemic began, WWE subscriptions are up.
Even with our marquee annual event WrestleMania being presented in a nontraditional way.
Notably, the third quarter marked an increase in network viewership and content consumption.
2.4 million total viewers watch content across all tiers, representing a 60% increase.
And those viewers watched 37 million hours of content, which was an 8% increase.
Perhaps more importantly, average paid subscribers to the network increased by 6% to $1.6 million.
To realize greater economics from WWE's international markets, we remain focused on developing localized content, which utilizes local talent and is produced in local language.
We're excited to now be working with our content partner in India, Sony, on a 2021 event that will primarily feature our developing Indian superstars.
That event will air in India on the Sony platforms and will also be distributed domestically in the United States.
We believe partnerships like this are the best way to build engagement and to maximize the value of content for our international distribution partners and our fans.
In the current environment, we expect to invest in international at a measured pace, balancing near-term results and long-term growth objectives.
WWE has demonstrated tremendous creativity in responding to today's unprecedented challenges.
And in our view, we are well positioned to leverage the value of live content and growth in digital consumption.
In this context, we believe WWE can develop new content in distribution platforms, introduce new products and increase our returns from international markets.
We look forward to sharing our progress on these objectives with you in the future.
Given the importance of WWE's brand strength for future success, I am pleased to introduce Forbes number two most influential marketing executive, Stephanie McMahon.
A lot of people ask me, what does a Chief Brand Officer really do.
And while every company is different, my role here is to expand and strengthen WWE's brand by amplifying our presence across all media platforms, deepening engagement with our fan base, creating value for partners and driving revenue.
Everything we do begins with what we call the WWE Universe, comprised of our fans, employees, partners and superstars.
We call it the WWE Universe because it is inclusive, like being a part of a giant community, which is especially important during times like these.
When the pandemic hit and sports leagues and content providers began to postpone and shut down, WWE became focused on not if, but how we were going to continue to deliver our in-ring content to our fans through our media partners.
We needed to provide relief for our audience and escape from their fear and uncertainty and do our best to deliver on our mission of putting smiles on faces.
So WWE did what we do best, we pivoted and began to innovate.
WrestleMania went from a sold-out Raymond James stadium in Tampa, Florida, with over 80,000 people to a two-night event at our performance center with no one in attendance.
Raw, Smackdown and NXT followed suit, and we began to test and learn in what was our new normal.
We experimented with audio techniques and cinematic style matches.
We started to bring in some of our developmental talent to serve as an audience through flexiglass, but it wasn't good enough.
After many months, we found a way to bring the spectacle back to WWE.
On August 21, we launched what we call WWE ThunderDome.
We returned to an arena setting and took up residency at the Amway Center in Orlando, Florida.
We partnered with the famous group to bring nearly 1,000 live virtual fans back to our show.
We're using pyrotechnics, laser displays, augmented reality and drone cameras in ways we never have before, making Raw and Smackdown feel alive again.
And we have seen a lift in the ratings of 6% for Raw and 12% for Smackdown as compared to the prior four weeks without fans.
Additionally, we made an investment in WWE's performance center, transforming the location into the capital wrestling center, a nod to my grandfather's organization and a new location to shoot in-ring content.
The CWC launched on October four for NXT's live special Takeover 31.
It's incredible to watch production teams from Orlando, Stanford and London, all working simultaneously connected through technology and innovation to create this show.
And as more and more people started to gravitate to streaming platforms, we adjusted our digital posting strategy to incorporate new original content, longer matches versus clips, and resurfaced high-performing historical content across YouTube, Facebook and WWE Network, resulting in increased digital views of 28% excluding the impact of geographical restrictions in India.
We recently surpassed 50 billion views on YouTube, making WWE the fifth most viewed YouTube channel in the world.
And we've partnered with new and upcoming platforms, most notably TikTok, where we are the second most popular sports brand behind the NBA.
In order to reach new audiences, we need to expand outside of our ecosystem.
In addition to some of the content Nick mentioned, we also have a pop culture strategy where we work to bring celebrities and influencers into our programming as well as casting our superstars outside of our programming.
Some recent integrations in the quarter included Adam Sandler, Chris Hemsworth, Ken Chong, and just this past Monday, Matthew McConagha was a guest in the ThunderDome on Raw.
Most importantly, we need a reason to keep our audience coming back for more.
In addition to compelling content, people want to invest their time and resources in a brand that has purpose and value.
WWE continued to support our community partners with the resources they needed to help them deliver on their mission.
We quickly transitioned from in-person events to virtual events, including hospital visits, career workshops through Zoom for Hire Heroes to support servicemen and women, virtual anti-bulling rallies with Boys & Girls Clubs of America and digital meet and greets for Wish kids through Make-a-Wish Foundation.
We also produced content to support physical and mental health for Special Olympics athletes as well as kid power-up videos for the launch of UNICEF's Kid Power at Home platform.
And during the month of September, we engaged our fan base, employees and superstars to raise money and awareness for pediatric cancer research through our partnerships with the V Foundation and Hyundai Hope On Wheels.
Speaking of partnerships as a final measurement of our brand strength, our advertising and sales revenue outpaced industry trends.
Top global brands continued to partner with WWE throughout the year even during the challenges with COVID, highlighted by companies such as Coca-Cola, Cricket Wireless, Hyundai, Mars, Microsoft Studios, Papa John's and Unilever.
And this month, we announced a major new partnership in the beer category with Constellation Brands, the largest beer import company in the United States, focusing on their Victoria, Corona and Modelo brands beginning next year.
In 2021 and beyond, we remain bullish about the opportunity to focus on long-term partnerships and capitalize on our unique ability to bring engagement, scale and reach with the ease of negotiating with one party, WWE.
Wow, I wouldn't want to follow that.
Today, I'll review WWE's financial performance, liquidity and capital structure and business outlook.
As a reminder, all comparisons are versus the year ago quarter, unless I say otherwise.
WWE generated third quarter revenue of $221.6 million, up 19% and adjusted OIBDA of $84.3 million, up more than 2 times, both were driven primarily by higher rights fees from U.S. distribution agreements.
Although government mandates continue to result in the cancellation of live events, WWE offset the absence of ticket sales with a reduction in event-related production expenses and other short-term cost savings.
During the quarter, WWE executed a reduction in force, resulting in severance expense of $5.5 million.
Given the nonrecurring nature of this expense, it has been excluded from adjusted OIBDA.
Looking at the WWE media segment, adjusted OIBDA increased approximately $60 million to $101.7 million, primarily due to higher domestic rights fees for Raw and Smackdown programs.
Despite a challenging environment, WWE continued to produce a significant amount of content, more than 550 hours of programming for television, streaming and social digital platforms.
As Stephanie mentioned, with the launch of WWE ThunderDome in August and the Capitol Wrestling Center in October, WWE continues to lead the sports and entertainment industry with innovative ways to safely recreate the interactive in-arena atmosphere that has been a staple of WWE events for decades.
This investment in a large-scale virtual experience brings a high level of production excitement and, most importantly, brings our fans back into the show.
Although third quarter ratings for Raw and Smackdown declined 29% and 2%, respectively, they showed improvement from July to September.
And they achieved this result despite unprecedented competition from the return of major sports, such as the NBA, NFL, MLB and including playoffs and Premier events, such as the Kentucky Derby and the Indy 500.
Meanwhile, while delivering Raw, Smackdown and NXT on television, WWE announced the continued second season of Miz & Mrs on USA Network and the sixth season of Total Bellas on E!
And reaching beyond television, WWE also produced original content for social and digital platforms.
In partnership with Hyundai, WWE launched DRIVE FOR BETTER series, which is posted on WWE's digital platform and Superstars social media channels.
And WWE debuted the podcast Uncool with Alexa Bliss, which is available on all major audio streaming services.
Adjusted OIBDA from live events declined by $1.2 million to a loss of $4.1 million due to a $22.5 million decline in live event revenue.
These declines were primarily due to the loss of ticket revenue resulting from the cancellation and/or relocation of events.
Until mid-March, WWE held arena and stadium-based events in front of ticketed audiences.
During the third quarter, however, WWE held no such events.
At this time, it is challenging to predict when ticketed live events will return, but our intention is to return as quickly and safely as possible.
Notably, the increase in e-commerce offset the absence of venue merchandise sales.
During the third quarter, WWE continued to introduce new products, expanded video game portfolio and develop partnerships across product categories.
The strong e-commerce business was driven by the release of six new title belts, including the Ric Flair Signature Series and by the launch of two targeted sites, WWE Legends and UpUpDownDown.
Licensing revenue reflected a 25% sales increase from the franchise game, WWE 2K20 and continue to benefit from the build-out of WWE's video game and toy portfolios.
WWE partnership partnered with Wargaming to launch World of Tanks: SummerSlam and with Take-Two to launch WWE 2K Battlegrounds.
WWE also partnered with Metal to release WWE Slambulance!
, which immediately became a top WWE product at Target and Amazon.
As of September 30, 2020, WWE held approximately $638 million in cash and short-term investments.
This includes $200 million borrowed under WWE's revolving credit facility to ensure the necessary capital to execute the company's strategy and deliver long-term value to our shareholders.
In the third quarter, WWE generated approximately $111 million in free cash flow, an increase of $127 million.
This increase was driven by improved working capital and the timing of collections associated with large-scale international events, stronger operating performance and, to a lesser extent, lower capital expenditures.
And finally, a word on WWE's business outlook.
The spread of COVID-19 and the related government mandates have directed WWE to cancel, postpone or relocate live events since mid-March.
WWE is continuing to adapt the business to the changing environment by investing to enhance content production value and deepen fan engagement, with examples of this being the creation of WWE ThunderDome and Capitol Wrestling Center.
With regard to fourth quarter performance, WWE anticipates that fourth quarter 2020 adjusted OIBDA will be below third quarter 2020 results.
WWE anticipates $40 million to $45 million in incremental fourth quarter expenses versus the third quarter.
This is due to $22 million to $27 million from, one, incremental production expenses associated with the creation of WWE ThunderDome and Capitol Wrestling Center; and two, incremental personnel expenses associated with employees returning from furlough.
Both of these are expected to continue in the coming year.
Also contributing to the incremental increase in expenses is that WWE booked $18 million in production incentives in the third quarter 2020.
This is typical timing for the incentives.
Additionally, fourth quarter 2020 adjusted OIBDA will likely be below fourth quarter 2019 results based on the absence of an event in Saudi Arabia, the absence of ticketed live events and, to a lesser degree, increases in other fixed costs.
WWE is currently developing its 2021 operating and financial plan and continues to evaluate the personnel requirements and potential investments needed to support WWE's long-term strategy.
Going forward, the potential impact of COVID-19 on WWE's business, which could be material, remains uncertain.
Based on the sustained economic uncertainties, WWE is not reinstating full year 2020 guidance at this time.
Given the lack of visibility, WWE did not buy back any stock in the third quarter under its $500 million stock repurchase program, but may resume activity on an opportunistic basis in the future.
WWE continues to have significant long-term opportunities.
As Nick stated, we believe WWE can develop new content and distribution platforms, introduce new products and increase returns from international markets, and we look forward to sharing progress on these strategies with you in the future.
Christy, we're ready now.
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q3 revenue $221.6 million versus refinitiv ibes estimate of $222.3 million.
not reinstating guidance at this time.
world wrestling entertainment - qtrly wwe network average paid subscribers were 1.6 million, an increase of 6%.
anticipates $40 - $45 million in incremental q4 expenses (4q 2020 versus 3q 2020).
currently developing its 2021 annual operating and strategic plans.
remains challenging to quantify potential impact of covid-19 on its business.
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Today's call will feature commentary from Chief Executive Officer, Ritch Allison and from the office of the CFO, Jessica Parrish.
Both of these documents are available on our website.
Actual results or trends could differ materially from our forecast.
I'll request to our coverage analysts, we would like to accommodate as many of you as time permits.
With that, I'd like to turn over the call to our CEO, Ritch Allison.
Overall, I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world.
We are still navigating through the COVID pandemic across the globe.
Throughout the last 18 months, our franchisees have continued to step up to the challenge in service to their customers, their communities and their team members.
I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carryout experiences.
You've heard me speak often about the importance of global retail sales growth and how that drives our business model.
During the second quarter, we delivered 17.1% global retail sales growth, excluding foreign currency impact, driven by a powerful combination of growth in US same-store sales, international same-store sales and global store counts.
The second quarter marked our 41st consecutive quarter of US same-store sales growth and our 110th consecutive quarter of international same-store sales growth.
We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth, highlighted by the opening of our 18,000th store.
We celebrated this terrific milestone with the opening of a beautiful store in La Junta, Colorado.
The pace of net store growth has accelerated significantly during the first half of this year.
When you look at it on a trailing four-quarter basis, our pace of net store growth is increased from 624 in Q4 2020 to 884 in Q2 2021.
During the quarter, we also completed our $1.85 billion refinancing transaction, lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction.
Overall, the Domino's brand continues to deliver, as our strong same-store sales, store growth and resulting retail sales growth deliver great returns to our franchisees and our shareholders.
She will take you through the details of the quarter and then after that, I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward.
Jessica, over to you.
We are excited to share our strong second quarter results with you today.
Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted earnings per share of $3.06 for Q2.
Our diluted earnings per share as adjusted for certain items related to our recapitalization transaction completed during the quarter with $3.12.
In Q2, we continued to see positive momentum in both the US and international businesses in both same-store sales performance and net unit growth, leading to strong global retail sales growth.
Global retail sales grew 21.6% in Q2, as compared to Q2 2020.
When excluding the positive impact of foreign currency, global retail sales grew 17.1%.
Breaking down total global retail sales growth, US retail sales grew 7.4% and international retail sales grew 39.7%.
When excluding the positive impact of foreign currency, international retail sales grew 29.5% rolling over a prior year decrease of 3.4%.
The prior year decrease in international retail sales, excluding foreign currency resulted primarily from temporary store closures, changes in store hours and service method disruptions in certain international markets as a result of the COVID-19 pandemic.
Turning to comps, during Q2, we continue to lead the broader restaurant industry with 41 straight quarters of positive US comparable sales and 110 consecutive quarters of positive international comps.
Same-store sales in the US grew 3.5% in the quarter lapping a prior-year increase of 16.1%.
Same-store sales for our international business grew 13.9% rolling over a prior year increase of 1.3%.
Breaking down the US comp, our franchise business was up 3.9% in the quarter, while our company-owned stores were down 2.6%.
As we noted on our Q1 call, we continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we have historically seen.
We believe this is primarily a function of the heavily urban and higher income footprint of our company-owned store markets relative to the more diverse mix across our franchise space.
The US comp this quarter was driven by ticket growth due to increases in items per order in our transparent delivery fee as well as the mix of products we sell.
Order count on a same store basis were consistent with Q2 2020 levels, which were higher than Q2 2019 levels, as a result of customer ordering behavior during the pandemic.
The international comp was driven by order growth due to the return of non-delivery service methods, the resumption of normal store hours and the reopening of stores that were temporarily closed in certain of our international markets in Q2 2020.
Shifting to unit count, we and our franchisees added 35 net stores in the US during the second quarter, consisting of 39 store openings and foreclosures.
Our international business added 203 net stores comprised of 217 store openings and 14 closures.
Turning to revenues and operating margins.
Total revenues for the second quarter were up approximately $112.4 million or 12.2% over the prior year quarter.
The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $4 million in Q2 2021 as compared to the prior year quarter.
Our consolidated operating margin as a percentage of revenues increased to 39.5% in Q2 2021 from 38.8% in the prior year, due primarily to higher revenues from our US franchise business.
Company-owned store margin as a percentage of revenues increased to 24.5% from 23.1% primarily as a result of lower labor costs, partially offset by higher food costs.
Recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19 pandemic.
Supply chain operating margin as a percentage of revenues decreased to 11% from 11.9% in the prior year quarter, resulting primarily from higher insurance and food costs, as well as higher fixed operating costs driven by depreciation and our new supply chain facilities opened last year.
These increases were partially offset by lower labor costs.
G&A expenses increased approximately $12.3 million in Q2 as compared to Q2 2020, resulting from higher labor costs, including higher variable performance-based compensation and non-cash compensation expense, partially offset by lower professional fees.
Additionally, as we discussed on our Q1 call, we completed our most recent recapitalization transaction during the second quarter in April.
Net interest expense increased approximately $6.7 million in the quarter, driven by a higher average debt balance.
Our weighted average borrowing rate for Q2 2021 was 3.8%, down from 3.9% in Q2 2020.
Our effective tax rate was 19.6% for the quarter as compared to 4.7% in Q2 2020.
The effective tax rate in Q2 2021 includes a 2.3 percentage point positive impact from tax benefits on equity-based compensation.
This compares to an 18.5 percentage point positive impact in Q2 2020.
This decrease was due to significantly fewer stock option exercises in Q2 of this year.
We expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits.
Combining all of these elements, our second quarter net income was down $2 million or 1.7% versus Q2 2020.
On a pre-tax basis, we were up $20.6 million or 16.5% over the prior year.
Our diluted earnings per share in Q2 was $3.06 versus $2.99 in the prior year.
Our diluted earnings per share as adjusted for the impact of the recapitalization transaction was $3.12, an increase of $0.13 or 4.3% over the prior year.
Breaking down that $0.13 increase in our diluted earnings per share as adjusted, most notably, our improved operating results benefited us by $0.53, net interest expense adjusted for the impact of the items affecting comparability I discussed previously negatively impacted us by $0.08, a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.12, and finally our higher effective tax rate, resulting from a lower tax benefits on equity based compensation negatively impacted us by $0.44.
Shifting to cash, our strong financial model continue to generate significant cash flow throughout the second quarter.
During Q2, we generated net cash provided by operating activities of approximately $143 million.
After deducting for capex, we generated free cash flow of approximately $126 million.
Regarding our capital expenditures, we spent approximately $17 million on capex in Q2, primarily on our technology initiatives, including our next-generation point-of-sale system.
As previously disclosed, during Q2, we also entered into an accelerated share repurchase transaction for $1 billion.
We received and retired approximately 2 million shares at the beginning of the ASR.
The ASR settled yesterday and we received a retired an additional 238,000 shares in connection with this transaction.
In total, the average repurchase price throughout the ASR program was $444.29 per share.
We also paid a $0.94 quarterly dividend on June 30.
Subsequent to the end of the quarter, our Board of Directors declared a quarterly dividend of $0.94 per share to be paid on September 30.
In closing, our business continued its strong performance during the second quarter and we are very pleased with the results our franchisees and team members around the world delivered.
And I'll begin my comments with a look at our US business.
For months now, many of you have been asking how we would lap the tough comparisons from Q2 of last year.
My answer has always been that we're not focused on managing to a 12-week quarter.
We are focused on building the business for the long term and that long-term focus on great product, service, image and technology is precisely why we were able to deliver a terrific quarter, highlighted by 7.4% US retail sales growth, lapping 19.9% from Q2 2020.
Turning to same-store sales, perhaps the thing I'm most pleased about when I look at the 3.5% US comp is the fact that we were able to hold orders flat while overlapping the big gains from Q2 2020.
I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases.
We achieved positive comps in both our delivery and carryout businesses, with delivery driven by ticket and carryout driven by a balance of order count and ticket growth.
We continue to see strong growth across our business in the quarter.
You've often asked, if our sales growth might be weaker in markets that had more fully reopened, but to the contrary, the opposite trend emerged through the second quarter where we saw higher levels of sales growth in the second quarter in the markets with fewer COVID-related restrictions.
Similar to Q1, we saw the comp growth in rural areas outperformed urban areas, and less affluent areas outperformed more affluent areas.
These differences, combined with the impact of more aggressive fortressing, accounted for much of the same-store sales gap between our corporate store and franchise store businesses.
We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that we delivered back in March.
It's difficult to quantify the magnitude of the impact of the one-time distributions and the ongoing unemployment and other government payments to consumers, but we believe that they do continue to have some positive sales impact on our business.
Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive boost week promotions, but instead remain focused on providing great service and offering great value to our customers every day.
As we continue to experience COVID overlaps, we believe it will be instructive to continue to look at the cumulative stack of comparable US same-store sales anchored back to 2019 as a pre-COVID baseline.
At 19.6% for Q2, we saw a material sequential improvement of the two-year stack when compared to the first quarter.
Beyond the comps, when you look at the absolute dollars, our second quarter same store average weekly unit sales in the US exceeded $27,000, another sequential uptick from the levels seen in the first quarter.
Now turning to the other critical component of our retail sales growth, new store openings, our addition of 35 net stores was softer than we expected.
We have a very strong pipeline of future openings, but had a number of stores delayed due to store level staffing challenges and construction, permitting or equipment delays.
We hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside.
I'll turn and speak now about the carryout and the delivery businesses.
We saw the return of carryout order growth in Q2 and we continue to build awareness of Domino's car-side delivery.
We ran a brief 49% off car-side delivery awareness campaign during the quarter and just recently launched a campaign highlighting our Car Side Delivery 2-Minute Guarantee.
This campaign hits on two key elements of the Domino's brand, service and value.
Our franchisees and operators have fully embraced car side delivery and we are consistently averaging below 2 minutes out the door and on our way to the customer's cars.
This is a great technology enabled way to serve our customers and will remain an important part of our strategy as we continue to evolve the carryout experience, not only to enhance the loyalty of our current carryout customers, but also to reach a new different and largely untapped drive-through oriented customer going forward.
For the delivery business, I was also very pleased to see positive delivery same-store sales growth during Q2, while facing very difficult overlaps.
We brought back the noise to highlight our partnership with Nuro for autonomous delivery.
This campaign hits on our technology and innovation leadership, while having a little bit of fun with our old nemesis, The Noid.
We continue to learn as we pilot a true autonomous pizza delivery experience to select customers in the Houston market.
Now turning to staffing, I'll reiterate something I said back in April.
We continue to operate in a very difficult staffing environment for our stores and our supply chain centers.
The combination of COVID, strong sales, the accelerating economic growth across the country and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time.
And frankly, this led to higher margins in our corporate store business than we would like to see.
The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores.
This puts pressure on our operators to meet demand, while continuing to deliver great service.
In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions.
And as we look forward in the US business, we will continue to make the necessary investments to drive retail sales growth into the future.
We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022.
We are making solid progress on the rewrite of our POS point-of-sale system and we'll continue that multiyear investment, along with additional investment in our enterprise systems to support the business.
We will continue to invest in technology, operations and product innovation to support our carryout and our delivery businesses.
We are continuing to raise wages and invest in our hourly team members and of course as always we will remain focused on value for our customers.
So I'll close out our discussion of the US business by simply saying that the Domino's brand has never been stronger and I remain confident in our ability to drive sustainable long-term growth.
Now let's move on to international.
It was an outstanding quarter of performance for our international business.
Our 29.5% international retail sales growth, excluding foreign currency impact was supported by an exceptional 13.9% comp, continuing the momentum we had in the first quarter.
As I discussed earlier with our US business, we're also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019 and we'll continue to do so throughout 2021.
Q2 represented a 15.2% two-year stack, a sequential improvement over the first quarter.
I'm particularly pleased with our strong momentum on store growth as international provides a significant push toward our two to three-year outlook of 6% to 8% global net unit growth.
Our 203 net stores in Q2 increased our trailing four quarter pace of international store growth to 653 net stores.
Our accelerated store growth continues to be driven by our outstanding unit level economics and the strong commitment of our international master franchise partners.
During the quarter, COVID continue to have a significant impact on many of our international markets and we expect COVID to remain a challenge in many parts of the world for some time to come.
At the end of the quarter, we had fewer than 175 temporary store closures, with many of those located in India, which has been hit particularly hard by COVID.
The company mounted a series of initiatives to support their employees and families through this unprecedented crisis.
This included a cross-functional team that provided employee assistance 24/7 as well as several COVID isolation centers with oxygen concentrator banks.
Jubilant mounted a massive vaccination drive for all of their employees and dependent family members.
Challenging times always bring out the best in Domino's franchisees and I could not be more proud of our leaders in India and how they have responded to this crisis.
I'd also like to highlight a few international markets that drove terrific growth during the quarter.
China passed the 400 store milestone during Q2 and once again Dash, our master franchise partner delivered outstanding retail sales growth for the brand.
China is without question, one of the most exciting businesses in the Domino's system with significant long-term runway for growth.
Japan reached the 800 store milestone in the weeks following the close of our second quarter and continued the outstanding performance under master franchisee Domino's Pizza Enterprises ownership.
The UK, Germany, Mexico and Turkey were also large market highlights in a strong quarter of performance across our international business.
I am proud of our master franchisees and their operators for their great work thus far in 2021, and I remain optimistic about our international retail sales growth opportunity over the long term.
So in closing, I'm very happy with our Q2 results.
Great franchisees and operators, combined with outstanding unit level economics place us in an enviable position within our industry and give us a strong foundation for future growth.
There is absolutely no question that Domino's is the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and carryout businesses.
As we look to the back half of the year and beyond, you can be confident that we will remain focused on winning the long game.
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qtrly u.s. same store sales growth of 13.4%.
qtrly international same store sales growth of 11.8%.
revenues increased $110.6 million, or 12.7%, in q1 of 2021.
global retail sales increased 16.7% in q1.
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On the call are Signet's CEO, Gina Drosos; and chief financial and strategy officer, Joan Hilson.
Any statements that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially.
During the call, we'll discuss certain non-GAAP financial measures.
For further discussion on those non-GAAP measures as well as reconciliations of them to the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.
Our performance in Q3 reflects the continuing progress of our inspiring brilliance transformation and the innovation, agility, and passion of our entire organization.
I continue to be inspired by our team quarter after quarter, and I am proud to work at their side every day.
As we look back at this past quarter and our year to date, I want to leave you with one core message, our inspiring brilliance transformation is working, making Signet a much healthier and more agile company today than we were a few years ago.
We believe our top and bottom line growth is sustainable, and we're growing share while also investing in important new capabilities and customer experiences at a rate that is currently unrivaled in our category.
We still have important work to do to complete this phase of Signet's transformation, but we have the strategic clarity, structural advantages, operating discipline, and high-performing team to continue driving growth ahead of the jewelry sector.
We saw this in Q3.
Our team delivered the strongest, most profitable third quarter in Signet's history, a quarter that has often been challenging because there's no broad scale gift-giving occasion.
We've been taking steps to mitigate our dependence on big holiday cycles and move to a more always-on approach.
This is evidenced in our investments in consistent marketing and customer engagement throughout the year, our year-round bridal cycle, and our efforts to increasingly support early holiday shopping in October.
This approach is paying off.
We delivered a same-store sales increase of almost 19% to the third quarter last year, with notable growth acceleration in October.
The overall jewelry category was strong this quarter, but we believe we're gaining market share.
We're achieving this growth by leveraging five structural advantages that we've built throughout our transformation: No.
1, our distinctive portfolio of banners; two, our connected commerce presence; three, data analytics capability; four, financial flexibility; and five, scale.
We've built these strategic advantages through a series of investments and innovation that we continue to build upon.
For example, we've made significant progress differentiating our banner value propositions with distinctive marketing campaigns and unique product assortments, delivering 14% sales growth in bridal and over 30% growth in fashion.
We've invested in connected commerce capabilities that now exist in virtually every part of our business.
This is reflected in capabilities such as seamless virtual and in-store consulting, asynchronous chat, product visualization, buy online pick up in store, ship from store, curbside delivery, same-day delivery, and more.
We've streamlined our fleet, enabling us to serve customers across channels, while also leveraging fixed costs as we drive the top line.
We've eliminated consumer credit risk from our balance sheet, enabling us to focus entirely on jewelry retail leadership, while offering a broader array of payment options that continue to gain traction.
By leveraging third-party expertise and focusing on what we do best, our financial services transformation is increasingly an enabler of customer acquisition and satisfaction.
We've also eliminated costs the customer doesn't see or care about.
Our expected cumulative four-year savings is now over $400 million through the end of fiscal '22.
One example of how we're doing this is our data-driven labor model that enables us to dynamically plan staffing needs; store-by-store, hour-by-hour, delivering a 75% improvement in productivity compared to this time two years ago.
And we've improved inventory turns 50% by defining our product assortment more precisely by banner and by providing a much broader range of fulfillment options.
We are becoming the consumer-inspired data-driven jewelry leader and innovator that we aim to be.
Given the very uncertain environment today, we are mindful of the challenges still ahead of us.
That said, Joan and I would like to use our review of Q3 and our look ahead at Q4 to show how the advantages we've created are driving our performance and growth and positioning us for a strong holiday this year and beyond within all the factors we can control.
Let's look first at how we're leaning into holiday earlier than ever.
Our research indicates that roughly 25% of shoppers finished their holiday shopping before Black Friday this year, up from 17% a year ago.
This trend is being driven by concerns about out of stocks, which we anticipated and planned for.
We took action months ago to ensure that our holiday assortment would be stronger and available earlier than ever before.
We pulled forward our premarket qualification of new merchandise, strengthened our core assortments, leaned into trends, identified in our research, and placed orders a month or more earlier than we typically do.
We also prepared for continuing increases in digital sales and connected commerce this holiday.
At this time last year, our jewelry consultants were providing new experiences like curbside pickup and virtual consultations to provide our customers a safe and convenient shopping experience.
This year, we've improved the customer experience, allowing customers to select curbside service online during checkout and stay connected to the store throughout the process from purchase to receipt to pick up.
And we've expanded curbside delivery to more than 800 stores.
We're offering ship from store at 1,850 stores, five times more than last year.
And we're offering buy online pick up in store at 2,100 locations.
In addition, we've enhanced our distribution capabilities particularly by building in a layer of surge capacity to fulfill customer e-commerce orders on our busiest days.
This is a good demonstration of the ongoing transformation at scale we're striving for.
Last year, we increased our e-commerce supply chain capability fivefold.
This year, we're building on that foundation, increasing the capacity of our distribution centers again, nearly 25% more than last year, and adding a nationwide fleet of local distribution centers with our ship-from-store capability.
We're working to extend these distribution advantages even further in the coming year.
We're building an AI-driven digital simulation of our entire supply chain.
This digital twin will enhance our planning with scenarios that identify potential issues before they occur, giving us insights that enable us to provide faster delivery while driving cost efficiency.
We're also improving our employee experience to maximize our advantages in talent and staffing.
We increased our hourly wage this year, significantly expanded benefits to respond to the changing needs of our team members, and have continued to invest in training, development, and career growth.
In addition, we continue to leverage the power of our purpose, inspiring love and our innovative agile culture to strengthen our team's pride, motivation, and performance.
These and other efforts are making a difference.
We've seen a 60% decrease in new employee turnover during their first two months at a time when turnover continues to top the headlines across retail.
This is important because tenure matters in the jewelry category, where expertise and personal relationships lead to lifetime value.
In fact, a jewelry consultant with at least one year of tenure achieves on average, 60% more sales than a new team member.
All of these readiness efforts are driven by the structural advantages I mentioned a moment ago and will help us deliver a strong holiday.
I'd now like to highlight the meaningful progress we made this quarter within each of our four where-to-play strategies: winning in our biggest businesses; expanding accessible luxury and value; accelerating services; and leading digital commerce.
Winning in our big businesses is our foundational strategy.
The story here is that the clearer our banner value propositions become the faster we grow.
We've gained real traction with this strategy over three consecutive quarters now.
For example, Kay and Zales are appealing to increasingly differentiated consumer segments.
While both appeal to bridal customers, almost 30% of New Zales customers are on a self-purchase journey, up 400 basis points compared to two years ago, and 64% of new Kay customers are on a milestone or gifting journey to celebrate special moments in the lives of those they love, which is 700 points higher than two years ago.
We plan our assortments with these journeys as our compass.
We were able to introduce newness with much better success rates because our customers are more precisely defined and because our assortments are more relevant to the journey our customers are on.
The success of the Monique Lhuillier launch at Kay is a clear example.
Monique is an acclaimed fashion designer known for her captivating bridal gowns.
Her brand is all about celebrating life's most special moments.
She's partnering with Kay because she considers Kay to be an authority in both the bridal experience and the celebration of milestone moments.
We just launched this line at the end of September, and it has already delivered more than $2 million in merchandise sales ahead of expectations.
Our second strategy, expanding the accessible luxury and value tiers of the mid-market is also an important driver of growth because it's bringing new customers into our banners.
Accessible luxury is appealing because it's a growing higher price point mezzanine segment that sits between luxury and the mid-market.
We've built a portfolio that is attracting a diverse mix of highly valuable customers.
Jared offers exclusive designer lines, concierge-level service, custom design studios, and a rich assortment of diamonds and fine jewelry for bridal, fashion, and gifting.
James Allen is our digital bridal mega store, the company that continues to pioneer the way that customers shop for engagement rings online, setting new standards for custom design and selection with over 300,000 natural and lab-created diamonds.
And Diamonds Direct, our newest banner, is our highly personalized bridal destination.
They offer customers high-touch bridal experiences with a highly productive operating model, unlike any other in the jewelry category.
This portfolio is designed not only to give accessible luxury customers a wide range of options but also to compete even more effectively with independent jewelers who make up more than 65% of the specialty jewelry category, and it's beginning to work as the integrated mix we've envisioned.
Jared's average transaction value this quarter was up 35% versus the third quarter two years ago through increased custom design and higher quality merchandise that includes larger stones and precious metals like platinum.
James Allen had 50% more customer transactions this quarter than two years ago, again, demonstrating our ability to attract and close highly discriminating bridal customers online.
And Diamonds Direct offers customers a differentiated accessible luxury experience, which is currently generating a median annualized revenue of approximately $18.5 million per store over the last 12 months.
We're confident we can learn from their model while also bringing Signet's best practices and our scale to their approach.
We see similar opportunity on the value end of the mid-tier.
Banter by Piercing Pagoda, is generating higher sales and resonating with customers we want to attract to our portfolio, young social media savvy and highly expressive Gen Z consumers and confident creative consumers of all ages.
We're also growing banter.com, which has relatively low digital penetration with significant upside remaining.
We're continuing to accelerate the expansion of the banter concept based on these early positive results.
Accelerating services is our third growth strategy.
Providing services is the glue that build lifetime relationships across every banner while also supporting our margin goals.
We remain confident that our services strategy is a $1 billion opportunity on Signet's path to $9 billion in total revenue.
Extended service agreements are a good example of the progress we're making with this strategy.
One of the largest factors driving ESA growth is interaction with a salesperson.
This happens naturally in store, but we are focused on enabling this kind of interaction for purchases made online.
We've empowered our virtual consultants to sell ESAs and have launched a series of educational videos that engage customers and discuss the benefits of our programs.
In addition, we've simplified our ESA offerings, which, along with these other improvements, has helped us nearly triple our attachment rate online compared to this time two years ago and has lifted our overall attachment rate across channels by 60 basis points.
Another example is our launch of a new loyalty program.
Our loyalty world is currently being piloted at a number of Jared stores.
And after making refinements based on what we're learning, we expect to extend it across all our banners.
This is a program that customers have expressed a desire for.
It currently includes exclusive discounts, a Rocksbox trial membership and unlimited jewelry cleaning.
These programs are a great way to reward customer loyalty, stay connected and provide additional data on how to better customize our assortment and services.
Leading digital commerce is our fourth strategy.
Digital is our accelerator, especially for our biggest businesses.
The story in digital is data.
This is becoming a real structural advantage for us, one of the biggest interventions we've made since we began our transformation.
Our data analytics capabilities enable us to operate with increasing precision.
For example, building on the insights of our initial real estate greenfield analysis, we are now taking a connected commerce approach to the next phase of this work.
We didn't have capabilities like ship-from-store during our original analysis and no real way to capture each store's e-commerce halo.
But now we do.
We're analyzing customer needs down to an even more precise level to determine where connected commerce opportunity exists and how we can drive market share growth on a more localized basis.
For example, we're now analyzing opportunities beyond just trade areas.
We're micro-targeting customers using populations of 3,000 or fewer people.
This focused level of data at scale is a significant advantage in the jewelry category and will serve us for years to come.
We're also leveraging our analytics capability to optimize the way we introduce product assortments, a good example being our expansion of lab-created diamonds.
Our merchandise teams have used our data to build and tier our LCD assortment in a way that doesn't compete with natural stones.
For example, customers who come into our stores this holiday with a certain piece in mind, will in some cases, be able to choose a lab-created piece in a similar style that offers higher clarity or even higher carat weight.
We're also offering an exclusive LCD cut through Zales called the Vera Wang true line, and we're offering an LCD option of Kay's Leo cut through the Leo legacy line.
Our database approach is ensuring that LCD is additive.
It is increasing selection, appealing to different customers and driving incremental sales.
In these and so many other ways, we're building and leveraging a culture of agility and innovation that is driving growth in every part of our business.
What I hope you can sense is that the momentum we've been building is intentional and disciplined and reinforces our conviction that Signet is a healthy and agile company.
The strategic clarity and structural advantages we've created, combined with the disciplined execution that our team is providing quarter after quarter, is building momentum and driving top line growth, margin expansion, and liquidity that we believe is sustainable over the long term.
We continue to work hard at our transformation efforts and we know there are many uncertainties in today's environment, but we're energized by the impact we're having in our customers' lives, and we're proud of what we're achieving and delivering together.
We also take pride in what our company stands for, and I want to close on this point.
Just as we're building momentum in our business, so are we building momentum in our leadership as a purpose-inspired company, and we're doing this from the inside out with our highly engaged team.
A year ago, we announced on our Q3 earnings call that Signet was, for the first time, named a certified Great Place To Work company.
Today, we're pleased to announce that not only was Signet recertified as a great place to work this year based on our strong employee trust index survey results but that all of our scores improved year over year.
For us, our partnership with the Great Place to Work Institute gives us the ability to continuously advance our employee experience by listening to our team, taking action to improve and benchmarking ourselves against other great companies.
Significantly, this year, 90% of our team share that they feel a sense of pride in what we are accomplishing and 82% believe wholeheartedly that Signet is a great place to work.
We can confidently assure you that our Signet team is fully engaged and passionate about delivering for our customers this holiday.
Additionally, this quarter, we paid close attention to the UN conference on climate change that concluded just a few weeks ago.
As a member of the UN Global Compact, we are fully committed to enhancing our business practices to meet evolving expectations from our investors, employees and customers.
We have established our own Signet Climate Action and Sustainability Committee, a cross-functional team tasked with preparing Signet for the future with our own net zero strategy as we articulated in our corporate sustainability goals released earlier this year.
These quarterly milestones advancing Signet's commitment to corporate citizenship and sustainability matter because consumers are increasingly seeking out companies that share their values.
On that note, I'll turn this over to Joan, who will provide deeper insight into what's driving our growth and where we're headed this fiscal year.
There are three important messages that I'd like to leave you with today.
First, we delivered cost leverage on top line growth again this quarter as a result of our strengthened operating structure.
Second, we achieved a trailing 12-month leverage ratio of 2.1 times.
We returned value to shareholders through dividends and share repurchases, and continue to invest in long-term growth.
Third, we are raising fiscal 2022 guidance to reflect enhanced connected commerce capabilities and business momentum, which continued through Black Friday and Cyber Monday weekend.
Also concluded in today's update is higher expected cost savings.
In Q3, we achieved total sales of $1.5 billion, growth of approximately $237 million over last year.
Compared to two years ago, sales are up $350 million with few -- with 423 fewer stores.
While retail foot traffic remains down to pre-pandemic levels, our team effectively used enhanced connected commerce capabilities to drive increased conversion and higher average transaction value.
So substantially, all merchandise categories and banners demonstrated growth supported by a roughly 50% increase in advertising to strategically drive earlier shopping and reduce reliance on traditional fourth quarter profitability.
We delivered approximately $576 million this quarter in gross margin or 37.4% of sales.
This is a 380 basis point improvement to last year, and a 630 basis point improvement to two years ago.
Leveraging of fixed costs contributed roughly two-thirds of the improvement in both years, driven by fleet optimization efforts.
Additionally, the remainder of gross margin improvement relates to merchandise margin and was driven by fundamental changes in our operating model.
These significant changes include enhanced discount controls and reduced promotions as well as strategic inventory initiatives that I'll discuss in a moment.
Moving on, SG&A was approximately $471 million or 30.6% of sales.
This rate is 70 basis points higher versus a year ago from investments in both advertising and labor as we anniversary the reopening of stores after the COVID shutdown.
Compared to two years ago, we leveraged 380 basis points.
We leveraged 300 basis points, reflecting changes in our cost structure.
These changes include cost savings from new credit agreements, a more efficient labor model and continued cost discipline across the organization.
These improvements help to fund increased advertising as well as investments in our connected commerce capabilities.
Non-GAAP operating profit was $105 million compared to $46.8 million last year and a loss of $29.3 million two years ago.
Third quarter non-GAAP diluted earnings per share of $1.43 compares to the prior year of $0.11 and a non-GAAP loss per share of $0.76 two years ago.
Looking deeper into our financial health, overall liquidity of $2.7 billion includes $1.5 billion of cash at quarter end.
Working capital efficiency improved approximately 40% to last year, net of cash through strategic reduction of inventory, collaboration with vendors on payment terms, and the sale of our in-house receivables.
We ended the quarter at $2.1 billion.
Even with a 15% increase in holiday receipts compared to last year, inventory was down $26 million and sell-down and clearance inventory was lower by roughly 14 points.
These improvements were driven by strategic inventory initiatives, including new flexible fulfillment capabilities, life cycle disciplines that includes SKU rationalization and data-driven allocation of product.
The cumulative result of these actions was a 50% improvement in inventory turn to last year.
Alongside the fundamental improvement in owned inventory, we've been partnering with our vendors to eliminate slower turning consignment inventory and strategically shift focus to just-in-time core products and data-driven testing of newer collections.
As a result, consignment inventory was lower by $315 million, which has effectively doubled its productivity over the last two years.
Moving on to capital.
The $2.7 billion of liquidity at quarter end supports our capital priorities.
Our first priority remains investing in growth opportunities, including our connected commerce and technology advancements, continued differentiation of our banners, as well as the recent acquisition of Diamonds Direct.
We continue to expect capital expenditures in the range of $190 million to $200 million for fiscal '22.
Our second priority is ensuring liquidity through a strong cash position to provide financial flexibility.
Recall, we extended our ABL facility through calendar 2026, providing enhanced flexibility to address calendar 2024 maturities of senior notes and preferred share obligations.
As mentioned earlier, the trailing 12-month adjusted leverage ratio of 2.1 times is nearly half that of pre-pandemic levels.
Our third priority is returning capital to shareholders.
We reinstated our common dividend earlier this year and this quarter, we repurchased for approximately $41 million.
We have roughly $185 million remaining under the current share repurchase authorization.
Now I'd like to discuss our fiscal '22 financial guidance.
We are raising our full year guidance to reflect business momentum as well as the acquisition of Diamonds Direct.
We expect fourth quarter total sales in the range of $2.4 billion to $2.48 billion and same-store sales in the range of 6% to 9%.
While we've managed the factors within our control, our guidance also considers headwinds outside of our control as we move closer to peak holiday selling.
These headwinds include disruptions emerging from COVID variants, government mandates and consumer behavior changes toward experience-related spending.
That said, it remains difficult to predict the magnitude and timing of these expected changes in consumer behavior.
We expect non-GAAP EBIT of $280 million to $317 million.
Compared to Q4 of last year, guidance includes higher marketing, incremental store labor costs, which include additional holiday incentives, higher domestic transportation costs and provides for promotional flexibility.
Lastly, we have raised cost savings expectations for fiscal '22 to $100 million to $115 million.
Now turning to real estate.
For fiscal '22, we expect approximately 75 closures across the fleet and 85 openings, primarily in highly productive Banter by piercing Pagoda format.
This update to our guidance is a result of stronger than expected performance in select locations, favorable lease economics on short-term extensions and a shift in project timing.
Looking deeper at our store footprint, we remain focused on optimizing our fleet through data-driven analytics.
This includes the transition of traditional mall formats to highly productive off-mall locations.
Over the past two years, we've increased the off-mall penetration within the Kay banner by four points.
Now with nearly half of Kay locations and off-mall formats, we're seeing growth at these locations outpace traditional mall formats and carry more favorable economics.
Additionally, this strategy to off-mall has reduced our exposure to declining malls by approximately eight points in our biggest banners.
Now I'd like to address operating margin.
We're often asked, given current jewelry category strength about the sustainability of our operating margin performance.
We believe our margin performance is sustainable in a normal environment because of fundamental changes that have created a healthier and more agile operating model.
I'd like to reiterate the following fundamental changes in our business.
Data analytics inform critical decisions, and we will continue to mature and build on these competencies.
Banner portfolio differentiation is driving growth and includes an increased focus on higher-margin services.
Inventory management improved significantly through the implementation of capabilities such as flexible fulfillment, life cycle and price management, SKU rationalization, as well as strategic use of consignment inventory.
Fleet optimization remains a critical part of our margin expansion and we will continue to refine our trade area analysis.
Cost savings will continue to help fund long-term growth initiatives, including always on marketing and investments in digital capabilities, technology harmonization, and talent.
Fully outsourced financial services, transitioned expertise to third-parties removed consumer credit risk from our balance sheet and provides customers with a broader and more modern range of payment options.
Liquidity and working capital management improved our financial strength and flexibility to continue investing in strategic initiatives while also returning capital to shareholders.
We still have important work to do to continue Signet's transformation.
That said, we've made fundamental changes that have built structural advantages and created strong operating discipline, and we have a high-performing team to continue growth within the jewelry category.
I'd like to wish everyone a safe and happy holiday season.
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q2 non-gaap earnings per share $3.57.
q2 sales $1.8 billion versus refinitiv ibes estimate of $1.64 billion.
q2 same store sales up 97.4% to q2 of fy21 and up 38.1% to q2 of fy20.
sees 2022 total revenue $6.80 billion to $6.95 billion.
sees q3 total revenue $1.26 billion to $1.31 billion.
expects to close over 100 stores in fy 2022 and open up to 100 locations, primarily in highly efficient piercing pagoda formats.
sees q3 same store sales down 3% to up 1%; sees fy 2022 same store sales up 30% to 33%.
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A copy of the release can be found on our IR website at ir.
These statements contain elements of uncertainty, which we have laid out on Slide 2 under the cautionary statement.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we'll be using combined historical results for the first quarter as defined as three months of legacy IFF results, and two months, February and March, of N&B results, in both the 2020 and 2021 period, to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rustom Jilla.
I will begin today's call by providing an overview of our first quarter results, including a review of our performance by region and segment.
I would also like to share with you an update regarding our efforts to integrate DuPont, N&B business, which continues to progress well, following the completion of our transaction in February.
Rustom will then provide a more detailed financial review of the business, highlighting segment level business dynamics and performance and cover cash flow and leverage as well.
IFF is off to a strong start in 2021, and I'm confident that the momentum we have built will continue for the remainder of the year and beyond.
Now beginning with Slide 6, I would like to review our performance and notable developments in the first quarter.
We achieved 3% in combined sales growth, or 1% in currency-neutral basis, compared to the first quarter of 2020.
Also because of our change to a fiscal calendar rather than a traditional 4-4-5 calendar, we have had less -- two days less in first quarter.
If we were to normalize for that, our combined currency-neutral growth in the first quarter would also have been approximately 3%.
And on a two-year average basis, to factor in our strong 7% year-ago comparison, growth would be strong at approximately 5%.
Our adjusted operating EBITDA margin improved by 30 basis points, reflecting our team's diligent execution of our cost management strategy.
IFF also continues to generate strong free cash flows, and we remain on track to meet our deleveraging target.
For the first quarter, our leverage ratio was 4.3 times.
I'm also pleased to say we have reached an agreement to divest our fruit preparation business to Frulact, who specializes in fruit preparations for the food & beverage industry.
The divestiture is expected to close in the third quarter 2021, pending customary closing conditions, including regulatory approvals.
The fruit preparation business contributed approximately $70 million to IFF's Nourish segment pro forma sales in 2020.
This is our first step in terms of our portfolio optimization strategy.
So, I expect more news as we progress through 2021.
As you can see, we have established a solid foundation to carry us forward.
As we have said before, the opportunities in front of us and our mission is to execute on our plan to deliver industry-leading returns for our shareholders.
As we move into the second quarter, we remain squarely focused, leveraging our new capabilities to reach our business objectives, and further establish ourselves as an innovation leader in a global value chain for consumer goods and commercial products.
Now on Slide 7, I would like to briefly discuss the regional sales dynamics that have influenced our first quarter financial results.
As you all know, there are notably significant differences in how different countries are managing the continued impacts of the pandemic.
So we want to talk to the dynamics we are seeing in our business across the world.
We are pleased to report that most of our operating regions saw sales growth in Q1.
In North America, we achieved solid performance across our portfolio with growth in nearly all of our segments.
This performance in North America reflects the impressive results in our Scent segment.
We continued to see healthy performance across our Asian markets, achieving a 6% increase in combined currency-neutral sales, primarily driven by double-digit growth in China and India.
While we are pleased to see growth across many of these key markets, we must recognize that our growth in India could be challenged in the near term as the country is grappling with hardship related to the pandemic.
We wish everyone in India, our Indian colleagues and their loved ones the very best, and hope to see rapid improvement in conditions.
In Latin America, we saw an 11% increase in overall sales for the region with growth primarily driven by local currency sales.
Two highlights, that I would like to call out, in Brazil and South Cone, where both grew double-digits in Q1.
COVID-19 and related ongoing restrictions continue to heavily impact Western and Central Europe, which has resulted in challenges across the entire EMEA region and a 5% decline in overall sales.
That said, we remain optimistic about the region's recovery as global vaccination rates increase and related restrictions ease.
As we press ahead, we will continue to work diligently with our regional teams and communities, particularly those that remain on the most pandemic-related pressure to adapt our [Phonetic] supply chain ensure that our customers continue to receive the leading solutions they have come to expect.
Let's move to Slide 8.
I would now like to review our first quarter sales performance across IFF's key business segments, so you can get a more granular view.
We are pleased to report solid growth across our Nourish, Pharma Solutions and Scent divisions.
Our largest group, Nourish, achieved combined currency-neutral sales growth of 1%, led by robust performance in Flavors.
We continue to see pandemic-driven headwinds in Food Design, which is driven primarily by continued declines in Food Service.
This channel, while improved from the fourth quarter trends, was down mid-single digits in the first quarter.
Scent continued its strong performance, achieving combined currency-neutral sales growth of 5%, the largest growth driver across our four divisions, led by continued strengths in Consumer Fragrances, double-digit growth in Cosmetic Actives, and a strong rebound in Fine Fragrance.
For our Pharma Solutions division, we achieved combined currency-neutral sales growth of 3%, with continued strong performance across the entire division and all sub-categories.
For Health & Bioscience division, combined currency-neutral sales decreased 3% against a strong double-digit year-ago comparison.
Increases in both health and home and personal care were offset by pressures in Microbial Control and Grain Processing.
Together, we have an in demand and diversified portfolio that is meeting that needs of our core end markets.
I feel, we are very well-positioned to continue executing our ambitious growth initiatives and the complexity of the global marketplace.
Now turning to Slide 9, I want to show a summary that highlights our business performance, particularly with regard to the segment-level adjusted operating EBITDA margin.
As you know, we are focused on driving overall group operating efficiencies as we execute on our integration plans.
Rustom will cover our first quarter segment performance in much more detail, but I wanted to present this slide as it will be included in our standard earnings package going forward, specifically focusing on year-to-year performance.
Some highlights for Q1, that are worth mentioning; within our largest division, Nourish, I'm very pleased to see early progress on margin expansion.
We achieved strong results in our Scent division.
The team did a great job, driving higher volumes, benefiting from the rebound in Fine Fragrance, which drove favorable mix and continued, therefore, to capture productivity savings.
In H&B and Pharma Solutions, adjusted operating EBITDA margins were pressured by increased raw materials and logistics costs, which overshadowed the strong cost discipline the team has accomplished.
Now on Slide 10, I would like to provide you with an update on our integration progress with N&B.
Since completing our combination in February, we have achieved several financial organizational integration milestones, which reflect the incredible efforts of our global team.
From an organizational perspective, we have established a comprehensive operating and leadership structure for our combined company, having identified and announced roles all the way from CEO, down to third level leaders.
These leaders are working closely with the integration management office to ensure that all employees are provided for the tools and resources they need to succeed.
They've also completed all IT migration from DuPont to IFF, and are on schedule regarding exiting many of our transition service agreements with DuPont.
On the revenue synergies front, we have a robust pipeline of projects, including both cross-selling and integrated solutions, that we expect will accelerate our ability to meet our $20 million synergy target this year.
This quarter, we achieved a significant cross-selling win within our Health & Bioscience divisions by detergents, and we've invoiced our first sales in April.
We are pleased with our project pipeline and with the efforts so far, and continued expressions of demand from customers.
We are confident in our ability to meet our three-year run rate synergy target of $400 million.
From a cost synergy perspective, we are under way and already seeing modest P&L benefits, given we are in early days.
We expect these cost savings to increase over the course of the year, putting us well on track to meet our $45 million cost synergy target in the full year 2021, and our year three run rate cost synergy target of $300 million.
I would now like to pass the call over to Rustom, who will provide a more detailed review of our financial performance in the first quarter.
First, let me go a bit deeper into our consolidated financial results.
In the first quarter, IFF generated $2.5 billion in sales, a 3% combined year-over-year increase, including foreign exchange benefits, or up 1% on a currency-neutral basis, primarily led by strong performances in our Scent and Pharma Solutions divisions.
As you may recollect, from 2021 onwards we are applying prior-year average FX rate to our current year non-US dollar revenues to derive currency-neutral growth rates.
This is the more common practice and makes us more comparable to our competitors.
Our gross margin was impacted in Q1 at Nourish, H&B and Pharma by higher raw material and logistics costs headwinds arising from input cost inflation and higher freight rates, tight inventories and weather-related plant disruptions.
Meanwhile, our aggressive cost management program led by headcounts and other expense reductions, enabled us to improve RSA to sales by 120 basis points and deliver year-on-year adjusted operating EBITDA growth of 4%.
As an aside, Q1 2020 was our most difficult comp with 7% combined currency-neutral sales growth and strong adjusted operating EBITDA growth.
IFF also delivered adjusted earnings per share, excluding amortization of $1.60 for the first quarter.
Now on Slide 12.
I'd like to discuss the first quarter performance of Nourish, which now includes the enhanced capabilities of N&B's pharma, food and beverages business.
Nourish sales totaled $1.3 billion for the quarter, representing 1% growth on a combined currency-neutral basis.
Adjusted operating EBITDA grew 6%, with a 60 basis point margin expansion led by strong cost management.
Looking at Nourish's performance by business, Flavors drove growth in nearly all our regions.
Within ingredients, which was flat year-over-year, Protein Solutions grew double-digits, but this was offset by softness in emulsifiers and sweeteners.
Continued pandemic-related challenges impacted Food Design, particularly Food Service, which declined mid-single-digits year-over-year.
As the effects of the COVID-19 pandemic lessen, and retail and away-from-home channels continue to recover, returning to growth in this area, while maintaining our strong performance in Nourish's other segments will remain a top priority for the remainder of 2021.
Moving to Health & Biosciences on Slide 13.
As Andreas noted, H&B had a combined currency-neutral sales decline of 3%, but this was against a robust 11% positive year-over-year comparison.
It should be noted that on the two-year average basis, currency neutral growth was solid at 4%.
Adjusted operating EBITDA was also pressured and operating margin declined by 70 basis points, primarily driven by lower segment volumes and higher raw material and logistics costs.
Our Home & Personal Care business grew strong double-digits this quarter, supported by evolving consumer buying trends related to the pandemic that has persisted through Q1.
But declines in Animal Nutrition this year, when compared to mid-teen growth in the prior-year period, offset that performance and impacted overall year-over-year growth.
Microbial Control & Grain Processing were also impacted by continued pre-COVID cycling, which impacted H&B's overall growth by approximately 5 percentage points.
We are pleased to say that over the course of the first quarter, these businesses showed improvement and were positive in April as we cycle the comparable.
We are encouraged by the tremendous performance of Home & Personal Care, which is a testament to evolving consumer trends that prioritize individual health more than ever before.
Turning now to Slide 14 to discuss the results of our Scent division.
Overall, we are very pleased with Scent's strong performance, which has been a significant contributor to our Companywide growth.
Our Scent division generated $569 million in total sales, representing 5% combined currency-neutral growth against a strong 7% growth in the year-ago period as well.
On a two-year basis, growth is exceptional at approximately 6%.
Adjusted operating EBITDA improved 8% with a 70 basis point margin expansion predominantly driven by volume growth across the entire segment, as well as favorable mix from Fine Fragrance recovery and continued productivity.
As we began to see last quarter, our Fine Fragrance business experienced a solid recovery as away-from-home restrictions continued to lift and consumer behavior returned to more traditional levels.
Coupled with this rebound, continued strength in Consumer Fragrances and mid-teens growth in Cosmetic Actives, resulted in another quarter of strong performance for the entire division, driven by volume recovery and new business wins across the segment.
Our new core wins also providing strong contributions with all three customers growing double-digits in the first quarter.
Now on Slide 15, I would like to discuss the results of Pharma Solutions, our fourth division.
As previously mentioned, Pharma Solutions had an impressive quarter of broad-based growth and made a solid contribution to IFF's overall higher Q1 sales.
Pharma Solutions delivered $162 million in net sales, representing 3% in combined currency-neutral growth while adjusted operating EBITDA grew 2%.
Taken in the context of the 11% growth in the prior-year period, growth is impressive on a two-year basis -- average basis at approximately 7%.
Looking at Pharma Solutions performance by business, Core Pharma and Industrial Pharma led the division with volume growth for METHOCEL, seaweeds and coatings, providing -- proving instrumental to Core Pharma.
And Global Specialty Solutions and Nitrocellulose supporting the success of Industrial Pharma.
While we are very pleased with Pharma Solutions' sales performance in the first quarter, we saw adjusted EBITDA margin declined due to higher cost of goods related factors.
More specifically, gross margin was hurt by higher raw material and logistics costs related to supply chain challenges and force majeures due to the bad weather in the Midwest earlier this year.
We had two plants shutdown temporarily, which impacted raw material availability and caused higher distribution costs.
Now turning to Slide 16, I'd like to review our cash flow dynamics and capital allocation, which remain a top priority.
As you will see, our operating cash flow was very strong at $358 million.
We are quite pleased with Q1 cash generation.
For legacy IFF, Q1 is usually the lowest cash flow quarter of the year.
We typically have net working capital headwinds, as we reset off Q4's loss and we make annual bonus payments in March.
And this year, we also had large deal-related costs such as, cost to achieve investment banking fees, consulting expenses, etc.
A large part of our Q1 success came from core working capital, where we generated $193 million, a great job by our global team and a great outcome.
But we don't expect this quarter after quarter, as we like to build inventory up in some of our legacy N&B business areas to support future growth.
In the first quarter, capex was approximately $93 million or 3.5% of sales, up from last Q1's combined comparative $76 million or 2.6% of sales.
Free cash flow generation was, therefore, strong $265 million, and we distributed $82 million in dividends to our shareholders.
Our leverage, which is net debt divided by credit adjusted EBITDA ended at 4.3 times, as Andreas noted back on Slide 6.
This is ahead of our expectation of 4.5 times first quarter post-merger leverage.
Now to provide some full year context.
Legacy IFF generated $520 million of free cash flow in 2020 and combined, we expect to generate $1 billion in 2021.
In 2021, we will invest more in legacy N&B production capacity to meet expected strong future demand, but will only be slightly above our original full-year capex projection of approximately 4.5% of sales.
The dividend payment this year will be -- this quarter will be $197 million reflecting our higher post-merger share count.
And we remain on track to meet our long-term deleveraging target of 3 times net debt to credit adjusted EBITDA in 24 months to 36 months from deal close.
Turning to Slide 17, I'd like to provide an update on our full-year 2021 consolidated financial outlook.
But before doing so, I want to remind everyone that in mid-April, we provided sales and adjusted EBITDA metrics for each of IFF's four segments on a 2020 pro forma and combined basis, and additional detail on a segment level via our Learning Labs series.
On a combined basis, IFF generated $10.6 billion of revenue for the full year 2020, with currency neutral growth of approximately 2%.
And our combined adjusted operating EBITDA margin for 2020 was approximately 22%.
Please remember that combined includes 11 months of N&B and 12 months of IFF in 2020 and 2021.
In our fourth quarter conference call in February, we gave initial pro forma guidance, which assume the full 12 months of IFF and N&B, in order to be directly comparable to our previously provided S-4.
Moving forward, to be more aligned with actual results and reporting, we are transitioning to guiding on 11 months of N&B, which excludes January and 12 months of IFF in the 2021 year, in light of the merger completing on Feb.
Also, please note that in January 2021, N&B's actual sales were approximately $507 million and adjusted operating EBITDA was $107 million.
Given our first quarter results, our April preliminary sales, our rest of year FX expectations incremental pricing to recover costs and the fact that Q1 was our toughest comparative period quarter, we are forecasting stronger sales growth through the rest of 2021.
We have, therefore, increased our sales expectation for 2021 to be approximately $11.25 billion in combined revenues, or plus 6% growth with an approximately 23% adjusted operating EBITDA margin.
Since the beginning of the year, we have seen a rise in the cost of goods, driven by input cost, including raw materials and logistics.
In terms of raw material costs, we are seeing a large increase in selected commodities, soy, locust bean kernels, vegetable oil, turpentine and propylene glycol.
In addition, freight costs are higher as a result of greatly increased rates.
For example, the global freight index is up three times due to non-availability of containers at contracted rate.
And we're also seeing an uplift in air freight volumes due to strong demand and supply chain challenges like force majeure earlier this year.
This has required us to go back to have additional pricing discussions to cover our exposure.
While we are confident that over time we can fully pass along the increase, there is a time lag before pricing is fully realized, which can pressure gross margin in the short-term.
Ultimately, by the end of the year, we are confident that through pricing and our ongoing focus on cost reduction, we can achieve our full year adjusted operating EBITDA goal on a combined basis.
With regard to Q2, we are pleased that we've started the quarter strong, a nice growth acceleration versus where we ended the first quarter.
We are optimistic that for the full second quarter, revenue growth including currency benefit should be in the high-single-digits range, with an adjusted EBITDA margin also around 23%.
To assist with understanding and modeling the new IFF, we are also sharing our expectations with regard to depreciation, amortization, interest expenses, capex, our adjusted effective tax rate, excluding amortization and our weighted average share count on a combined basis.
While, most of these metrics probably don't need to be elaborated upon, it's worth noting that we expect moderately higher capex in 2021, as we invest for growth and work to exit some of our IT-related transition services agreements with DuPont more quickly than planned.
We're also providing a 2021 adjusted effective tax rate, excluding amortization for the first time.
And the 21.5% is broadly in line with our early expectations.
This is still preliminary and will change as we finalize purchase accounting and intangibles by jurisdiction.
The equivalent for heritage IFF on a similar basis for the full-year 2020 was approximately 18.5%.
Collectively, these metrics and decisions reflect our confidence in IFF's ability to deliver solid results even in this volatile global environment.
It has truly been a busy quarter, and we all have much to be proud of, especially as this all was accomplished during a global pandemic.
Looking beyond our solid Q1 financial results, I want to reemphasize the important first step that we took in tightening our business and optimizing our portfolio strategy, by agreeing to divest our fruit preparation business.
By divesting this non-core business, IFF will be more efficient organization with a greater capacity to focus on growth and innovation across our key businesses, ultimately generating greater value for our shareholders.
As we enter Q2 together, we are confident that we have the right team and the right structures in place to ensure that our newly combined company will meet our financial and operational goals.
As I mentioned, we are targeting strong year-over-year financial improvements with accelerated sales growth over the coming quarters, backed by our commitment to delivering industry-leading innovative products and services to our customers around the world.
And as Rustom stated, we are pleased that we have started Q2 strong, and optimistic that our full second quarter sales growth should be in a high-single-digit range.
I'm tremendously proud of all we have accomplished, and I firmly believe that the best is yet to come.
We're taking each and every learning from the N&B integration process to create a stronger, more agile and diversified company, that defines the future of our industry and showcase of what it means to be a leading ingredients and solutions partner.
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q1 adjusted earnings per share $1.60.
sees combined fy 2021 (excluding.
n&b jan) sales about $11.25 billion.
qtrly adjusted earnings per share excluding amortization $1.60.
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We will begin today with comments from Entergy's Chairman and CEO, Leo Denault; and then Drew Marsh, our CFO, will review results.
In an effort to accommodate everyone who has questions, we request that each person ask no more than two questions.
Management will also discuss non-GAAP financial information.
Today, we are reporting quarterly results that keep us firmly on track to meet our financial commitments.
Third quarter adjusted earnings were $2.45 per share.
With good visibility into the rest of the year, we are narrowing our 2021 guidance range and $5.90 through $6.10 per share and expect to achieve 2022 and 2023 results in line with our outlooks.
Further, we are extending our outlooks to include 2024 and see our steady predictable growth of five percent to seven percent continuing through this period.
Additionally, we achieved the milestone of raising our dividend by six percent and aligning with our earnings growth.
This happened on the schedule we previously communicated and represents another commitment met.
We have developed a more resilient business.
And despite $65 million of nonfuel revenue losses in the third quarter due to Hurricane Ida, we are maintaining our financial commitments.
Our resiliency provides stability that is valuable to all of our stakeholders, particularly customers and owners.
The quarter was heavily impacted by Hurricane Ida, which made landfall as a strong category for hurricane bringing powerful destructive wins across New Orleans, Baton Rouge and beyond.
Our coastal communities were particularly hard hit by both strong winds and storm surge.
Ida disrupted the lives and businesses of many of our customers and communities and Entergy was there to help when they needed us.
We gathered a restoration force of 27,000, our largest ever, representing Entergy employees, contractors and mutual assistance crews from 41 states across the country.
Further gratitude goes to our employees who worked restoration despite their own homes being damaged by Ida.
They epitomize what it means to put our customers first.
I never cease to be amazed by the dedication and effectiveness of the many restoration workers who step away from their lives for weeks at a time to help our customers and communities get their lives and livelihoods back up and running again.
Despite Ida's wins creating significant damage and destruction across our power grid with close to one million peak outages, our team restored customers at a rapid pace.
In just over a week, we had roughly half of all customers restored.
Metro areas like New Orleans and Baton Rouge saw restoration essentially completed by day 10.
Within three weeks, more than 98% of all affected customers were restored.
And it's easy to lose sight of the fact that this restoration was successfully accomplished while dealing with the effects of the pandemic.
Entergy also helped our customers and communities throughout the recovery process by developing -- or deploying 165 commercial scale generators to power critical community infrastructure like medical facilities, gas stations, grocery stores, municipal water systems and community cooling centers in advance of power being restored.
In addition to restoration work, Entergy's employees contributed countless hours to their communities and Entergy shareholders committed $1.25 million to help affected communities rebuild and recover.
While power has been restored to customers who can safely take it, our job is not finished.
We are committed to minimizing the effects of Ida on our customers' bills.
We will work with our regulators to seek securitization of Ida storm costs, which is a proven and low-cost means of recovery.
Further, we are coordinating with key officials and stakeholders, including Louisiana Governor Edwards, The City Council of New Orleans, Louisiana Public Service Commission, Louisiana Congressional Delegation and the Biden administration to seek federal support that could offset the cost of our customers for Ida in the 2020 storms.
There is widespread alignment among state and local leaders on the compelling case that Louisiana has to obtain federal support.
We are fully aligned with this perspective.
To be clear, any federal funding that Entergy utilities obtain will reduce the customer obligation dollar for dollar.
We're also committed to mitigating the impacts of future storms.
Entergy has made significant transmission and distribution investments, nearly $10 billion over the last five years, which made our system more resilient.
We've seen those new investments perform well under the most challenging conditions.
Wind damage to our transmission structures, for example, has occurred most almost exclusively to older structures built to prior standards.
It has become clear that major weather events of all types are occurring more frequently and with greater intensity.
Hurricane Laura made landfall as the strongest storm to hit the Louisiana Coast since 1856.
Then exactly 12 months later, Hurricane Ida hit with almost equal force.
Our resilient standards and asset programs have never been static, and we've continued to evolve them.
And as I mentioned, our investments are working as designed.
However, the uptick in severity and frequency of storms is compelling us to take a fresh look at how we can make our system more resilient, including the pace at which we can achieve it.
Even prior to Ida, we are actively deploying multiple options along the resiliency scale, particularly for our service areas south of I-10 and I-12, which has the greatest exposure to hurricane-strength winds and flooding.
Evaluating these resiliency options needs to be done under future climate scenarios.
And we are taking into account important considerations such as customer affordability and sufficiency of materials and skilled labor.
This customer-driven investment will be significant, and we will work collaboratively with our regulators and other stakeholders to determine the optimal path forward.
Coming back to the quarter, I would like to highlight that despite dealing with a major storm, the business continued to run well without missing a beat.
We've made great progress in several open proceedings.
First, Entergy Arkansas filed a unanimous settlement for its formula rate plan, and the Arkansas Commission has agreed to cancel the hearing and take up the settlement based on the filed testimony, which is positive.
New rates in Arkansas will be implemented in January.
In New Orleans, we recently implemented rates at the level that reflected all adjustments proposed by the council's advisors so there are no further proceedings there.
We also are pleased to note that Entergy Arkansas reached a settlement with key customers of its Green Promise tariff filing.
If approved, this tariff will enable us to offer green solutions to meet the growing sustainability demands of our customers.
And we're making progress on other open proceedings.
In Entergy Louisiana, its FRP rates went into effect.
Entergy Arkansas received approval for the West Memphis Solar project.
Entergy Texas reached an unopposed settlement on its 2020 storm cost filing.
And Entergy Texas also filed for approval of the Orange County Advanced Power Station.
And the Louisiana 2020 storm recovery and securitization process remains on track.
We continue to make progress on decarbonizing our fleet.
We've announced five gigawatts of solar in our supply plan through 2030 with a goal of doing more.
And an update to our supply plan and renewables growth will be provided next week at EEI.
In addition to healthy meeting -- in addition to helping meet decarbonization goals, the cost of renewable resources relative to conventional resources continues to trend favorably, and renewable resources provided an important edge against rising and volatile natural gas prices.
We will provide more details around our latest resource plans at EEI.
Last quarter, I discussed ways in which Entergy can help our industrial customers meet their sustainability goals.
While many have expressed long-term goals like net-zero by 2050, even more have developed shorter-term interim goals that will require action by the end of the decade.
Clean electrification is one of several important tools that our industrial customers have as a means to achieve their objectives.
Clean electrification provides a great opportunity for load growth and will require significant capital investment in renewable generation, transmission and distribution.
The load growth that comes with electrification will help pay for incremental customer-centric investments.
We'll have more to discuss regarding the opportunity we have to help our customers meet their sustainability objectives next week at EEI.
While it is important to discuss these longer-term growth opportunities, I want to make sure we don't lose sight of the very solid based investment plan that we have in front of us.
Over the next three years, we have a $12 billion capital plan that is designed to deliver reliability, resilience and improve customer experience and environmental and cost efficiency benefits to our customers.
When paired with our well-defined regulatory constructs, our plan will deliver five percent to seven percent adjusted earnings per share growth for our owners over the next three years.
That's a very solid base plan.
And beyond this strong foundation, these other opportunities in renewable generation, clean electrification and resilience acceleration will serve to extend our runway of growth throughout the rest of the decade.
We look forward to continuing the conversation with you at the EEI Financial Conference.
Now Drew will review the quarterly results.
Today, we are reporting solid results even with the challenges from Hurricane Ida.
Summarized on Slide five, our adjusted earnings per share was $2.45, slightly higher than a year ago.
We continue to execute our strategy, and we are firmly on track to meet our commitments.
In fact, with three quarters of the year behind us, we are narrowing our guidance range to $5.90 to $6.10.
We're also affirming our outlooks and extending the outlook period through 2024, and we recently raised our dividend to align with our adjusted earnings per share growth rate.
Turning to Slide six.
Our investments to improve customer outcomes continue to drive growth.
That includes rate changes to recover those investments as well as associated new operating expenses.
Industrial billed sales were 10% stronger than a year ago.
We saw increases across most segments with the largest increases in primary metals, petrochemicals, transportation, industrial gases and chlor-alkali.
This reaffirms the strength of our industrial customer base.
And in a world with supply chain constraints and higher energy prices, our industrial customers' businesses remain strong and competitive.
These industrial sales were strong despite Hurricane Ida.
Overall, across all classes, we estimate that third quarter revenues were approximately $65 million lower as a result of Ida.
Hurricane Laura's impact on third quarter 2020 was approximately half of that.
Other O&M was higher this quarter as planned.
This is partly due to higher costs for distribution operations, including reliability costs, higher expenses in our power generation function and higher health and benefit costs.
Moving to EWC on Slide Seven.
You'll see results were slightly lower than a year ago.
The key driver was the shutdown and sale of Indian Point.
Operating cash flow for the quarter is shown on Slide Eight.
The quarter's result is about $300 million higher than last year.
The increase is due largely to improved collections from customers, including collections associated with investments to benefit customers and Winter Storm Uri.
This was partially offset by expenditures related to higher natural gas prices.
Slide nine summarizes our credit and liquidity.
We expect to maintain our current credit ratings, and we continue to expect to achieve targeted rating agency credit metrics as storm restoration spending is securitized and we retire storm-related debt.
I'll take a minute to discuss our balance sheet, beginning with a quick update on Hurricane Ida on Slide 10.
Over the past several weeks, we've refined our cost estimates, and we've shaved $100 million off the upper end of the range.
The total cost is now expected to be $2.1 billion to $2.5 billion.
We've also updated our estimate of the nonfuel revenue loss to $75 million to $80 million, the lower half of our previous range.
While our net liquidity, including storm reserves remained strong at $4 billion, we are also working to ensure timely storm cost recovery.
That starts with a successful restoration effort and proceeds through two avenues.
First, Entergy Louisiana amended its 2020 storm filing to request an additional $1 billion to provide early liquidity for Hurricane Ida costs.
And in Texas, we reached a settlement on the 2020 storm cost filing and that is now before the PUCT.
Second, we have improved the efficiency of our storm invoice processing to accelerate our filings and ultimately, cost recovery.
We plan to complete financing for the 2020 storms by early next year and Ida by the end of next year.
And our work isn't over, we'll continue to identify ways to further reduce business risk.
As Leo highlighted, we are looking forward to a conversation with our customers, retail regulators and other stakeholders about how we best accelerate and implement a strong resilience plan.
We have already hardened more than half of our critical transmission and distribution structures along the Gulf Coast to standards implemented after Katrina and Rita, continue to move the bar higher by reevaluating current standards using the latest weather data.
In addition, a comprehensive resilience plan needs to include the strategic placement of assets to allow higher-risk communities to recover more quickly.
For example, MicroGrid's Distributed Energy Resources and the deployment of generators, Leo highlighted to certain critical customers and the aftermath of storms could be very helpful in supporting communities as they recover.
I go into more depth on this in our conversations with EEI.
In addition to physical resilience, our regulators know the importance of a healthy credit at the operating companies to support customers.
And they have put in place time-tested cost recovery mechanisms such as securitization and storm reserves to support that need.
We are fortunate that in looking to recover the 2020 and 2021 storm costs, we are starting with some of the lowest rates in the country.
We have significant electrification growth potential that could help pay for incremental customer-centric investments and future storm costs.
All of these will support our credit as our regulators and key stakeholders aligned with us around a strong, resilient acceleration plan.
In addition, we continue to execute on the exit of EWC, and we're less than a year from completing our plan.
The resulting improvements were recognized by S&P last fall through our improved business risk profile and by Moody's, just this past quarter through changes to our rating thresholds.
Those changes remain in place and our ratings reflect future storm risk.
As a result, we were able to reduce our 2021 to 2024 equity need.
Combined with our ATM transactions, our future equity need is more than 50% lower than the $2.5 billion communicated at Analyst Day last year.
Moving to Slide 11.
We have a clear line of sight on the remainder of the year.
And for the third year in a row, we are narrowing our adjusted earnings per share guidance.
In this case, for 2021 to $5.90 to $6.10.
We are also affirming our longer-term outlooks of five percent to seven percent adjusted earnings per share growth and extending the 2024.
Our confidence in our solid base plan continues to grow, and a key expression of that confidence is the dividend.
For the last several years, we've discussed our goal to align our dividend growth with our adjusted earnings per share growth.
Our Board of Directors recently declared a $0.06 increase in our quarterly common dividend, which is now $1.01 per share.
That's a six percent increase as planned.
We expect to continue this growth trend going forward, obviously, subject to Board approval.
That's good news for our owners to provide the capital needed to meet our customers' evolving needs.
Today, we are executing on key deliverables, and we have a solid base plan to meet or exceed our strategic and financial objectives.
In less than a week, Leo, Rod and I will be imported to meet with many of you in person for the first time in almost two years.
We'll provide our typical updates on considerations for next year's earnings expectations and will provide our preliminary three-year capital plan, including a positive update on our expectation for renewables.
We'll also talk about the significant long-term customer-centric investment beyond our current outlooks from renewables, clean electrification and acceleration of our system resilience.
We're excited about these opportunities ahead and look forward to talking to you about all of it at EEI.
And now the Entergy team is available to answer questions.
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q3 adjusted non-gaap earnings per share $2.45.
narrowed its 2021 adjusted earnings per share guidance to a range of $5.90 to $6.10.
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These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated.
Also, during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements.
We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner.
nuskin.com for any required reconciliation of non-GAAP numbers.
And with that, I'll turn the time over to Ritch.
We really do appreciate you joining us today.
As many of you may know, this will be my last earnings call as CEO of Nu Skin before transitioning leadership to Ryan on September 1.
We truly have an amazing Nu Skin team around the globe, and the future continues to get brighter for growth and prosperity of this business.
I'm excited about all that we've accomplished, but I'm even more positive about the future, and these are some of the reasons for my optimism.
First, we've taken deliberate actions to evolve into a more customer-obsessed enterprise that delivers world-class beauty and wellness products through a socially enabled affiliate platform.
We've also positioned our business to leverage powerful macro trends and shifts in consumer behaviors.
For example, we focused our product development on beauty device systems, and we have now been recognized by Euromonitor as the world's number one brand for beauty device systems for four consecutive years.
We formed key partnerships with Amazon Web Services and Alibaba and have revamped our tech strategy by moving our infrastructure to the cloud.
While this transition has greatly expanded our load capabilities and increased our ability to scale, I am most encouraged by the new tools and digital experiences that we plan to introduce, which will delight our customers and empower our affiliates.
We've modified our incentive structure to speed payments and increased flexibility to our affiliates and attract a younger demographic.
We purchased manufacturing assets to increase our speed and agility in bringing beauty and wellness products to market and securing our supply chain.
We established aggressive sustainability goals around people, product and planet with a focus on building a better tomorrow for our world.
This foundation will continue to drive growth and profitability going forward.
In the second quarter, we generated very strong results, which highlight our corporate focus on improving our geographic balance and operating margin.
We reported revenue growth of 15% with the western segment accounting for approximately 40% of our revenue.
We also improved our operating margin by 260 basis points to 12.1%, which contributed to our reported 42% earnings-per-share growth.
Through all my years at Nu Skin, I can truly say that we are better positioned for the future than we have ever been.
The transition of management has been going very well.
Ryan and I have worked hand in hand over the past several years in building the strategy of the company and executing our growth plans, and I am confident that he and our team will accelerate our growth into the future.
Let me now turn the time to Ryan to report on the business and give more detail around our second quarter results.
For the past nearly five years, we've been working together tirelessly to drive Nu Skin's transformation into an even more customer-obsessed global and digital-first company.
And I'm really extremely proud of the progress that we're making.
Before we describe the quarter in more detail, I'd like to discuss how we'll accelerate our vision to becoming the world's leading innovative beauty and wellness company that's powered by our dynamic affiliate opportunity platform.
We're all familiar with the emerging macro trends that are shaping the broader consumer marketplace, including product personalization and every brand's desire to know their customers on a more intimate level; digital, social and mobile connectivity of the direct-to-consumer experience; and the disruption of retail and e-commerce with social media and influencers to what is now being called social commerce.
As we look to the future, we're aligning our vision and strategy to take advantage of these emerging market forces and reposition Nu Skin as a disruptive beauty and wellness leader through three key transformational moves.
First, building on our heritage of developing innovative products and leveraging our leading position in beauty device systems, we will be introducing connected device systems as we personalize our product offerings and deepen our relationships with more than 1.4 million registered customers.
Second, we will continue to transform our business by leveraging the power of social commerce and our unique person-to-person affiliate marketing channel to build brand awareness and acquire customers at greater scale via social media platforms in a deeper and more personal manner than traditional retail or e-commerce.
And third, we will enable all of this through our enhanced digital ecosystem that improves our ability to attract, connect and nurture customers, which currently makes up more than 90% of Nu Skin's revenue.
Together, these three transformational moves will enable us to accelerate our vision to becoming the world's leading innovative beauty and wellness company.
So let me dive a little deeper into our strategy, beginning with our innovative beauty and wellness products.
We continue to focus on expanding our leadership position in beauty device systems with the launch of ageLOC Boost in several markets in the first half and the remainder of our markets in the second half.
These beauty device systems now make up approximately 30% of the company's total revenue.
Additionally, we're pleased with the first half results of Nutricentials Bioadaptives, our customizable skincare line that's targeted toward millennial and Gen Z emerging skincare enthusiasts.
For the remainder of the year, we will introduce two new product innovations.
First, we'll leverage our unique inside/outside R&D capabilities to develop our first beauty-from-within solution, beauty Focus Collagen+, which will be launched in several markets throughout the second half.
This proprietary formula is our entry into the rapidly expanding $40 billion beauty supplement market.
Second, we will be introducing in several of our markets our next significant Pharmanex product innovation, ageLOC Meta, a supplement that supports metabolic health and help shift the body's biochemistry toward a healthier mode.
Looking ahead into 2022, we will expand our device system leadership position by introducing next-generation connected devices, which will further enhance the company's ability to provide consumers with more personalized product experiences to meet their needs.
The second part of our strategy, our dynamic affiliate opportunity platform, is how we take these products to market in order to acquire and serve our customers.
Virtually every consumer brand today is looking to build lasting relationships directly with their customers, though they struggle to do so due to the constraints with their retail partners.
At Nu Skin, we are leveraging our global team of micro influencers in nearly 50 markets who utilize the power of their personal brand and relationships to provide authentic product recommendations and personalized customer engagement via social media.
This form of social commerce is now enabling us to expand our target market and reach new customer segments at greater scale, evidenced by the acceleration of our business over the past year.
Overall, we have a growing number of affiliates adopting social commerce in the West, and we are actively proliferating this model in key markets throughout the East.
Grand View Research is projecting social commerce to grow from an estimated $474 billion in 2020 to $3.3 trillion by 2028 with Asia currently accounting for 68% of the total social commerce revenue.
We believe Nu Skin is ideally positioned to take advantage of this growth opportunity as our social commerce business model evolves in those markets.
We continue to expand our digital ecosystem by incorporating new digital tools to empower our affiliates to make this shift, including Vera, our personal product recommendation app, which is currently in beta form and will be migrated to a new consumer experience app later this year; MySite, our most popular affiliate tool, which will be migrated into a more robust affiliate app with enhanced social commerce functionality; and our WeShop Tencent-powered social commerce tool set that will be introduced in China beginning in the second half.
Our dynamic affiliate opportunity platform is enabling us to accelerate our shift to a social commerce business model through the coming quarters.
So turning to our global markets.
We have been able to sustain growth in the West over the past year.
Despite ongoing COVID-related disruptions in certain markets, our trends are improving in our Eastern markets as we expand our product offering and social commerce business.
Our customers remained relatively flat due to the surge in the prior year while sales leaders grew 15% related to new product introductions and enhanced new leader qualification programs.
In the Americas Pacific region, the successful launch of Nutricentials Bioadaptives has helped sustain the gains we achieved during the past year.
We achieved strong revenue and leader growth due to promotional product cadencing and leadership alignment.
The year-over-year moderate customer decline in the region is primarily due to a slowdown in Argentina related to inflationary challenges.
As I mentioned earlier, we look forward to the Collagen+ and Boost launches in the U.S. in the second half of the year along with the digital tool enhancements that we'll begin to roll out in Q4.
Moving on to EMEA.
ageLOC Boost exceeded our expectations during the product preview in Q2, and we expect the excitement to continue into consumer launches in the second half of the year.
Social commerce continued to propel our business in the first half, though we are seeing some leveling in the summer months as personal travel increases over the prior year.
With new product launches and strong product promotions kicking into gear, we remain optimistic about the future of EMEA and our business there.
This was a busy quarter for us in Mainland China where the launches of Boost and Nutricentials contributed to the ongoing stabilization of this market.
We are strongly focused on growing this region, and we were excited to hold trainings in July with more than 10,000 sales leaders in preparation for social commerce and the rollout of our enhanced digital tool set, including WeShop personal storefronts.
We're also preparing for the introduction of Meta and Collagen+ in the second half.
In Hong Kong and Taiwan, we remained stable with solid sales of Boost and Nutricentials Bioadaptives.
We are focused on advancing social commerce training in these markets as well and expect to benefit from the introduction of ageLOC Meta in Q4.
Turning to Japan, a successful promotion of our ageLOC products, including devices, contributed to the fifth consecutive quarter of local currency growth.
Our business continues to perform well as we focus on engaging and training leaders on social commerce platforms ahead of our Meta previews in the quarters to come.
In Korea, a strong promotion of our TR90 weight management system in the quarter led to solid 6% growth in local currency.
Social commerce trainings continue in the region as well with Meta preview scheduled for the fourth quarter.
And finally, Southeast Asia.
This market has been perhaps most impacted by COVID with deepening lockdowns in various markets.
That said, we saw revenue and sales leader growth in the region, led by Indonesia, offset by continued challenges in Vietnam and Thailand that contributed to our customer decline.
We look forward to the introduction of Meta in the half.
So wrapping up, we continue to transform our business to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform.
Our vision is on point to take advantage of the most significant beauty and wellness trends in the market.
And our social commerce go-to-market strategy is aligned to enable us to reach even more consumers through the power of our micro influencer affiliates.
We will continue to invest in our business to drive growth through innovation while improving our operational efficiencies to generate shareholder value in the near and long term.
I'm excited about what lies ahead for us at Nu Skin as we lean aggressively into this vision.
And with that, I'll turn the time over to Mark.
I'll provide a financial overview and then give Q3 and 2021 guidance.
For additional details, please visit the Investor Relations section on our website.
For the second quarter, revenue increased 15% to $704.1 million.
Quarterly revenue was positively impacted 6% due to favorable foreign currency.
Earnings per share improved 42% to $1.15 and benefited nicely by improved gross margin and overall cost containment.
Gross margin for the quarter improved 80 basis points to 75.6% due to product mix, product cost focus and supply chain efficiencies.
Gross margin for the core Nu Skin business was 78.3% compared to 77.6% in the prior year.
Moving on to selling expense, which, as a percent of revenue, was 39.5% compared to 40.6% in the prior year.
For the Nu Skin business, selling expense was 42.4% compared to 43.3%.
As a reminder, selling expenses often fluctuate quarter-to-quarter, plus or minus 1%.
General and administrative expenses as a percent of revenue were 24% compared to 24.7% year-over-year as we continue to carefully manage expenses and gain leverage as we grow revenue.
I am very pleased with our operating margin improvements during the quarter, which improved 260 basis points to 12.1% compared to 9.5% in the prior year quarter.
This is another strong step toward our stated goal of a 13% operating margin.
The other income expense line reflects a $4 million expense compared to a $1.6 million gain in the prior year.
The change was largely the result of fluctuating foreign currencies along with a loss on an asset disposal.
Cash from operations was $20 million for the quarter as we continued our strategic investment in inventory to meet customer demand for our new products, shipped more product via ocean to reduce freight charges and built some protection from global supply chain constriction in this period of uncertainty.
We believe this elevated inventory level will decrease over the next few quarters.
We paid $19 million in dividends and repurchased $10 million of our stock with $265.4 million remaining in authorization.
Our tax rate for the quarter was 27.1% compared to 29.8%.
Our tax rate continues to be benefited by increased profits in the West, specifically the U.S.
Our manufacturing partners had another strong quarter, growing 27% with steady momentum heading into the back half of the year.
These entities continue to benefit our core business by strengthening our supply chain and bringing U.S. profit that helps our overall tax rate.
Our annual revenue guidance is $2.81 billion to $2.87 billion.
And based on ongoing efficiencies we are driving in the business, we are now raising our annual earnings per share guidance by $0.20 to a range of $4.30 to $4.50.
This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 25% to 29%.
While our Q3 is historically slightly softer seasonally than Q2 due to summer vacations in many markets, our prior year quarter included product launch revenue and we saw less impact from travel last year.
Our third quarter revenue guidance is $700 million to $730 million, assuming a positive foreign currency impact of approximately 2% to 3%.
Q3 earnings per share guidance is $1.10 to $1.20 and assumes a tax rate of 25% to 29%.
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compname reports 42% earnings per share growth in q2.
compname reports 42 percent earnings per share growth and 15 percent revenue growth in the second quarter.
q2 earnings per share $1.15.
q2 revenue $704.1 million versus refinitiv ibes estimate of $702.4 million.
sees 2021 revenue $2.81 billion to $2.87 billion; +9 to 11%.
sees 2021 earnings per share $4.30 to $4.50; +18 to 24%.
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pseg.com, and our 10-Q will be filed shortly.
We will also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income or loss as reported in accordance with generally accepted accounting principles in the United States.
PSEG reported non-GAAP operating earnings of $0.70 per share for the second quarter of 2021 versus $0.79 per share in last year's second quarter.
GAAP results for the second quarter were $0.35 per share net loss related to transition charges at PSEG Power, and that compares with $0.89 per share of net income for the second quarter of 2020.
Also in the quarter, PSEG Power recorded a pre-tax impairment of $519 million at its New England Asset Group, partly offset by a pre-tax gain of $62 million from the sale of the Solar Source portfolio.
We continue to make great progress on a number of fronts to position ourselves for the future.
We had a strong operating quarter that, once again, produced non-GAAP operating earnings in line with our expectations for the year.
Our results for the second quarter bring non-GAAP operating earnings for the first half of 2021 to $1.98 per share.
This 9% increase over non-GAAP results of $1.82 per share for the first half of 2020 reflects the growing contribution from our regulated operations and continued derisking at PSEG Power.
Slides 13 and 15 summarize the results for the quarter and the first half of the year.
It's been a year since we announced our intentions to explore strategic alternatives for our non-nuclear generation assets, and I'm pleased with the progress to date in what I believe is a compelling platform for future regulated growth at PSE&G.
Our utility, a clean energy infrastructure-focused business, will be complemented by a significantly contracted, carbon-free generating portfolio, consisting of our nuclear fleet and investments and opportunities in regional Offshore Wind.
The marketing of the fossil assets has garnered a significant level of interest from numerous qualified buyers in a competitive process, which is advancing as expected.
And we expect to provide you with more information on this process in the very near future.
I'm pleased that we've reached a balanced agreement with the New Jersey Board of Public Utilities and the Division of Rate Counsel on PSE&G's transmission rate, which, if approved by FERC, will resolve a significant regulatory uncertainty for us and provide a timely rate reduction for customers.
PSE&G has agreed to voluntarily reduce its annual transmission revenue requirement, which includes a reduction in its base return on equity to 9.9% from 11.18%.
If approved by the FERC, a typical electric residential customer will save 3% on their monthly bills.
New Jersey continues to experience positive economic activity since Governor Murphy lifted the Public Health Emergency Order in June.
Our largest customer class in terms of sales, the commercial segment, has shown a rebound in electricity demand.
Electric sales overall adjusted for weather were up nearly 4% over the second quarter of 2020, led by an 11% increase in commercial sales, which was partly offset by a 5% decline in residential sales as people gradually returned to work outside the home.
The warmer-than-normal summer has also increased PSE&G's average daily peak load for the quarter to 5,480 megawatts compared to last year's second-quarter average of 5,100 megawatts and the 5,330 megawatts experienced in the pre-COVID second quarter of 2019.
And so far this summer, PSE&G's load has peaked at 10,064 megawatts on June 30, exceeding the 10,000-megawatt mark for the first time since July 19 of the year 2013, eight years ago.
Turning to clean energy developments in New Jersey, the BPU in June awarded a second round of Offshore Wind projects totaling 2,658 megawatts and is now halfway toward the state's goal of procuring 7,500 megawatts of Offshore Wind generation by 2035.
The award was split between the 1,510 megawatt Atlantic Shores project and Orsted's 1,148 megawatt Ocean Wind 2.
The OREC price is set in the second round range from about $86 to $84 for the Atlantic Shores and Ocean Wind projects, respectively.
And last week, the BPU approved a new solar successor incentive framework that consists of two programs: an administratively determined incentive; and a competitive solicitation incentive, which would apply to larger projects defined as five megawatts and above.
Incentive levels for the administratively determined segment range from $90 per megawatt-hour for net-metered residential projects to $70 to $100 per megawatt-hour for the commercial and community solar segments and up to $120 per megawatt-hour for certain public entity projects.
You will recall that the prior program consisting of solar renewable energy credits or as we frequently refer to them as SRECs, average well above $200 per megawatt-hour over the past decade.
And combined with net metering subsidies and federal tax credits provided later incentives topping $300 per megawatt-hour.
So this successor program is a positive step toward balancing the need for clean energy while recognizing the importance of affordability for our customers.
PSEG's existing solar programs are essentially fully subscribed.
We'll continue to work with the state MBP on programs that can help meet the solar goals in the Energy Master Plan.
PSEG continues to make tangible progress on our own decarbonization and ESG goals.
In the second quarter alone, we closed on our 25% equity stake in the 1,100-megawatt Ocean Wind project in New Jersey, that's the Ocean Wind one project, obviously.
We retired our last coal unit at Bridgeport Harbor in Connecticut, making our generating fleet coal-free, and moved up our net-zero vision by 20 years to 2030.
But not only do we accelerate the net-zero vision, we also expanded it to include Scope one direct greenhouse gas emissions, and Scope two indirect greenhouse gas emissions from operations at both PSEG Power and PSE&G.
Expanding the net-zero vision to include both the utility and power operations is a significant move forward in our decarbonization efforts and one that will both inspire and challenge us to do more and do it better.
Coming up, PSEG is preparing to bid into a competitive process to build Offshore Wind transmission infrastructure.
This solicitation is intended to procure transmission solutions to this important New Jersey 7,500-megawatt Offshore Wind target by 2035.
The potential projects can cover onshore upgrades, new onshore transmission connection facilities, new offshore transmission connection facilities, and a network to offshore transmission system.
Proposals may address any or all of these four components.
The decision-making criteria is expected to include, among other things: an evaluation of reliability and economic benefits; cost; constructability; environmental benefits; permitting risks; and other "New Jersey benefits".
This competitive transmission open window will be jointly conducted by PJM and the New Jersey Board of Public Utilities.
PJM will lead the technical analysis of the proposed transmission solutions, and the BP will be the ultimate decision-maker.
We support the state's efforts to procure transmission in a manner that is most reliable, constructible, and cost-effective for our customers.
All of this is great progress on our decarbonization efforts and continues to demonstrate our alignment with the state's Clean Energy agenda and our industry leadership on environmental stewardship.
New Jersey's recent endorsement of the environmental benefits provided by our New Jersey nuclear plants through the second zero-emission certificates, I'll refer to that as ZEC for the rest of this conversation, extends the $10 per megawatt-hour carbon-free attribute recognition through May of 2025.
This extension will allow us, along with stakeholders in New Jersey and at the federal level, the time we need to work on a long-term economic solution to keep our merchant nuclear fleet economically viable and preserve its currently unmatched contribution of reliable, carbon-free baseload generation, the most cost-effective clean generation source available.
During the ZEC deliberations, a growing recognition of these nuclear units were economically at risk, but vitally important to New Jersey's ability to reach its clean energy and carbon goals gain further traction.
The importance of the New Jersey nuclear units to the state's climate goals was also recognized in the BPU Staff's recent resource adequacy report.
The report recommends that New Jersey should continue exploring a regionwide or New Jersey-only integrated clean capacity market, with the fixed resource requirement, often, we refer to that as an FRR.
We expect that the BPU will be closely watching to see whether FERC accepts PJM's just filed modifications to the minimum offer price rule which appears to better align the PJM capacity market with New Jersey's clean energy goals.
The results of the first PJM capacity auction in three years, influenced by a COVID-19 pandemic stifled demand curve, served as further evidence of the market risks faced by our nuclear units.
This sentiment is shared by Biden administration officials, including DOE Secretary Granholm and White House Domestic Climate Advisor Gina McCarthy, who have both spoken publicly on the importance of nuclear energy as a clean energy resource.
We continue to work on promoting a federal nuclear production tax credit proposal where the value of the credit declines as market revenue increases.
This is the primary federal policy that would help prevent premature closing of merchant plants whose market revenues are not currently covering cost and risk.
Other options, such as the federal nuclear grant program administered by the Department of Energy are also being discussed.
However, we and others in the industry share the view that a competitive grant program will not provide timely relief nor the certainty these plants need to remain operational.
Nonetheless, we're encouraged by the attention that at-risk nuclear plants are getting in Washington.
And we especially appreciate the efforts of New Jersey Congressman Bill Pascrell, who's leading this effort in the House of Representatives, and Senators Cardin, Manchin, and Booker in the Senate.
That said, we do expect the federal infrastructure effort to take the better part of the rest of the year to unfold.
On the social side of ESG during the second quarter, we recognized the Juneteenth holiday by giving employees paid time off to commemorate and celebrate this important day in our nation's history and supported our LBGTQ+ community with numerous events for Pride Month.
Also in June, PSEG was named to JUST Capital's Top 100 companies supporting healthy families and communities.
Overall, we had a solid quarter and results for the first half of the year have positioned us to update our full-year guidance somewhat earlier than has been our practice.
We are raising by $0.05 per share at the bottom end of PSEG's non-GAAP operating earnings guidance for full-year 2021 to a range of $3.40 to $3.55 per share, based on favorable results of PSE&G and Power through the first six months of the year.
This update also incorporates an August one effective date to implement the transmission rate settlement and the expectation that the fossil assets will contribute to consolidated results through the end of the year.
We're on track to achieve the Utilities 2021 planned capital spending of $2.7 billion on schedule and on budget.
This spend is part of PSEG's consolidated five-year, $14 billion to $16 billion capital plan, which we still intend to execute without the need to issue new equity, while also continuing to offer the opportunity for consistent and sustainable growth in our dividend.
Before closing, I do want to recognize the contributions of Dave Daly, who will be retiring on January 4, 2022, after 35 years of dedicated service to the company.
Kim Hanemann, who had been named PSE&G's Senior Vice President and Chief Operating Officer, was promoted to succeed Dave as President and COO of PSE&G effective June 30.
In support of a seamless transition of leadership at PSE&G, Dave is serving as an executive advisor through the end of the year.
With her promotion, Kim is the first woman to lead New Jersey's largest electric and gas utility in our 118-year history.
Many of you know Kim is the power behind the transmission buildout over the past 10 years, and I hope all of you will have the opportunity to meet here in the near future.
Speaking of meeting, New Jersey has among the highest rates of fully vaccinated people in the country, but vaccination rates in the state have recently plateaued.
So we're carefully monitoring the impact that highly contagious variants are having on updated health and safety protocols.
So whether in person or virtually, we are looking forward to hosting an investor-owned -- an investor event in the fall when we expect to share with you the many good things that are happening at PSEG regarding our improved business mix, increased financial flexibility, and solid growth opportunities.
As Ralph said, PSEG reported non-GAAP operating earnings for the second quarter of 2021 at $0.70 per share versus $0.79 per share in last year's second quarter.
We've provided you with an information on Slides 13 and 15 regarding the contribution to non-GAAP operating earnings by business for the quarter and the year-to-date periods, and Slides 14 and 16 contain corresponding waterfall charts that take you through the net changes in non-GAAP operating earnings by major business.
I'll now review each company in more detail starting with PSE&G.
PSE&G reported net income of $309 million or $0.61 per share for the second quarter of 2021 compared with net income of $283 million or $0.56 per share for the second quarter of 2020.
PSE&G's second-quarter results reflect revenue growth from ongoing capital investment programs.
Growth in transmission added $0.01 per share to second-quarter net income, reflecting continued infrastructure investment as well as the timing of transmission O&M in the quarter and true-ups from prior year filings.
Electric margin added $0.02 per share to net income compared to the year-earlier quarter, driven by commercial and industrial demand, reflecting higher margins in April and May compared to the COVID-19 restrictions that affected prior year results; and the implementation of the Conservation Incentive Program or CIP mechanism in June.
Gas margin added $0.01 per share, driven by the Gas System Modernization Program rate rollings.
Gas-related bad debt expense and O&M expense were both $0.01 per share favorable compared to the year-earlier quarter, driven by the timing of COVID-related deferrals since the issuance of the BPU's order in the third quarter of last year.
An increase in distribution-related depreciation due to higher rate base lowered net income by $0.01 per share.
Nonoperating pension expense was $0.02 per share favorable compared to the second quarter of 2020, reflecting the continued recognition of strong asset returns experienced last year.
Tax expense was $0.02 unfavorable compared to the second quarter of 2020, driven by the timing of adjustments to reflect PSE&G's estimated annual effective tax rate.
The transmission agreement between PSE&G, the BPU, and Rate Counsel that Ralph mentioned earlier has been filed with FERC for approval with an August one requested effective date.
There's no timetable from when FERC must respond, however, we will begin recording the impacts of the settlement on our financials starting with the August one requested effective date.
The agreement would reset the base ROE for PSE&G's formula rate to 9.9% from 11.18%, which lowers the annual transmission revenue requirement by about $100 million per year on a pre-tax basis.
Other key elements of the settlement lower annual depreciation expense by approximately $42 million, which has a corresponding reduction in revenue that results in no net impact on earnings and an improved cost recovery methodology for our administrative and general costs and investments in materials and supplies.
The agreement also includes an increase of PSE&G's equity ratio from 54% to 55% of total capitalization.
The financial impact of the settlement agreement is expected to lower PSE&G's net income by approximately $50 million to $60 million or $0.10 to $0.12 per share on an annual basis in the first 12 months once implemented.
Weather for the second quarter was significantly warmer than the second quarter of 2020, with the temperature-humidity index that was 34% higher than normal and a significantly higher than normal number of hours at 90 degrees or greater.
The New Jersey economy continued to recover in the second quarter, increased by total weather-normalized electric sales by approximately 4% compared to the second quarter of 2020, which was at the height of the COVID-19 economic restrictions.
On a trailing 12-month basis, weather-normalized electric and gas sales were each higher by approximately 1%, with residential electric and gas usage up by 4% and 2%, respectively.
The Conservation Incentive Program, which started June one for electric sales, removes the variations of weather, economic activity, efficiency, and customer usage from our financial results, resetting margins to a baseline level.
This new mechanism supports PSE&G's ability to maximize customer participation in energy efficiency programs without losing margins from lower sales.
A similar program covering gas sales will commence October one and replace the weather normalization clause.
PSE&G's capital program remains on schedule.
PSE&G invested approximately $700 million in the second quarter and $1.3 billion year-to-date through June.
This capital was part of 2021's $2.7 billion Electric and Gas Infrastructure Program to upgrade transmission and distribution facilities and enhance reliability and increase resiliency.
We continue to forecast over 90% of PSEG's planned capital investment will be directed to the utility over the 2021 to 2025 time frame.
PSE&G's forecast of net income in 2021 has been updated to $1.42 billion to $1.47 billion from $1.41 billion to $1.47 billion.
Now moving on to Power.
PSEG Power reported non-GAAP operating earnings for the second quarter of $0.10 per share and non-GAAP adjusted EBITDA of $159 million.
This compares to non-GAAP operating earnings of $0.24 per share and non-GAAP adjusted EBITDA of $258 million for the second quarter of 2020.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure as well as income tax expense, interest expense, depreciation, and amortization expense.
We also provided you with more detail on generation for the quarter and for the first half of 2021 on Slide 24.
PSEG Power's second-quarter non-GAAP operating earnings were affected by several items that combined lowered results by $0.14 per share below the quarter from a year ago.
Recontracting and market impacts reduced results by $0.09 per share, reflecting seasonal shape of hedging activity and higher cost to serve load versus the year-ago quarter.
Generating volume and zero-emission certificates were each down by $0.01 per share, affected by lower nuclear output related to the spring refueling outage at the 100% owned Hope Creek Nuclear Plant.
PJM capacity revenue added $0.02 per share to the year-ago quarterly comparison.
For the year ended June 30 -- for the year-to-date ended June 30, capacity is $0.05 per share favorable compared to the first half of 2020, reflecting the scheduled higher price of approximately $167 per megawatt day for the majority of the first half of 2021 versus the $116 per megawatt day for the same period in 2020.
Higher O&M expense reduced results by $0.04 per share compared to last year's second quarter, primarily reflecting the planned Hope Creek refueling outage and higher fossil operating expenses.
Lower depreciation expense, reflecting the sale of the solar source portfolio and the early retirement of the Bridgeport Harbor coal-fired generating station, combined with lower interest expense, to add $0.02 per share versus the year-ago quarter.
Taxes and other items were $0.03 per share unfavorable, reflecting the absence of a multi-year tax audit settlement included in the second quarter 2020 results.
Gross margin in the second quarter of 2020 was $28 per megawatt-hour compared with $33 per megawatt-hour for last year's second quarter.
The decline quarter-over-quarter reflects the seasonal price impact of recontracting, that is anticipated to result in a negative $2 per megawatt-hour price decline in the hedge portfolio for the full year.
We expect recontracting results in the third quarter of 2021 to be similarly negative, as we mentioned last quarter, will more than offset the $0.03 per share benefit seen in the first quarter of this year.
Now let's turn to Power's operations.
Total generation output declined by 1% to 12.6 terawatt-hours in the second quarter as the refueling outage at Hope Creek and subsequent forced out its lower nuclear output versus the second quarter of 2020.
The nuclear fleet operated at an average capacity factor of 86% for the quarter, producing 7.2 terawatt-hours, down by 7% versus last year, which represented 57% of total generation.
Power's combined-cycle fleet produced 5.3 terawatt-hours of output, up 8% in response to higher market demand helped by warm weather.
Power is forecasting generation output of 25 to 27 terawatt-hours for the remaining two quarters of 2021 and has hedged 95% to 100% of its production at an average price of $30 per megawatt-hour.
Also during the quarter, we're pleased to remind you that PSEG Power eliminated all coal from its generating mix with the early retirement of Bridgeport Harbor Station three.
Power's quarterly impairment assessments, including consideration of its strategic review of the non-nuclear fleet, determined that the ISO New England asset grouping showed an impairment as of June 30, 2021.
As a result, Power recorded a pre-tax charge of $519 million for this asset group.
PJM and New York ISO asset groupings did not show an impairment as of June 30, 2021.
However, a move of these assets to held for sale, which would be effective upon an anticipated sale agreement, would be expected to prompt an additional material impairment to the fossil portfolio.
Such a move to held for sale would also prop the cessation of depreciation and amortization expense for the held-for-sale units, resulting in a favorable impact to GAAP and non-GAAP operating earnings through the close of the transaction.
In June of 2021, PSEG completed the sale of PSEG's Solar Source, which resulted in a pre-tax gain of approximately $62 million and income tax expense of approximately $63 million, primarily due to the recapture of investment tax credits on units that operated for less than five years.
For the remainder of the year, depreciation expense will also decline by approximately $0.03 per share as a result of the Solar Source sale.
Forecast of PSEG Power's non-GAAP operating earnings for 2021 has been updated to $295 million to $370 million, from $280 million to $370 million, while our estimated non-GAAP adjusted EBITDA remains unchanged at $850 million to $950 million.
Now let me briefly address operating results from Enterprise and Other and provide an update on PSEG Long Island.
For the second quarter of 2021, PSEG Enterprise and Other reported a net loss of $3 million or $0.01 per share for the second quarter of 2021, which was flat compared to a net loss of $2 million or $0.01 per share for the second quarter of 2020.
The net loss for the second quarter of 2021 reflects higher interest expense at the parent initially offset -- partially offset, I should say, by the ongoing contributions from PSEG Long Island.
In June, PSEG Long Island entered into a nonbinding term sheet with the Long Island Power Authority, that would resolve all the authorities claims related to Tropical Storm Isaias.
The terms will be adopted into amendments to our operation service agreement, or OSA, and submitted to New York state authorities for approval later this year.
The OSA contract term will continue through 2025, with a mutual option to extend.
For 2021, the forecast for PSEG Enterprise and Other remains unchanged at a net loss of $15 million.
PSEG's financial position remains strong.
At June 30, we had approximately $4 billion of available liquidity, including cash on hand of about $107 million, and debt represented 52% of our consolidated capital.
During the first half of 2021, PSEG entered into 2,364-day variable rate term loan agreements totaling $1.25 billion.
During the second quarter, PSEG Power retired $950 million of senior notes maturing in June and September 2021 and ended June with debt as a percentage of capital of 20%.
In May, Moody's changed PSE&G's credit rating outlook to negative from stable.
Their first mortgage bond rating remains Aa3.
We still expect to fund PSEG's $14 billion to $16 billion capital investment program over the 2021 to 2025 period without the need to issue new equity, while also continuing to offer consistent and sustainable growth in our dividend payment.
As Ralph mentioned, we've raised the bottom end of our forecast of non-GAAP operating earnings for the full year to $3.40 to $3.55 per share, up by $0.05 per share based on the solid results we have seen in the first half of the year that give us confidence that we can deliver results at the upper end of our original guidance.
That concludes my comments.
And Carol, we are now ready to answer questions.
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compname announces q1 earnings per share of $1.28.
sees fy non-gaap operating earnings per share $3.35 to $3.55.
qtrly earnings per share $1.28.
qtrly non-gaap operating earnings $1.28 per share.
public service enterprise group - on track to execute five-year, $14 billion to $16 billion capital plan through 2025.
public service enterprise group - on track to execute 5-year capital plan through 2025, have financial strength to fund without need to issue new equity.
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In addition, this conference call contains time-sensitive information that reflects management's best judgment only as the date of the live call.
Management's statements may include non-GAAP financial measures.
I will not dwell on the economic devastation that occurred in the second quarter.
You have all heard more than enough about that by now.
For Forum specifically, a primary piece of our business is selling short-cycle products to service companies to sustain, replace and upgrade their drilling and completion operations.
Our customers have sharply reduced their spending in these areas as their equipment utilization evaporated.
Eventually, much of this equipment will go back to work, which will drive demand for our products and services, but the timing is uncertain.
That is why Forum's recently announced debt exchange that extended our debt maturity to October 2025 was so important.
This gives us the extended runway we need to exploit the inevitable upturn in drilling and completion activity.
After buying back $72 million of our bonds at about $0.40 on the dollar in the first half of 2020, under our exchange, $350 million of the $328 million of our debt was due in 2021 was rolled into a new security.
This new debt has a cash coupon of 6.25%, the same as the old debt, plus another 2.75% that is payable at the company's option in cash or in kind additional notes.
In addition, there is a clear path for the company to delever as the new notes are partially convertible into for equity.
$150 million principal amount of the new notes are convertible at a conversion price of $1.35 per share and are automatically and mandatorily convertible once form stock price trades through $1.50 for 20 business days.
The conversion of $150 million of new debt at a conversion price that is more than 2.5 times the current stock price would represent about 50% dilution to current shareholders, while ensuring a strong and sustainable capital structure for the company.
This debt exchange provides a number of benefits, the time necessary for a business recovery, a clear path to delever the balance sheet.
It does not burden the company with a higher required cash cost of financing or restrictive financial maintenance covenants.
And it aligns the interest of our debt holders and our legacy stockholders around the long-term success of Forum.
The second quarter of 2020 was exceptionally difficult, and Lyle will review our results in a minute.
But it did provide the catalysts to resolve Forum's capital structure issues and to significantly restructure our costs for long-term success in a world of lower demand for oilfield equipment.
Compared to the year ago quarter, our second quarter cash costs, excluding our purchased materials costs, are down about $150 million or 39%, with most of that savings happening in the most recent quarter.
So we now have a very competitive cost structure for the current market environment.
As I look ahead, I believe we have seen the bottom in our orders and our EBITDA.
For the third quarter, we expect revenues will be comparable to the second quarter as we rebuild the order book with an increase in domestic completions and international well construction activity.
We are already seeing some positive signs in this regard.
We also expect a modest improvement in EBITDA driven by cost reductions.
Looking further ahead, Forum is positioned for renewed success with our new cost and capital structures, dedicated employees and our portfolio of winning products.
I am pleased to represent the Forum team with Cris and Neal at this exciting inflection point for the company.
The decrease in activity and spending by our customers resulting from the COVID-19 pandemic and the dramatic reduction in drilling and completion activity due to low oil prices had a significant impact on our second quarter financial results.
Our total revenue for the quarter was $113 million, down 38% from the first quarter.
Our book-to-bill ratio was 76% as orders for our consumable products, which are typically booked and shipped in the same period, were most severely impacted.
In response to the forecasted declines in our revenue, we initiated a significant cost reduction plan in March and completed many of our identified cost reduction actions early in the second quarter.
We focused our plans on cash costs included in SG&A and cost of goods sold, except from the purchased materials.
In total, we reduced these costs by $24 million compared to the first quarter, a 30% reduction.
These cost reductions, which have all occurred since March, amount to approximately $100 million in total savings on an annualized basis.
Our cost reduction actions included significant head count reductions, especially at senior levels of the organization; facility closures, including production and distribution facilities located in the U.S.; salary reductions across the company; suspension for our U.S. and Canadian retirement plans; and other reductions in variable costs.
As a direct result of these cost savings, sequential decremental EBITDA margins were limited to 23%, resulting in adjusted EBITDA of negative $11 million for the second quarter.
We are particularly pleased with this result given the weak pricing environment and the COVID-related under absorption of fixed costs that had a direct impact on our gross margins.
For clarity, adjusted EBITDA results exclude roughly $3 million of noncash stock compensation expense for the second quarter.
Our free cash flow after net capital expenditures in the second quarter was negative $3.5 million as the impact of lower earnings was mostly offset by reductions in working capital from strong collections of receivables and inventory management.
Included in this result were approximately $5 million of cash severance and other restructuring costs paid in the quarter.
But for these restructuring costs, Forum was free cash flow positive in the quarter and has generated positive free cash flow for the past seven quarters.
Over this period, Forum generated $109 million of free cash flow.
In the quarter, we decreased our net inventory position by $15 million and expect the monetization of excess inventory to continue in 2020 and beyond.
Net loss for the quarter was $5 million or $0.05 per diluted share.
Excluding a $39 million gain on extinguishment of debt and $9 million of special items, adjusted net loss was $0.29 per diluted share.
Special items for the quarter on a pre-tax basis included $4 million of severance and other restructuring costs, $4 million of inventory and other working capital impairments and $1 million of foreign exchange loss.
I will now summarize our segment results on a sequential basis.
In our Drilling & Downhole segment, orders were $42 million, a 40% decrease from the first quarter, resulting from significant declines in drilling and well construction activity in North America.
This decrease was mitigated by our international exposure in this segment.
To put that in context, despite the low commodity price environment in the second quarter, our drilling product line was awarded a multiyear contract to supply rig handling tools and related equipment for a 24-rig new build program in the Asia market.
Orders for the second quarter include $14 million for this award with additional orders under the award anticipated in the second half of the year.
Segment revenue was $47 million, a $29 million or 38% sequential decrease as book and ship activity across the segment was impacted by lower activity levels and lockdowns due to the COVID-19 pandemic.
Adjusted EBITDA for the segment was negative $3 million in the second quarter, a sequential decrease of $10 million.
In our Completions segment, orders decreased 72% to $14 million.
Segment revenue was $18 million, a sequential decrease of $33 million or 65% due to the virtual standstill and well completion activity in the quarter.
The segment was also impacted by shipping delays from one of our international customers due to the impacts of COVID-19.
Adjusted EBITDA for the segment was negative $6 million, a $10 million sequential decrease.
Despite the significant cost reductions mentioned earlier as well as additional furloughs in several facilities within the segment, the magnitude of the decline in revenue and resulting loss of operating leverage from unabsorbed fixed costs had an outsized impact on our Completions segment EBITDA.
Production segment orders were $29 million, a sequential decrease of 43%, primarily due to a significant decline in customer bookings activity for our valves product line as customer activity ground to a halt due to the pandemic due to pandemic-related lockdowns and significant distributor destocking.
Segment revenue was $49 million, a 13% decrease due to lower sales of valves.
This decrease was partially offset by a slight increase in shipments of surface production equipment for our customers focused on natural gas production in the Northeastern United States.
Adjusted EBITDA for the segment was $2 million, up $2 million sequentially due to lower overhead expenses from cost reductions.
I will now discuss some additional details about our results and financial position at the Forum level.
Our capital expenditures in the second quarter were less than $1 million.
We are a capital-light business, and we expect our total capital expenditures for 2020 to be less than $5 million.
In the second quarter, we reduced net debt by $32 million, primarily due to the repurchase of $72 million principal amount of senior notes at a discount.
We ended June with $110 million of cash on the balance sheet and availability under our revolving credit facility of $84 million, resulting in total liquidity of $194 million.
Our debt at the end of June included $85 million outstanding on our revolving credit facility and $328 million of unsecured notes due 2021.
Following the debt exchange completed earlier this week, we now have $315 million of new secured notes due in 2025 and $13 million remaining on the old unsecured notes.
In connection with the debt exchange, we also amended our revolving credit facility.
The changes include: a reduction in the size of commitments from $300 million to $250 million, an increase in the interest rate margin, a limit on the amount of availability derived from our inventory collateral and certain other administrative changes.
The maturity of the revolving credit facility will be October 2022 with the resolution of the small remaining stub of all notes.
Pro forma for the credit facility amendment, our liquidity at the end of the second quarter would have been $126 million.
Interest expense was $6 million in the second quarter.
While we do expect higher interest expense following our debt exchange, the 6.25% of cash interest on the new convertible notes is consistent with cash interest on the previous notes.
In the second quarter, depreciation and amortization and stock-based compensation were $12 million and $3 million, respectively.
We expect these expenses to remain at similar levels in the third quarter.
Adjusted corporate expenses were $6 million in the second quarter, and we expect them to be similar in the third quarter as well.
We will continue to have some tax expense despite an overall net loss as we are not recognizing tax benefits in loss-making jurisdictions, but we continue to recognize tax expense for some international jurisdictions with income.
Once we turn profitable in the loss-making jurisdictions, we expect to have a relatively low tax rate as we begin to use our net operating losses.
Together, we made sacrifices to dramatically reduce costs and position Forum for the future.
The market will recover, and when it does, our employees will be the key differentiator in our success.
As Cris and Lyle have mentioned, the unprecedented decline in drilling and completions activity due to COVID-19 significantly reduced demand for many of our products.
In response, we have sized our businesses to produce positive EBITDA with only a modest market rebound.
We remain committed to controlling costs while generating cash flow from inventory.
The second quarter presented the most challenging market conditions in a generation.
Our ability to execute will increase as the market improves.
Forum's customers rely on our products to increase their productivity and reduce their cost.
For example, within our Forum Multilift solutions product portfolio, we provide sand management tools and cable plants that extend the life of electric submersible pumps, or ESPs.
These products witnessed an increase in monthly demand after bottoming out in May, and we expect demand for these products to continue as we as more wells are brought back online.
Another example of Forum's winning products was the large multiyear rig handling tool award Lyle referenced earlier.
In an industry where capital is limited and tight, our customer selected the premium product of our handling tools, and we are very excited to play a key role in this rig new build program.
Let me provide one more example.
In the midst of last quarter's meltdown, one service company customer was proud to post a picture of social media with one of their frac fleets working.
Among the key components in that picture, seven were supplied by Forum, 7: our 3,000-horsepower pumps, our JumboTron radiators, our ICBM single-line manifold, our high-pressure flow wire, our AMT wireline pressure control equipment, our Hydraulic Latch Assemblies and our newest product from quality wireline and wireline cables.
In addition, after the frac work was completed, our DURACOIL coiled tubing from Global Tubing was used for drilling out the plugs and our Forum SandGuard with Cannon clamps was used with the artificial lift installation.
This picture reinforced to me that Forum has the products, the people and the desire to be the leading solutions provider in our space.
These are just a few examples, and I can name many more from our valve solutions, production equipment and subsea product lines.
The market rebound may take many months to occur, but when it does, we are positioned to win.
The second quarter presented an extremely challenging market environment, but I am proud of the way our team has navigated through the significant cost reductions.
I am also pleased with the outcome of our debt exchange, which leaves us well positioned for future growth.
We now have the cost structure and the balance sheet to prosper in a lower-for-longer environment.
Forum has excellent earnings power potential with our stable of well-positioned completions products, artificial lift accessories and well construction products, to name a few.
With our new much more efficient cost structure, we can realize this earnings potential at a much lower level of drilling and completions activity than in the past.
Shanteller, let's take the first question.
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compname reports q2 loss per share $0.05.
q2 loss per share $0.05.
q2 revenue $113 million.
q2 adjusted loss per share $0.29 excluding items.
customer spending has been 'exceptionally' weak, impacting demand for many of forum's products.
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They can be accessed at ir.
Following our prepared comments, we will open up the call for a question-and-answer session.
We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2020.
The extent of these impacts, including the duration, scope, and severity, is highly uncertain and cannot be predicted with confidence at this time.
We will also be referencing non-GAAP financial measures during the call.
It's great to be joining you all today on my first earnings call as WestRock CEO.
I've been in this role now for seven weeks and spent that time meeting with our customers, our business leaders, and teammates.
With every interaction, I'm impressed with the capability and strength of the WestRock team and couldn't be more excited about our future prospects.
It's still early in this process, but what I'd like to do today is share with you my initial observations since joining and my priorities going forward.
Before doing that though, let me touch briefly on our performance in the second quarter which Ward will discuss in more detail shortly.
Faced with dual issues of the ransomware incident and significant weather disruption, the team focused, executed, and delivered for our customers, generating revenue of $4.4 billion, adjusted segment EBITDA of $641 million, and adjusted earnings per share of $0.54 per share.
The ransomware and weather incidents lowered our adjusted earnings per share by $0.23.
Ward will provide additional detail about our performance.
I am pleased to say that we have fully restored our IT systems with all sites up and running, and we continue to make excellent progress on restoring our supply chain and customer service levels.
During the time we were dealing with this incident, we prioritized serving our customers and incurred additional costs that impacted earnings in the quarter.
We are accelerating investments that were on our IT development timeline to further strengthen our infrastructure.
Throughout these events, the WestRock team demonstrated incredible resiliency and dedication, and we have made a remarkable recovery.
With all of this now behind us, I am confident in our team, our markets, and our path forward.
I mentioned at the start that much of my time over these first seven weeks has been spent getting to know our company.
I toured 12 facilities, met virtually or in-person with hundreds of teammates, and spoken with many of our top customers WestRock has built a unique portfolio, successfully integrating acquisitions, and investing to create a differentiated set of capabilities with incredible opportunities for growth.
I've seen firsthand how the consumer, corrugated, and machinery businesses work together, and believe we can do even more to maximize the performance of our platform.
We serve, diversify, and grow in packaging end markets and the demand for fiber-based paper and packaging continues to gain momentum.
Key markets that we serve such as food and beverage, e-commerce, and healthcare continue to grow.
For example, the demand from customers for safe and secure e-commerce solutions has only been accelerated by the pandemic, and I believe this remains a significant opportunity that WestRock Solutions are well-positioned to address.
One of my visits was to our high-quality, low-cost facility in Florence, South Carolina, and it was great to see the new state-of-the-art paper machine up and running.
This slide includes a QR code you can use to view a video of the mill and the new equipment.
This machine produces high-performance containerboard grades at low basis weights and replaces three machines in our system.
This mill is well-positioned to serve a diverse set of customers seeking these low basis weights to drive more sustainable packaging solutions.
This investment makes Florence one of the lowest-cost virgin containerboard mills in North America.
We expect Florence to ramp up to full capacity by the end of our fiscal fourth quarter.
The Florence mill is a great example of a strategic capital investment that improves our capabilities, lowers our costs, and expands margins.
Looking forward, there are a few key priorities that I want to focus on.
WestRock has a unique portfolio of sustainable fiber-based packaging and great opportunities to leverage the enterprise and help our customers win in their markets.
The path to long-term shareholder value creation is through a focus on attractive markets where our differentiated portfolio and combination of products and services are valued and rewarded.
We will also focus on improving our productivity and operational excellence across the enterprise, which are both important levers to grow earnings and margins.
I believe strongly in the leadership role that WestRock can play in improving the circular economy and helping our customers improve the sustainability of their products.
We recently refined our sustainability platform to focus on people and communities, bettering the planet and innovating for our customers and their customers, whether it's developing new fiber-based packaging solutions that enable our customers to meet their sustainability goals, initiatives to reduce our own environmental impact, or our work to improve the diversity inclusion of our company, WestRock has substantial capabilities and opportunities to help drive a more sustainable future.
And a more sustainable future means that we must focus on innovation to develop new fiber-based packaging that meets the needs of customers and consumers.
Removing plastic from packaging and developing more sustainable packaging solutions through design, material science, digital, and automation continue to be growth drivers in our industry.
WestRock has a capability to create new, recyclable fiber-based solutions that are good for our customers and the environment.
Next, I'd like to share my initial thoughts on capital allocation.
I believe that disciplined, balanced capital allocation is a key factor in creating sustainable shareholder value.
I'm impressed by the strength and stability of West Rock's cash flows and believe this is a positive attribute for the company and our investors.
We will invest in our business to maintain and improve our assets, and investments and acquisitions and strategic capital projects will be tightly aligned to our strategy and deliver returns above our cost of capital.
We will remain committed to returning capital to our dividend and intend to steadily increase it every year.
We've already taken the first step today with the announcement of a 20% increase to our quarterly dividend.
Today's increase reflects our confidence in the outlook and cash flow generation of our business.
In addition, we will evaluate share repurchases in the future as another way to return capital to shareholders.
We remain committed to our investment-grade credit profile and believe that our leverage target of 2 in a quarter to 2.5 times is appropriate.
And in the coming months, I'll share more detail about my priorities and vision for WestRock's future.
We were able to serve our customers, deliver solid earnings, and continue to reduce our leverage despite the challenges in the quarter.
We generated revenue of $4.4 billion, adjusted segment EBITDA of $641 million, and adjusted earnings per share of $0.54 per share.
These results were impacted by both the ransomware incident and winter weather.
The two events negatively impacted revenue by $189 million, adjusted segment EBITDA by $80 million, and adjusted segment EBITDA margins by approximately 110 basis points.
Adjusted earnings per share was $0.23 lower as a result of these events.
In addition to the impact of the ransomware incident that we show on the adjusted segment EBITDA bridge, we also incurred $20 million in ransomware recovery costs.
The $20 million of recovery costs were excluded from our adjusted segment EBITDA and adjusted earnings per share.
We estimate that the total insurance claim will be approximately $75 million, and we expect to recover the claim from our cyber and business interruption insurance coverage in future periods.
It's important to look beyond the events in the quarter to see the underlying trends in our business.
Demand is strong and we continue to focus on improving our business mix.
In addition, we are currently implementing the published price increases across all of our paper grids.
The implementation of these price increases and improved business mix drove $88 million in year-over-year earnings improvement.
Notably, we had record second-quarter North American box shipments which increased 5.5% year over year on a per-day basis.
Cost inflation was driven by a $43-per-tonne increase in recycled fiber from Q2 of the prior year, coupled with higher chemical and energy costs resulting from the winter storm.
Transportation costs were also higher due to tight availability across all modes.
We did not exercise the option to purchase an additional 18.7% equity interest in Grupo Gondi.
As a result, we recorded a charge of $22.5 million that we excluded from adjusted EPS.
As we indicated earlier in the quarter, the lag in customer invoicing from the period when our systems were down negatively impacted our working capital in Q2.
As expected, accounts receivable increased in the second quarter and we expect receivables to normalize in the third quarter.
Despite this, our net funded debt declined $74 million from Q1 and our net leverage decreased to 2.8 times.
Due to the decisive actions we have taken over the past year to strengthen our balance sheet, we have reduced our adjusted net debt by $1.6 billion.
Demand continues to increase for sustainable fiber-based packaging, and we sell into an attractive set of end markets.
Our overall packaging volumes increased by 3% in Q2, including e-commerce box volume growth of 18.4% on a per-day basis.
Our paper sales represent 27% of our total revenue in the company and we are focused on reducing our participation in the export containerboard and specialty SBS markets.
The pricing environment has improved across our paper and packaging grades.
We are implementing published increases across our paper and packaging businesses as expected.
Turning to segment results, our corrugated packaging segment reported revenue of $2.9 billion and adjusted segment EBITDA of $438 million.
North American adjusted segment EBITDA would have been $54 million higher and margins approximately 140 basis points higher without the events in the quarter.
Corrugated box demand is very strong across most of our end markets, and we reported record per-day shipments for the second quarter.
As I said earlier, corrugated box shipments were up 5.5% per day year over year.
Excluding the impact of the ransomware and weather incidents, per-day box shipments would have increased approximately 8%.
We lost approximately 121,000 tons of containerboard production and revenue due to the disruptions in the quarter.
This directly impacted our external containerboard channel sales as we could have sold all of the lost production.
We highlighted the primary drivers of cost inflation earlier, higher recycled fiber, energy, chemical, and transportation costs.
However, we offset this inflation in the quarter through higher pricing and volume, excluding the impact of the events.
We also continue to implement the previously published price increases and expect the benefit of these increases to more than outweigh inflation.
Inventory levels remain low as we head into our peak mill-outage quarter in Q3 with 112,000 tons of planned maintenance outage downtime.
Finally, we are making great progress on our strategic capital projects.
The Florence mill continues to increase its production and operate well.
As David commented earlier, we expect the mill to be at full production levels at the end of the fourth fiscal quarter.
The margins in Brazil have been lower in the past two quarters as a result of the maintenance and capital outage related to the Tres Barras expansion.
Demand is strong in the Brazilian market, and we expect margins to improve in the second half of the fiscal year.
Turning to consumer packaging.
The segment reported revenue of $1.6 billion and adjusted segment EBITDA of $212 million.
EBITDA would have been $26 million higher and margin's approximately 100 basis points higher without the events in the quarter.
Our sales mix is improving by shifting to higher-margin food and beverage packaging sales.
Food and beverage packaging revenues were up 4.7% year over year, driven by improved mix to quick-service restaurants and beverage packaging.
We lost approximately 46,000 tons of production and corresponding revenue due to the disruptions in the quarter.
In addition, we had approximately 20,000 tons of consumer paperboard shipments that were deferred into the third quarter due to these disruptions.
Backlogs have increased across all substrates and are currently at six to eight weeks.
We are in the process of implementing the previously published price increases.
The increased pricing improvement in our business mix and productivity more than offset inflation in the quarter.
We continue to produce containerboard at our Evadale, Texas mill, given the strong demand and low inventory levels.
In addition, we are making progress with CNK production at the Evadale mill and are on track to deliver 25,000 tons of CNK production in FY '21 and 50,000 tons of production in FY '22.
We are able to flex the CNK and containerboard capacity from SBS with no additional capital investment.
Here are some things to consider for our fiscal third quarter.
We expect adjusted segment EBITDA of $775 million to $805 million and adjusted earnings per share of $0.88 to $0.97 per share.
The primary drivers of our sequential increase include the implementation of the previously published price increases, continued strength in packaging demand, and the return to normal operations for the third quarter.
These items are partially offset by modest sequential inflation across recycled fiber, chemical, and transportation costs.
In addition, we will take approximately 112,000 tons of scheduled maintenance downtime across our North American containerboard mills.
Finally, we expect higher incentive accruals due to a stronger earnings outlook.
We want to share with you our current outlook for fiscal 2021.
We expect the continued flow-through of the previously published price increases, as well as packaging growth across our primary end markets.
As a result, we expect full-year adjusted segment EBITDA to be approximately $3.05 billion.
Given our earnings outlook and continued strong cash flows, we fully expect to be within our leverage target of 2.25 to 2.5 times by the end of the fiscal year.
We will provide additional details on our next earnings call.
And now, I'll hand it back over to David for closing remarks.
I'm excited about the future of WestRock.
We have great opportunities to grow our company and provide value to our customers, our teammates, and our shareholders.
We have a broad portfolio of products that is uniquely positioned to meet our customers' needs, and we will further leverage the power of the enterprise to create value.
We intend to lead in sustainability by being a valued partner to our customers to help them achieve their sustainability goals as we work to achieve ours.
To do this, we will focus on accelerating innovation, creating products that enhance the performance and sustainability of our products and services, and we will continue to be disciplined in our capital allocation strategy.
We have confidence in our future, evident by the increase in our dividend this quarter.
As recovery picks up momentum, we are well-positioned with significant financial flexibility to pursue our goals.
The future is bright at WestRock, and I am proud to be part of the team.
James, we are now ready for Q&A.
[Operator instructions] Operator, may we take our first question, please?
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compname reports q2 sales of $5 bln.
q1 adjusted earnings per share $0.65.
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These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them.
Also, our discussion today may include references to certain non-GAAP measures.
I'm joined today by Harp Prana, our chief financial officer.
In the third quarter, our strategic initiatives continued to fuel record growth and drive strong results.
We posted $22.2 million of net income or $2.11 of diluted EPS, with very attractive returns of 7.1% ROA and 31.6% ROE.
We continue to grow our market share and once again experienced double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 24% and 23%, respectively.
We generated record sequential portfolio growth of $131 million in the quarter, leading to another all-time high in net finance receivables and quarterly revenue.
The successes of our long-term strategic initiatives are evident.
We built a growth company with a focused omnichannel strategy and proven consistent execution.
At the same time, we've derisked the business by investing heavily in our custom underwriting models and shifting more than 82% of our portfolio to higher-quality loans at or below 36% APR, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders.
In the third quarter, delinquency increased in line with expectations as government stimulus waned, but it's 4.7%, our 30-plus day delinquency rate is on par with the prior year and 180 basis points below third quarter 2019 levels.
Our net credit loss rate during the quarter was 5%, the lowest in our history as a public company, a 280 basis point improvement from the prior-year period and a 310 basis point improvement from the third quarter of 2019.
Our strategic investments in digital initiatives, geographic expansion and product and channel development, along with our proven omnichannel marketing engine, continue to drive substantial growth.
We originated a record $421 million of loans in the third quarter, which was up 35% over last year and 19% above 2019 pre-pandemic levels.
This includes $129 million derived from our new growth initiatives.
The loans originated through these growth initiatives are performing as expected with solid credit experience and strong net credit margins.
New digital volumes represented 28% of our total new borrower volume, with 57% originated as large loans.
Our digital prequalification engine will continue to be integrated with new states as they roll out and with our existing and new digital affiliates and lead generators in the months ahead.
Aside from our improved digital pre-qualification experience, we continue to test our new guaranteed loan offer product, which is an alternative to our convenience check loan product and provides online fulfillment with ACH funding into a customer's bank account.
Within the next few months, we will also begin testing our end-to-end digital origination product, and we remain on pace to deliver an improved online customer portal and a mobile app in the early part of 2022.
As we continue to build on our omnichannel model and expand our digital initiatives, we made significant strides to further strengthen our team during the quarter with the addition of Chris Peterson as our first chief data and analytics officer.
A strong data and analytics function can transform an organization, and we believe that it will be a key enabler in delivering our long-term strategies.
We are confident that our investment in data and analytics will ultimately drive a step change in customer insight and engagement, transform products and services, enable better business decisions and risk management, and improve our core operations.
In the third quarter, we also continued to grow our geographic footprint.
Near the end of the quarter, we entered Utah as we expanded our operations to the western U.S. As a reminder, we entered Illinois in the second quarter and as of the end of October, our first branch has reached $2.8 million in receivables in six months, and the four branches in the state have exceeded $9 million in receivables.
We're confident in our ability to quickly gain a strong foothold in new geographies as we expand.
In the coming months, we expect to enter a new state and open 10 new branches across our network, and we have plans to enter an additional five to seven new states by the end of 2022.
This will result in higher average receivables per branch and the need for fewer branches, which we expect will drive greater operating leverage.
In the third quarter, we assessed our legacy branch network and decided to lean further into our omnichannel approach by optimizing our footprint.
To that end, we closed 31 branches in the fourth quarter, where there were clear opportunities to consolidate operations into a larger branch in close proximity, while still providing our customers with the best-in-class service they've come to expect.
These branch optimization actions will generate approximately $2.2 million in annual savings, which we'll reinvest in our expansion into new states.
Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit quality.
In October, we closed a five-year $125 million private securitization transaction at a fixed coupon of 3.875%, which enables us to fund loans above and below 36% APR.
The transaction increases our percentage of fixed rate funding further diversifies our funding sources and strengthens our overall liquidity position.
Following the October securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and an average revolving duration of nearly three years.
Following the transaction, we also maintained $350 million of interest rate caps with strike rates of 25 to 50 basis points, covering $133 million in variable rate debt and future portfolio funding.
In sum, we remain well positioned to fund our future growth and we're well protected against the risk of rising interest rates.
As I noted earlier, our credit profile remains very strong.
We have achieved controlled growth with stable credit through prudent underwriting to our rigorous pre-pandemic standards and our ongoing investment in our custom scorecard.
We have further protected our portfolio with the addition of enhanced verification processes implemented at the outset of the pandemic and the use of alternative data in our risk and response models to adjust for the impact of stimulus and forbearance programs.
Across all product lines, FICO scores have increased since early 2020, and our highest growing customers make up a larger portion of our overall portfolio.
As of September 30, approximately 87% of our portfolio had been originated since April 2020.
The vast majority of which was subject to enhanced credit standards that we deployed following the outset of the pandemic.
Consistent with our loan portfolio growth, we built our allowance for credit losses by $10.7 million in the third quarter.
And as a result, our allowance for credit losses reserve rate at the end of the quarter was 11.4%.
Our $150.1 million of allowance for credit losses as of September 30 continues to compare quite favorably to our 30-plus day contractual delinquency of $61.3 million and includes a $15.5 million reserve for additional credit losses associated with COVID-19.
We released only $2 million of our COVID-related reserves in the third quarter as we continue to maintain a conservative stance as we monitor the impact of the delta variant, the pace of the economic recovery and the health of the consumer as the benefits of government assistance continue to dissipate.
Looking ahead, absent any significant changes to the macroeconomic environment, we expect that our fourth quarter and full year 2021 NCL rates will be below 7%.
Our allowance for credit losses will increase in the fourth quarter as the portfolio continues to grow, and we now anticipate that the reserve rate will return to pre-pandemic levels of around 10.8% by roughly mid-2022.
Assuming the economic recovery remains on track, we believe that credit performance should remain strong into next year and that our 2022 NCL rate will be at or below 8.5% even as delinquencies continue to normalize off the recent historically low levels.
As we near the end of 2021, we remain in the strongest position in our history.
Our net finance receivables are at record highs and loan demand remains robust as the economy recovers.
We look forward to strong portfolio and top line growth as our strategic investments yield solid returns, and we continue to take market share.
Based on our third quarter results, we're raising our expectations for full year 2021 net income to between 85 and $87 million, up from our prior range of $75 million to $80 million.
Our revised outlook reflects our strong third quarter core portfolio growth of 25.4% over the prior-year period, which outpaced the broader market.
Our outlook also assumes the year-end net finance receivables will be approximately $1.4 billion, providing a strong jump-off point as we enter 2022 and further demonstrating the power of our omnichannel model.
As a reminder, we're only providing a full year net income outlook for 2021 due to the unique circumstances we've encountered this year.
We're having a record year and we're extremely excited for our long-term future.
Our omnichannel initiatives are working quite well for us, and we continue to invest broadly in our growth plans and digital capabilities.
We'll bring our financial solutions to even in more states in the months ahead, while ensuring that our customers continue to receive outstanding service.
And we'll continue to prioritize our credit quality, our balance sheet strength, and driving operating efficiencies, which will lead to more profitable growth, the return of excess capital to our shareholders, and sustainable long-term value creation.
Let me take you through our third quarter results in more detail.
We generated net income of $22.2 million and diluted earnings per share of $2.11, driven by significant portfolio and revenue growth, stable operating expenses, low funding costs, and a healthy credit profile.
The business continued to produce attractive returns with 7.1% ROA and 31.6% ROE this quarter and 7.8% ROA and 32.4% ROE year to date.
We continue to demonstrate our ability to drive revenue to our bottom line and generate strong returns.
As illustrated on Page 4, branch originations were well above the prior year as we originated $268 million of branch loans in the third quarter, 18% higher than the prior-year period and 3% higher than 2019.
Meanwhile, direct mail and digital originations also increased nicely year over year to $152 million, 80% higher than the prior year and 66% higher than 2019.
Our total originations were a record $421 million, up 35% from the prior-year period and 19% higher than 2019.
Notably, our new growth initiatives drove $129 million of third quarter originations and have become a significant factor in our accelerating expansion.
Page 5 displays our portfolio growth and mix trends through September 30.
We closed the quarter with net finance receivables of $1.3 billion, up $131 million from the prior quarter and $255 million from the prior-year period as we continue to successfully execute on our omnichannel strategy, new growth initiatives, and marketing efforts.
Our core loan portfolio grew $132 million or 11% from the prior quarter and $263 million or 25% from the prior-year period as we continue to take market share.
Large loans and small loans grew 12% and 10% on a sequential basis.
For the fourth quarter, we expect demand to remain strong and to generate healthy quarter-over-quarter growth in our finance receivables portfolio, resulting in year-end net finance receivables of approximately $1.4 billion.
On Page 6, we show our digitally sourced originations which were 28% of our new borrower volume in the third quarter as we continue to meet the needs of our customers through our omnichannel strategy.
During the third quarter large loans were 57% of our new digitally sourced originations.
Turning to Page 7.
Total revenue grew 23% to a record $111.5 million.
Interest and fee yield increased 50 basis points year over year, primarily due to improved credit performance across the portfolio, resulting in fewer loans and nonaccrual status and fewer interest accrual reversals.
Sequentially, interest and fee yield and total revenue yield each increased 40 basis points due to credit performance and the growth in our small loan portfolio in the third quarter.
As of September 30, 67% of our portfolio was comprised of large loans and 82% of our portfolio had an APR at or below 36%.
In the fourth quarter, we expect total revenue yield to be approximately 70 basis points lower than the third quarter and our interest and fee yield to be approximately 50 basis points lower due to the continued mix shift toward larger loans and the impact of nonaccrual loans as credit continues to normalize.
Moving to Page 8.
Our net credit loss rate was 5% for the third quarter, a 280 basis point improvement year over year.
Net credit losses were also down 240 basis points from the second quarter due to improving economic conditions and our lower delinquency levels.
We continue to expect that our full year net credit loss rate will be below 7%.
Flipping to Page 9.
30-plus day delinquencies have begun to normalize as expected.
Our 30-plus day delinquency level as of September 30 was 4.7%, an increase of 110 basis points versus June 30, but comparable to the prior year and 180 basis points below 2019 levels.
Our 90-plus day delinquency level increased only 40 basis points sequentially and remains below third quarter 2020 and 2019 levels.
Moving forward, we expect delinquencies to continue to rise gradually toward more normalized levels.
Absent any significant change to the macroeconomic environment, we expect strong credit performance into 2022.
And we anticipate that our 2022 NCL rate will be at or below 8.5%, even as the historically low delinquencies continue to normalize.
Turning to Page 10.
We ended the second quarter with an allowance for credit losses of $139.4 million or 11.8% of net finance receivables.
During the third quarter of 2021, the allowance increased by $10.7 million to $150.1 million to support our strong portfolio growth, but the allowance as a percentage of net finance receivables decreased to 11.4%.
The allowance increase in the quarter consisted of a base reserve build of $12.7 million to support our portfolio growth and a COVID-related reserve release of $2 million due to improving economic condition.
We continue to maintain a reserve of $15.5 million related to the expected economic impact of the COVID-19 pandemic.
As a reminder, as our portfolio grows, we will build additional reserves to support new growth.
We continue to reduce the severity and the duration of our macroeconomic assumptions given the stronger economy.
We expect that the reserve rate at year-end will be comparable to current levels and will normalize to pre-pandemic levels of approximately 10.8% by around mid-2022.
Our $150.1 million allowance for credit losses as of September 30 continues to compare very favorably to our 30-plus day contractual delinquency of $61.3 million.
We are confident that we remain appropriately reserved.
Flipping to Page 11.
G&A expenses for the third quarter of 2021 were $47.8 million, up $4 million or 9% from the prior-year period, driven by increased investment in our new growth initiatives, personnel, and omnichannel strategy.
G&A expenses for the third quarter also included $0.7 million of expenses related to the consolidation of 31 branches as a part of the company's branch optimization plan and the $3 million benefit related to the deferral of digital loan origination costs, of which $1.5 million was incremental to the quarter.
On a sequential basis, our G&A expenses rose $1.4 million.
Overall, we expect G&A expenses for the fourth quarter to be approximately $54 million as we continue to invest in our digital capabilities, our geographic expansion into new states and personnel to drive additional sustainable growth and improved operating leverage over the longer term.
Fourth quarter G&A expenses will include an estimated $0.9 million of branch optimization expenses.
Turning to Page 12.
Interest expense was $8.8 million in the third quarter or 2.8% of our average net finance receivables on an annualized basis.
This was a $0.5 million or 70 basis point improvement year over year.
The improved cost of funds was driven by the lower interest rate environment and improved costs from our recent securitization transactions.
We currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of third quarter totaled $219 million.
$350 million of the interest rate caps at a one-month LIBOR strike price between 25 and 50 basis points and a weighted average duration of 2.3 years.
As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly.
Looking ahead, we expect interest rate expense in the fourth quarter to be approximately $10 million, excluding mark-to-market impact on interest rate caps, with the increase in expense attributable to the growth in our loan portfolio.
Page 13 is a reminder of our strong funding profile.
Our third quarter funded debt-to-equity ratio remains at a conservative 3.5 to one.
We continue to maintain a very strong balance sheet with low leverage and $150 million in loan loss reserves.
As of September 30, we had $722 million of unused capacity on our credit facilities and $194 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
As a reminder, in October, we closed our seventh securitization, a private $125 million transaction that has a five-year revolving period and a fixed coupon of 3.875%.
The new securitization enables us to pay down higher cost variable rate debt, provides us with additional fixed interest rate certainty, and allows us to fund multiple product types, both above and below 36% APR.
Following the securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and average revolving duration of nearly three years.
Our effective tax rate during the third quarter was 23% compared to 27% in the prior-year period.
For the fourth quarter, we expect an effective tax rate of approximately 25%, excluding discrete items, such as tax impacts associated with equity compensation.
The company's board of directors has declared a dividend of $0.25 per common share for the fourth quarter of 2021.
The dividend will be paid on December 15, 2021 to shareholders of record as of the close of business on November 24, 2021.
In addition, during the quarter, we repurchased 390,112 shares of our common stock at a weighted average price of $56.32 per share under our $50 million stock repurchase program.
We continue to be extremely pleased with our outstanding performance throughout the year, a robust balance sheet, and our near and long-term prospects for growth.
That concludes my remarks.
In summary, it was another outstanding quarter for Regional.
Our omnichannel operating model, new growth initiatives, and superior credit profile continue to set us apart from our competition.
We're a growth company at a value price, and we hope that you're as excited as we are about our future and the focused omnichannel strategy that we've developed.
We'll continue to execute on our key strategic initiatives, positioning us to sustainably grow our business, expand our market share, and create additional value for our shareholders.
We look forward to continuing to provide our shareholders with predictable, consistent, and high-quality returns.
Operator, could you please open the line?
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compname reports q3 earnings per share $2.11.
q3 earnings per share $2.11.
q3 revenue rose 23 percent to $111.5 million.
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My name is Nestor Makarigakis.
Participating on the call for Mistras will be Dennis Bertolotti the company's President and Chief Executive Officer; Ed Prajzner Senior Vice President Chief Financial Officer and Treasurer; Dr. Sotirios Vahaviolos Founder and Executive Chairman; and Jon Wolk Senior Executive Vice President and Chief Operating Officer.
The company's actual results could differ materially from those projected.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP.
I will now turn the conference over to Dennis Bertolotti.
During today's call we will provide an update on Mistras' business performance.
Our financial results for the third quarter and first nine months of 2019 as well as discuss our lower outlook for the remainder of the year.
Third quarter results continue to reflect the progress being achieved toward our long-term strategic initiatives.
Revenues were up margins expanded and earnings increased on a year-over-year basis.
We also generated strong cash flow a hallmark of Mistras.
Let me note some key highlights for the quarter.
Gross margin increased across all 3 segments.
SG&A decreased by 100 basis points as a percentage of revenue generated strong cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter.
Additional highlights for the first nine months of the year.
Consolidated gross margin increased 160 basis points.
Cash from operations of $40.5 million with free cash flow of $22.5 million.
Debt paydown of $23.3 million exclusive of the $4.8 million paid for New Century Software our latest acquisition.
Revenue and operating earnings were ahead of fiscal 2018 on a year-to-date basis through the first nine months indicators of a robust business.
However our strong momentum developed over the past 2 quarters encountered some headwinds coming into the fourth quarter of 2019.
In particular a note of caution unexpectedly rose among our oil and gas customers attributable primarily to increased macroeconomic uncertainty.
Although our long-term outlook remains intact.
These factors are clearly influencing current activity in the oil and gas market with pushouts in demand.
Most of our oil and gas exposure is predominantly in the up and downstream sectors.
The downstream being driven by capital spend including turnarounds and modestly in the run and maintain opex spend.
Consequently we feel well positioned with our strategy focused on growing our run and maintain revenue a sector of the market that we dominate.
I feel very good about where we are in our look for the long term of this unexpected pause and the oil gas in markets has created some immediate challenges that will affect our performance through the end of 2019 and may drag into the first quarter of next year.
Consequently, you can understand why our full year with is not lower than originally anticipated.
And why we are accordingly lowering our guidance for 2019.
We view this as a timing issue.
As we expect most of the work will return to the market over the next couple quarters.
And we'll walk you through a detailed update in a few minutes.
But looking out into 2020 and beyond, our underlying oil and gas business remains strong.
And our plans and strategies to grow profitably over a long term are unaffected.
Based on what we are seeing and hearing underground we believe we are gaining market share and except for a few locations we have retained a vast majority of the customers served by our close to 90 labs across the U.S. Canada and Europe.
Each of these locations remain staffed with our experienced professionals so that we are well positioned to serve customers and capitalize on current opportunities as well as to continue to grow our market share in 2020 and beyond.
Even by conservative estimates we serve a $14 billion industry within the NDT spend of the business not counting the greater spend generated in the data and mechanical sectors in which we participate.
These markets are growing at healthy rates and support our growth aspirations.
Our product line expansions into adjacent markets such as mechanical and pipeline inspection that increase that opportunity.
And are quickly evolving MISTRAS Digital platform is providing us even greater opportunity.
Though quite large it is a highly fragmented industry.
And many of our smaller competitors simply can't match the depth of our resources or the breadth of our services and valuable experience.
This builds strong relationships with our customers because we save them unnecessary spend.
We are also utilizing our resources to create new products and services, and to make strategic acquisitions, all of which help diversify or in markets provide additional stability to our results in further distance ourselves from the competition.
Before turning the call over to Ed let me offer a few comments on some of the key developments in the quarter.
Performance at Onstream continues to reflect a strong U.S. growth but a relatively weak Canadian market.
The recent commercialization of their 20-inch tool and the impending introduction of their larger 24-inch tool slowly increased their contribution.
And with the geospatial technology from the New Century acquisition providing an excellent complement to Onstream's Stream data view analytics we believe there are strong synergies that will open up new possibilities in the future as well as benefit our complementary PCMS software.
We see this acquisition as a strong strategic fit in one of our stated pillars for growth that being the midstream sector of the energy market.
We view this as a growth market driven by increased regulatory oversight and rising customer demand due to more vigilant mechanical integrity programs all needs Mistras is uniquely qualified to deliver.
West Penn has good momentum and should outperform the fourth quarter as of last year.
We expect them to continue to ramp up utilization at a second facility.
In aerospace we also continue to benefit from the strength of our French operations.
Overall aerospace remains a key corporate growth pillar where the outlook for the industry over the next few years continues to be strong.
Data management is also one of our strategic objectives and MISTRAS Digital is a discrete way to integrate our vast data capabilities.
Onstream Streamview PCMS software our ruggedized MISTRAS Digital field tablets sensing and monitoring capabilities and now the New Century Software are just some of the various ways that are weaving -- that we are weaving together our data management capabilities to establish a leading position as the asset-protection market enters the age of the industrial Internet of Things.
As the market gets more sophisticated we want to be the leader in the market for more data and predictive analytics which we think are the industry big growth drivers.
An exciting endorsement of our strategy has been the rapid adoption of our MISTRAS Digital tablet rollout that we've been piloting at a growing number of refineries.
These customers value this technology so much so that they are asking us to open up the app to let other on-site vendors piggyback on the software hence we are reviewing the monetization of this application to other third parties.
We expect to continue to roll out our MISTRAS Digital tablet to other customers in an accelerating rate to more of our locations throughout the fourth quarter and especially in 2020.
This quarter we acquired New Century Software which forms another element of MISTRAS Digital.
More importantly this acquisition is another example of forward thinking about the direction of the midstream sector and the opportunity to leverage technology to grow.
New Century is a leading provider of pipeline integrity management software and services to energy transportation companies.
New Century provides software solutions data management expertise and extensive pipeline experience to enable a global network of customers in the oil and gas industry to manage pipeline integrity meet regulatory compliance requirements and maximize safety and reliability.
This acquisition aligns with MISTRAS' mission of delivering value-added integrated smart data solutions to its customers.
Looking at results for the third quarter consolidated revenues were up 5.5% to $192 million.
Organic growth was 2.1% with acquisitions contributing 4.4% offset by a 1% decline due to unfavorable currency translation.
Consolidated gross profit for the quarter was $57.8 million a 10% increase over the year ago quarter.
Consolidated gross profit margins improved significantly to 30.1% for the third quarter compared with 28.7% in the prior year quarter an increase of 140 basis points.
The ongoing expansion of our gross profit margin is indicative of the success of our underlying strategy focusing on more profitable opportunities in our core operations shedding less profitable businesses and making strategic acquisitions that help to improve margins.
We believe that our year-to-date gross margin in 2019 can be maintained into 2020 even with short-term volatility in revenue volumes.
Operating income improved for the third quarter to $10.8 million compared with $3 million in the comparable period last year.
On a non-GAAP basis adjusted operating income was $11.2 million compared to $10.1 million last year an increase of 10%.
Net income for the third quarter was $3.1 million compared with a net loss of $1 million for the same period last year.
Adjusted EBITDA was up 7% to $22.4 million for the third quarter of 2019.
As a percentage of revenue adjusted EBITDA improved to 11.6% for the third quarter compared to 11.4% in the same period last year.
The improvement in adjusted EBITDA is reflective of the success being achieved by focusing on higher-value operations and better leveraging our global infrastructure.
As Dennis mentioned earlier the company is a strong cash generator.
We stated last quarter that we had anticipated a continued strengthening of our cash flow generation coming into the back half of the year and we achieved that with third quarter cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter this was consistently strong on a sequential basis over the second quarter and a significant improvement over the prior period last year.
Strong cash flow this year has benefited in part from our commitment to improved working capital management.
Now looking more closely at our segments.
Services revenue increased by almost 8% in the third quarter.
Organic revenue grew a little over 2%.
And acquisitions primarily Onstream incrementally added nearly 6% to revenue growth.
The Services segment generated a gross profit margin of 28.4% for the quarter an improvement of 90 basis points compared to the year ago period of 27.5%.
Margin expansion is a key corporate strategy and we are pleased to see our margins continue to expand in our largest segment driven by pruning low-margin operations and growing higher margin operations including acquisitions such as West Penn and Onstream.
We have a strong operating leverage in this segment with significant contribution margins on incremental revenue.
International revenues in the third quarter were up 5.4% organically offset by 4.4% unfavorable currency rates for a 1% nominal increase.
The growth organically is noteworthy in that it was achieved despite the previously disclosed run-off of the low-margin German staff leasing business.
For the third quarter International reported a 31.6% gross profit margin compared to 29.7% a year ago which represents a 190 basis point improvement.
We attribute that improvement largely to higher labor utilization which is a result of increased visibility and visibility that was a key focus in this past year.
Products and Systems revenue decreased slightly in the third quarter to $5.5 million due to the sale of a subsidiary that was divested in 2018.
Gross profit margin increased for this segment to 49.6% compared with 45.6% in the prior year due to a favorable product sales mix.
We had another prudent quarter in maintaining strong cost control with a below inflation increase of 1% in SG&A year-over-year.
As a percentage of revenue SG&A was down 22% from 23% in the same period last year a decrease of 1 full percentage point once again reflecting our focus on improving operating leverage.
Considering expenses this year contain those assumed in the inclusion of the Onstream acquisition the ongoing investment we are making in sales and marketing as well as with developing and launching MISTRAS Digital we believe our efforts are beginning to reflect the many efficiency initiatives under way at MISTRAS.
Spending in the quarter was consistent with our expectation that the first half 2019 levels represented what we felt would be the run rate for the full year.
We continually review and rationalize our companywide overheads for savings to make sure we maintain a flexible and efficient footprint to support and invest in our growing business.
The company's net debt defined as total debt less cash and cash equivalents was $252.9 million as of September 30 2019 compared to $265.1 million at December 31 2018.
The company has paid down over $23 million of total debt during the first nine months of this year.
The company additionally paid a total of $7.7 million for acquisitions and income taxes related to the net settlement of share-based awards during the nine months ended September 30 2019.
As defined in our credit agreement our leverage ratio was approximately 3.6x as of September 30 2019.
Our goal is to reduce this ratio to below 3x by no later than the end of fiscal 2020.
Given our cash flow annual interest expense and net debt we believe our balance sheet is strong and will support the funding of both our organic growth objectives as well as any selective tuck-in acquisitions such as New Century Software.
Our effective tax rate was approximately 61% for the third quarter of 2019 including a $1.4 million or $0.05 per share write-off of certain deferred tax assets.
As Dennis mentioned earlier we are seeing a weak oil and gas market coming into the fourth quarter and we experienced an overall fall season that ended much sooner than anticipated.
In particular the oil and gas turnaround sector slowed attributed to factors such as supply buildups early in the year as well as refinery shifting resources to prepare for IMO 2020.
The note of caution that unexpectedly arose among oil and gas customers toward the middle of September 2019 into October 2019 is attributable primarily to increased macroeconomic uncertainty.
It is the same note of caution that is being heard in various sectors stemming from many factors including trade tensions negative European interest rates and the slowdown of domestic GDP growth.
Although the long-term outlook remains intact these factors are clearly influencing current activity in the oil and gas market resulting pushouts of demand.
Consequently the company's full year outlook is now lower than originally anticipated for the fourth quarter and accordingly the company is lowering its guidance for full year 2019 as follows: total revenues are expected to be between $740 million to $750 million; adjusted EBITDA is expected to be between $70 million to $75 million; capital expenditures are expected to be under $25 million; and free cash flow is expected to be between $28 million to $32 million.
We are still developing our full year 2020 budget but preliminarily we anticipate modest single-digit top line growth while maintaining year-to-date 2019 gross profit operating margins and cash flow levels.
There are also a number of additional growth opportunities all of which will be incremental to our current expectations.
We will provide our outlook for full year 2020 on our next scheduled call.
We are confident in our sustainable business model which has proven to be nimble in responding to sudden and severe cyclical changes in the oil and gas sector.
We remain firmly committed to diversifying our end markets over the long term while at the same time embracing our current end markets with an evolving differentiated solution.
As we implement our long-term strategy we recognize there may be some bumps along the road.
However these distractions are not a hindrance to achieving our ultimate objective of becoming the partner of choice in the NDT market and its adjacencies.
We continue to steadily transform Mistras with our basic principles always at the forefront that being delivering value meeting our promises innovating to drive productivity for our customers and developing industry-leading productivity tools.
I am confident and continue to see signs that our customers' operations see value in the span with us as a true ROI.
The enthusiastic reception of our MISTRAS Digital tablet initiative further illustrates the partnerships we are forming with our clients.
I also believe that we do this better than our competition and this will be evidenced by our relatively stronger performance than our market as we exit 2019 and head into 2020.
We are keenly focused on differentiating ourselves in the market particularly through our expanding service lines which solve for customers' needs of reduced overall labor to accomplish a given project involving digital solutions as I mentioned earlier.
We also remain firmly committed to maintaining our position at the forefront of leading the development of advanced inspection tools utilizing proprietary technology.
We add value and this enables us to price at market and generate solid operating profit with predictable attractive cash flow.
In the process we serve our customers with an exceptional return on their investment by delivering top-quality results with superior economic value.
I am confident that we are on the right path executing on our strategy and creating value over the short mid and long-term for Mistras shareholders.
Brian please open up the phone line.
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qtrly consolidated net revenues of $2.7 billion, an increase of 140% compared to prior year quarter.
qtrly mgm china net revenues of $289 million, an increase of 517% compared to prior year quarter.
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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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graco inc - withdraws 2020 revenue guidance due to economic uncertainty.
graco inc qtrly net sales $373.6 million, down 8%.
graco inc qtrly earnings per share $0.42.
graco inc qtrly adjusted earnings per share $0.38.
graco inc - q1 sales did not meet our expectations and deteriorated as quarter progressed.
graco inc - graco is well positioned financially and strategically to operate without making major changes.
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These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
With me on the call today is Mimi Vaughn, board chair, president, and chief executive officer.
And Tom George, chief financial officer, will review Q3 results in more detail and provide guidance for Q4.
As we announced last month, and you just heard, I'm very pleased we've removed interim from Tom's title.
Tom brings almost 30 years of CFO experience and deep roots in brands and retail, most recently at Deckers Brands.
He has been a tremendous asset to the organization since joining us a year ago, helping guide the business through a period of significant recovery and growth.
We're excited he's part of our leadership team and will continue to benefit from his knowledge and expertise as we grow Genesco going forward.
Now onto recent performance.
Building off an extremely strong first half of the year, we delivered another record earnings per share that well exceeded our expectations, fueled by a very successful back-to-school selling season.
As expected, sales were up considerably from last year, but what's most exciting is the double-digit increase over pre-pandemic level.
We entered the pandemic in a position of strength, are navigating the pandemic well and will enter the post-pandemic phase even stronger.
While the current market conditions have presented a number of external challenges, including supply chain disruptions, labor shortages and wage increases, elevated freight expense, and other cost pressures, we are managing through them adeptly.
This quarter's performance highlights the differentiated competitive positions of our retail and branded concepts, strong consumer engagement, and the strategic advantages delivered through our footwear-focused strategy as we work to transform our business.
In particular, our results spotlight Journeys and Schuh as the leading destinations for teen and youth fashion footwear.
Customers view them as unparalleled fashion authorities, validating whatever brands they're currently selling and are increasingly turning to our concept for their branded footwear needs.
and the U.K. as students largely return to in-person classes in the U.S. for the first time.
Sales at Journeys and Schuh exceeded pre-pandemic level.
And while sales volumes typically moderate after the back-to-school rush, we were very encouraged that demand accelerated throughout the quarter and remained strong into October.
I'll call out for Q3 overall was the robust consumer appetite for in-person shopping even as the number of COVID cases spiked, which allowed us to drive a 30% increase in store sales over last year.
Although traffic is still below pre-pandemic levels, it improved across the board to the best levels we've seen.
Our ability to capitalize on the increased demand would not have been possible without the commitment and drive of our store teams who worked tirelessly to prepare and execute a successful back-to-school.
Congratulations to our entire field organization on a job well done.
These results reinforce our view that kids like to shop in person even if they begin their shopping journey online, making our stores a strategic asset working in tandem with our digital capabilities.
I'll now provide some key highlights from this important back-to-school quarter.
Third quarter revenue of $601 million increased 25% versus last year and 12% versus two years ago.
And revenue growth, better-than-expected gross margins, and expense leverage resulted in an operating income increase of almost 70% over pre-pandemic levels and record earnings per share of $2.36 compared with $0.85 last year and $1.33 two years ago, all on an adjusted basis.
Additional highlights include: the robust store sales I've already talked about plus another quarter of strong digital growth; digital sales, which come with double-digit operating margins, increased 11% year-over-year and 79% compared to fiscal '20.
With this, our e-commerce business now represents 18% of total retail sales and is approaching $0.5 billion; next, increasing gross margin by 210 basis points versus last year, driven primarily by higher full-price selling and price increases while being flat with fiscal '20 in spite of the changing mix of our business and some freight expense pressure; leveraging adjusted SG&A by 260 basis points compared to pre-pandemic levels, as we make progress on efforts to reshape our cost structure; and finally, restarting our share repurchase activity by buying back $31 million of Genesco stock, demonstrating our strong financial position, confidence in our future, and commitment to a strong track record of returning capital to shareholders.
As excited as we are about this quarter, we are even more excited about driving our strategy forward to deliver additional growth, profits, and shareholder value.
So, turning now to discuss each business in more detail.
Strong consumer demand for a variety of brands and styles drove continued momentum as Journeys achieved record third quarter revenue and operating profit, marking the fourth consecutive quarter of record profitability even while operating with inventory almost 30% below pre-pandemic levels.
Leveraging its industry-leading vendor partnerships and deep talent and experience, Journeys merchants selected and secured a compelling assortment of footwear most desired by its team customer.
The current fashion cycle, which I've been describing as shifting more into casual, plays into Journeys strength with a nicely diversified assortment.
However, for this back-to-school, performance was strong in several categories across both casual and fashion athletic.
Nine of the top 10 brands experienced year-over-year growth in the quarter.
In addition, the in-person back-to-school also drove a big pickup in non-footwear sales, like backpacks, with non-footwear up over 50%.
With consumers willing to spend more for full-priced items, coupled with higher footwear ASPs, Journeys also experienced a nice lift in gross margins.
Direct sales held on to most of last year's very strong gains as Journeys increased social media and digital advertising, driving an almost 30% increase in online conversion versus two-year-ago results.
Recent market research validated that our strategies are further building the strength of the Journeys brand as Journeys share of teen footwear purchases and likelihood to be considered as a go-to place for shoes have both increased nicely since the last time the research was conducted.
We were also very pleased with Schuh's back-to-school performance as Q3 constant currency sales increased almost 20% above pre-pandemic sales.
Although students attended school in person last year, this year, shoppers increasingly return to physical retail, and our store teams drove higher conversion and more multi-sales on the best traffic of the year.
The return to stores did not impede the growth of online with direct sales notching large gains on top of last year's meaningful growth as the e-commerce channel more than doubled on a two-year basis.
Fueling this growth were several back-to-school key marketing campaigns and increased spending.
The fashion trends driving Schuh's business are largely the same ones driving Journeys, and several of Schuh's top 10 brands experienced growth in the quarter as well.
Additionally, Schuh's success managing through COVID strengthened its key vendor partnerships, boding well for the future with even better access to products.
Turning now to our branded side.
Our plan to reimagine Johnston & Murphy for a more casual, more comfortable post-pandemic environment is delivering tangible results.
Hardest hit by COVID, J&M is tracking well ahead of its turnaround goals.
Sales improved further in Q3, both online and in stores but are still below two-year-ago levels due to the extended delays of return to the office and lower inventories from supply chain disruption.
Delayed deliveries and much stronger-than-expected demand put J&M's inventory almost 50% below two-year-ago levels.
We are especially pleased with the performance of J&M's new athletically inspired casual product.
Casual footwear now makes up more than 70% of DTC footwear product sales with casual athletic increasing 120% versus last year.
J&M's marketing strategy in which we highlight innovation and technology features new products such as the bags, which was presented in the September advertising campaign and resulted in an 80% sell-through by the end of the month.
In addition, J&M's apparel business, highlighted by printed woven shirts and knits, increased by over 30% versus two years ago, endorsing efforts to position J&M as a modern lifestyle brand with broader consumer reach.
Rounding out the discussion, Licensed Brands, unfortunately, saw the biggest challenges from supply chain disruption, which led, among other things, to much higher-than-expected freight costs.
On a positive note, there was strong demand for both Levi's and Dockers footwear in value and full-price channels, which positions the business for improved profitability and supply challenges subside.
Turning now to the current quarter.
We have trend-right assortments and are well-prepared for the holiday season, which many will celebrate together for the first time in two years.
We were very pleased with our results in November, as sales tracked nicely ahead of pre-pandemic levels, and the boot season is off to a good start with boots as a key part of our fourth quarter mix.
For the Black Friday weekend itself, we were also pleased with the results.
While supply chain issues will continue to require close management, we have taken many actions to best prepare our businesses to meet our holiday sales expectations.
Given the recovery and confidence we have, we are returning to giving guidance.
We expect adjusted earnings for fiscal '22 to be between $6.40 and $6.90 per share.
We regard this guidance as a range, but somewhere close to the middle reflects our best current belief of where we would come out, representing an increase of about 45% over fiscal '20.
Tom will give more guidance details later in the call.
Our footwear-focused strategy is delivering results.
COVID has provided the real opportunity to transform our business at a more rapid rate and we are on a very good pace delivering growth and improved operating margins and EPS.
This new direction leverages our strong direct-to-consumer capabilities across footwear retail and brands and the synergies between platforms.
Driving this strategy are six strategic pillars that emphasize continued investment in digital and omnichannel, deepening consumer insights, driving product innovation, reshaping our cost base, and pursuing synergistic acquisitions, all to transform our businesses and exceed the expectations of today's consumer whose needs have advanced.
I'd like to give a brief update about some of the work underway.
We have rolled out at Johnston & Murphy in the U.S., new point-of-sale hardware and software, along with new tablets advancing efforts to further digitize our stores and enhance the omnichannel shopping experience.
For consumers, tablets allow easier access to the full merchandise assortment anywhere in our network.
Mobile checkout allows consumers to skip the checkout line.
The new software enables new payment methods like Venmo, and we are able to upgrade our clienteling efforts.
For employees, the new technology creates efficiencies across in-store tasks, such as visual merchandising and new hire onboarding.
After the holidays, we will roll out this technology at Journeys and will benefit from these capabilities in our next fiscal year.
Journeys research shows that while our digitally native Gen Z customer interacts with us across several digital touchpoints, up to 75% intend to make their purchases in-store, requiring investment to provide a compelling store experience.
Journeys also brought online a bespoke e-commerce packing module with carton on-demand capabilities, which is helping speed fulfillment of online orders during this peak holiday period and keep up with a much higher digital demand.
An added benefit is we are able to keep our stores well stocked for in-person shopping.
Finally, Journeys piloted on its website and pleased with the conversion results plans to roll out augmented reality software, which enables customers to virtually try on and visualize what a pair of shoes would look like on their feet.
Building deeper consumer insights is another pillar where Journeys is dedicating substantial effort starting with first-party data.
Our methods for capturing first-party data and being able to identify Journeys' customers continue to improve.
Because of the trusted relationships we have with our team, consumer, and their parents, the efforts of our people to collect customer information in stores, combined with our notable online growth, has improved visibility.
And we're currently able to identify 80% of Journeys' customers.
Identified customers enter the Journeys' marketing ecosystem and depending on their preferred method of communication receive a combination of digital, email, SMS, social, and direct mail marketing.
In parallel, we're in the process of moving our customer database in-house, cleansing our existing data, and populating a data lake.
Along with the customer segmentation from our primary research, this will enable us to invest in differentiated marketing content that drives consumer engagement, whether we're speaking with the consumer who love shoes and wants to stand out or the consumer who cares a lot about fitting in and wearing shoes their friends were.
In a fragmented industry and knowing our teams enjoy wearing a variety of footwear brands, our aim is to drive loyalty, further consolidate their purchases and take a larger share of our customers' closets.
Touching now on ongoing initiatives of giving back to our communities.
In the fall, Journeys ramped up efforts across North America in partnership with a nonprofit candidate, Journeys employees in 73 cities came together to build and donate 1,500 skateboards to underserved use.
It was the largest employee-driven giveback campaign in our history, with more high-impact events to come.
We're advancing our ESG program on this and on other fronts, with the key milestone being the start of an enterprisewide carbon footprint assessment as we work toward publishing a comprehensive ESG report next year.
I'm continually inspired by the drive and the dedication of our people and saw so many examples over Black Friday weekend, as you're all going the extra mile to serve our customers so well.
We continue to execute well on our strategy.
Third quarter results exceeded our expectations in pre-pandemic fiscal year '20 levels.
We achieved better-than-expected sales, margins, and SG&A leverage, all on significantly lower inventory levels.
Before I get into the details of the quarter, I want to remind you, we believe that comparing to our pre-pandemic fiscal '20, two years ago provides the more difficult and often most meaningful assessment of our business.
However, when comparing to fiscal year '20, keep in mind how our strategy has changed our business.
E-commerce has become a larger percentage of sales along with wholesale sales for licensed brands.
These changes come with an overall lower gross margin rate due to the impact of direct shipping expenses and the expansion of our wholesale volume.
However, this should be more than offset with lower SG&A from these businesses.
While these changes are reshaping the P&L, they have a net positive impact on operating margins and an added benefit of a less capital-intensive business model.
In terms of the specifics for the quarter, consolidated revenue was $601 million, up 12% compared to fiscal '20.
Journeys grew 7% while Schuh grew 17% on a constant currency basis, and we doubled our licensed brands business.
Regarding J&M, we are pleased with the continued momentum we are seeing.
We were 8% below fiscal year '20 levels, and we continue to narrow the gap.
From a channel perspective, we experienced increases in all channels.
E-commerce was up 79% to fiscal year '20 and accounted for 18% of total retail sales, up from 11% in fiscal year '20.
With stores opened 99% of the possible days during the quarter, we are going back to providing comparable sales information versus last year for the stores open in both periods.
On a year-over-year basis, Journeys and Schuh drove positive overall comps of 15% and 23%, respectively, while J&M comps were positive 77%.
We were very pleased with gross margins, which were up 210 basis points to last year and flat at 49.2% versus two years ago.
Strong full-price selling and price increases offset the channel mix impact of increased e-commerce and wholesale and increased logistics costs.
Increased logistics costs put approximately 70 basis points of pressure on Q3 gross margin were the greatest drag in our branded businesses.
Journeys gross margin was up 140 basis points to fiscal year '20, driven by more full-price selling and higher footwear ASPs.
While Schuh's gross margin was down 180 basis points to fiscal year '20 due to a higher e-com mix and higher shipping expenses.
J&M's gross margin was up 230 basis points to fiscal year '20, benefiting from strong full-price selling, which also drove the release of slow-moving inventory reserves.
For J&M, additional logistics costs put 240 basis points of pressure on J&M's Q3 margins.
Finally, licensed brands gross margin was down 150 basis points to fiscal year '20, as we experienced 740 basis points of pressure on Q3 margins from additional logistics costs, which more than offset margin improvements in the business.
Adjusted SG&A expense was 41.6%, a 260 basis point improvement compared to fiscal '20 as we leverage from higher revenue and ongoing actions to manage expenses.
In addition, we experienced leverage in selling salaries and depreciation, partially offset by deleverage in marketing expenses.
As part of the SG&A discussion, I would like to provide a brief update on our $25 million to $30 million cost savings initiative.
I'm pleased to report we have identified the full amount of the target for this fiscal year.
A significant portion of the savings is from rent reductions with the remainder in several areas, including travel, conventions, inter-store freight, compensation, and other overheads.
The full effect of these savings will be realized by the end of fiscal year '23.
These savings are part of the ongoing multiyear effort of reshaping our cost structure by improving store channel profitability.
Regarding rent reductions, year to date through Q3, we have negotiated 129 renewals and achieved a 19% reduction in rent expense in North America on a straight-line basis.
This was on top of a 22% reduction or 123 renewals last year.
These renewals are for an even shorter term, averaging approximately two years compared to the three-year average we have seen in recent years.
With 40% of our fleet coming up for renewal in the next couple of years, this remains a key priority.
In summary, third quarter adjusted operating income was $45.2 million, a 7.5% operating margin compared to $26.7 million or 5% for fiscal year '20.
This quarter's profitability provides strong evidence of the operating margin expansion opportunity achievable with our footwear-focused strategy.
Our adjusted non-GAAP tax rate for the third quarter was 23%.
Turning now to the balance sheet.
Q3 total inventory was down 28% compared to fiscal '20 on sales that were up 12%.
As we remain vigilant in keeping pace with consumer demand in the face of delivery delays.
Our strong net cash position of $267 million and our confidence in the business enabled us to repurchase 522,000 shares of stock for $30.6 million at an average price of $58.71 per share.
We currently have $59 million remaining on our share repurchase authorization.
Regarding capital allocation, our first priority is to invest in the business then continued to return cash to our shareholders through opportunistic share repurchases.
Capital expenditures were $15 million, and depreciation and amortization was $10 million.
We closed five stores during the third quarter to end the quarter with 1,434 total stores.
Now, turning to our outlook.
Given the recovery and confidence we have, we are returning to providing annual guidance.
Based on the strength of our performance this year to date, current Q4 visibility, and expectations for a more normal holiday selling season, we expect fiscal year '22 sales to grow 9% to 11% compared to the pre-pandemic fiscal year '20.
For adjusted earnings, we expect a range of $6.40 to $6.90 per share.
Our best current expectation is that earnings will be near the midpoint of this range, an increase of 45% over fiscal year '20 pre-pandemic levels.
Note that our full year guidance does not anticipate any further significant supply chain disruptions nor increased negative consumer or economic impact from COVID, including new COVID variants.
Although our plan going forward is not to provide quarterly guidance, given the current timing of restarting formal guidance, we would like to provide insights into Q4.
Note that all the comparisons we make are to pre-pandemic fiscal '20 Q4.
Implicit in the annual guidance is an expectation for Q4 sales growth versus fiscal '20 at the midpoint to be in the mid-single digits.
Q4 adjusted earnings per share would range from $2.22 to $2.72 per share.
And again, our best current expectation is for earnings to be near the midpoint of this range.
We expect gross margin rates for Q4 to be relatively flat versus fiscal year '20 levels with a possible 30 basis point swing in either direction.
We believe the promotional environment will remain favorable, and this range represents the degree of full-price selling we could achieve.
Similar to Q3, we expect channel mix as well as increased logistics costs to pressure gross margins.
Increased logistics costs are expected to pressure gross margins by 130 basis points and will offset to some extent these improvements in full-price selling.
We expect Q4 adjusted SG&A as a percentage of sales to deleverage in the range of 180 to 200 basis points compared to fiscal year '20.
This is driven primarily by increased advertising and marketing costs, particularly in brand advertising and digital marketing related to cost per click and higher performance-based compensation associated with the expected improvement in annual results, partially offset by leverage in occupancy cost.
As a reminder, fiscal year '20 Q4 performance-based compensation was relatively low, and this year's level reflects the improved performance that we have experienced on a year-over-year basis.
One more factor worth mentioning on the Q4 SG&A rate is we are not expecting the same amount of onetime government relief or rent abatements we experienced in Q3 this year or last year in Q4.
Our guidance assumes no additional share repurchases for the remainder of the fiscal year, which results in Q4 weighted average shares outstanding of approximately 14.3 million.
Furthermore, for Q4, we expect the tax rate to be approximately 28%.
In summary, this all results in an expected Q4 operating margin below FY '20 levels in large part driven by cost pressures unique to the fourth quarter this year.
We have the right team and the right strategy to continue to drive shareholder value.
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q3 non-gaap earnings per share $2.36 from continuing operations.
q3 sales rose 25 percent to $601 million.
sees fy adjusted earnings per share $6.40 to $6.90 from continuing operations.
qtrly same store sales increased 25% over last year.
sees fy22 sales to be up 9% to 11%, compared to fiscal 2020.
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The company undertakes no obligation to update the information.
whitestonereit.com, in the Investor Relations section.
With that, let me pass the call to Jim Mastandrea.
Today, I would like to share what I believe are pivotal to Whitestone's business, and our CFO, Dave Holeman, will provide even greater detail our operating and financial performance as well as a more detailed COVID update.
Given that we've all been affected by COVID-19 pandemic, we hope that all of you, your families and the businesses are doing well and staying safe.
The past six months have been incredibly challenging for everyone across the country and the world.
As the U.S. economy fell off the cliff in March of 2020, we reacted quickly with safeguards we had in place.
In terms of our markets and specifically, as it relates to our community-centered shopping centers located within Texas and Arizona, we too have faced extraordinary challenges, although I believe somewhat less than other parts of the country, operating in states with more business-friendly characteristics as we are.
At the time of our earnings call back in May, we were in the early stages of the pandemic and 63% of our tenants were open, and April collections were 64%.
As I report today, I am pleased to say that 94% of our businesses are open, and we collected 81% of our rents during the second quarter and have collected 86% for July so far.
Our business model, which has been crafted from the lessons we learned during the 2008 recession and prior economic downturn, performs exceptionally well in good times and minimizes financial risk in these toughest of times.
Our business operations have produced exceptional compounded growth rates since our IPO in 2010, and this trend continues, with our relatively strong performance in the second quarter and in the face of very difficult headwinds.
Whitestone's foundation is built on three key pillars.
First Whitestone's philosophy, including how we acquire the right real estate and then how we effectively operate and lease and manage it.
The second is our entrepreneurial culture in which employees become shareholders and participate shoulder-to-shoulder with our shareholders and value to help create.
And third, our experienced management team that extends beyond this 12 years they worked together producing results for our investors, and consistently demonstrating an ability to capture and capitalize on opportunities that others may miss.
My first point is that our philosophy provides us with autonomy to act quickly and decisively.
Even before the pandemic, the rapid shift toward online shopping as the preferred distribution channel was taking a huge toll.
Store closures and retail transactions hit all-time high.
The pandemic only served to amplify that trend.
Overall, Whitestone stayed on point with our strategy.
Our business strategy, which was formulated in an economic down cycle with great recession of a decade ago, is created to withstand tough times and significant structural change in the structure of our industry e-commerce.
Our contrarian approach focuses on buying open air properties in Texas and Arizona.
These states have led the nation in population growth and small business formations over the past several years.
Investing in real estate in these states allow us more freedom and control of our properties to lease and manage the owners as builders.
This affords the flexibility to make decisions that could be implemented quickly and strategically.
If a tenant performs well, we can expand them into other locations.
And if they do not succeed, we can replace them with no hesitation.
Keep in mind that we have a large tenant base and tenant can impact our revenue stream more than 3% if they go viral.
We fill our properties with business owners committed to innovating, growing and contributing to their communities.
Our diversified mix of tenants that provide essential services for needs that can't be easily acquired online, if at all.
As a result, our open air center is providing community experiences that cater to the adjacent neighborhood as an extension of the resident's lifestyle.
We continue to take a proactive approach to engaging with our tenants and are always looking for ways to help their businesses.
Our market level teams, with their deep tenant knowledge, have developed longtime relationships with local entrepreneurs.
This is what differentiates us from many of our peers who tend to have relationships with the real estate arm of national tenants, not the person fully committed to making daily tough decisions in running the business.
We have implemented numerous strategic initiatives at the property level, including on-site measures to help customers feel safe, a digital signing, and have worked with many of our restaurant tenants to increase their takeout, meal delivery business, and expand their outdoor spaces to generate more revenue, while maintaining safe social distancing.
As our tenant businesses return to full capacity, we believe our initiatives will continue to produce additional revenue sources for them.
Our philosophy has produced sustained profitability and added value to our properties, resulting in industry-leading returns because it works.
My second point is at Whitestone, the core of our culture is our people.
We believe a strong culture makes for a strong business.
Our team members are committed to creating value for all shareholders and they go the extra mile.
After two months of effective remote working, our associates reporting feeling safe and excited about returning to the office.
We implemented safety measures in our offices, and now we have our entire dedicated workforce back in each of our offices.
From the beginning of the pandemic, Whitestone associates worked tirelessly, continuing to manage in these properties with an expansive base of approximately 1,400 tenants.
They conducted themselves with integrity and fairness, helped tenants access PPP loans, providing temporary open/closed signs, and in some cases agreeing to rent deferrals, not for giving us any pressure and give tenants time to recover.
Working in the team, they have also been willing to make tough decisions that are in the best interest of our shareholders.
We want all of our tenants to succeed and make it through these tough times.
Yet we've seen a few who are taking advantage of this situation, not working collaboratively with us and not necessarily anxiously willing to pay the rent.
We expect to honor our commitments and we expect our tenants to honor theirs, which means paying the rent.
During the quarter, we locked out a few tenants who by the way are well capitalized.
In most of these situations, these tenants pay the full amount of rent always and continue operating in the states.
We repeated this tough love approach several times, even though we prefer a more collaborative approach of working with our tenants.
Our leadership team has both the depth and breadth of experience in the industry, which leads me to my third point.
I would like to say that it is not only what we own but it's what we do with what we own.
As a result of the skills and experience of our team, we have and we will continue to identify structural shifts in the industry before they happen and capitalize on those opportunities.
We know our markets, we know our properties, we know our tenants and we know the consumer.
From the start, we understood that by owning and operating quality properties in global markets, mastering consumer business and preferences and staying disciplined, we could succeed.
In closing, our philosophy, culture and experience underlies our brand that identifies lifestyle in the real estate industry with a formula that produces leading investment results.
We call this hard work and as our brand evolves within the industry, we believe our work will be recognized for the results we produce.
We believe that all shareholders should have the benefit real estate by owning shares in Whitestone.
We also know that we have continued to gain their confidence by delivering meaningful value and producing stable, predictable cash flow, value appreciation through asset management and leasing that increased 2% to 3% annually.
And when appropriate, both through acquisitions and development, to achieve scale and long-term sustainable value.
We have a highly dedicated team that works every day to create local connections and communities that thrive, and we feel strongly that we are positioned to withstand the current headwinds and thrive into the future.
Given the severe economic pressures caused by the stay-at-home orders during the quarter, our portfolio has held up remarkably well.
Entering the pandemic, our overall occupancy stood at 89.7%.
Despite having a significant amount of our tenant businesses closed or severely impacted for all or part of the quarter, we only had a handful of tenants closed for good, such that the portfolio occupancy rate held up well, ending the quarter at 89.2%.
Also, our annualized space rent per square foot held relatively flat at $19.58.
While our square foot leasing activity was down 37% from the second quarter of 2019, we were pleased with positive leasing spreads of 13.5% and 3.4% on renewals and new leases signed in the quarter.
As Jim mentioned, for the quarter, we collected 81% of our rents.
This includes base rent and triple net charges billed monthly.
We have also entered into rent deferral agreements for 5% of our second quarter rents.
As part of the deferral agreement, we have negotiated beneficial items such as entry into our online payment portal, reporting of tenant sales, suspension of co-tenancy requirements, loosening of exclusives or restrictions, allowing further development and stronger guarantees.
Today, 94% of our businesses are open.
As a result, July collections have shown improvement.
To date, we have collected 86% of our July rents which compares favorably to Q2 and to the April collections of 64% we reported at this time last quarter.
While we are encouraged by how things are progressing, the pandemic took a toll on our business during the second quarter in terms of our financial results.
Funds from operations for the quarter was $9.6 million, or $0.22 per share, compared to $11.1 million, or $0.27 per share, in the same quarter of the prior year.
The decrease is primarily due to the impact of the pandemic, which resulted in a charge of $2.8 million, or $0.07 per share, related to the collectibility of revenue, which includes $500,000, or $0.01 per share, for noncash straight-line rent receivables.
Let me add a little color on our flexibility analysis related to the pandemic.
For the quarter, we recorded a bad debt reserve of $2.3 million, which excludes reserves for straight-line rents and unbilled amounts.
Our cash collections for the quarter were 81%.
So with the remaining 19% of unselected rents, which includes 5% of agreed rent deferrals, we reserved 41%.
Additionally, we have converted approximately 70 tenants, representing 3% of our GLA and 3.2% of our revenue, to cash basis accounting.
Those tenants paid 41% of their own rent in Q2.
We have provided some additional details on our collections that can be found on page 25 of the supplemental.
Turning to the balance sheet.
Since March, we have implemented various measures to conserve cash, including further reductions in head count.
Today, we have approximately $45 million in cash, representing an $8 million or 22% increase since March 31.
We have one $9 million mortgage loan maturing in 2020, which we expect to refinance in the third quarter, and no debt maturities in 2021.
Currently, we have $110.5 million of capacity and $1.2 million of borrowing availability under our credit facility.
Borrowing availability under the credit facility is largely driven by trailing 12-month net operating income for unencumbered properties.
Assuming that NOI for the third quarter is the same as the second quarter, we project that our current borrowing will exceed our available borrowing at the next measure period, which is September 30, 2020.
We expect to remain in compliance with our debt covenants and continue to work closely with our bank group.
We have seen pent-up demand in our markets as consumers are leaving their homes and returning quickly and in force.
Parking lots are filling, stores and restaurants are active, and figuring out creative ways to do business.
Whitestone is well positioned to capture this pent-up demand and intends to do so.
Our team has worked together through this ongoing crisis, and our shareholders will reap significant future benefits through greater collaboration, a more robust exchange of ideas, better and more effective communication, and improved systems and processes that provide new actionable data and allow us to more efficiently scale our infrastructure.
Whitestone is continuing to perform and deliver on its strategic plan.
It is in many of the most highly desirable growth markets and high population growth states.
We look forward to providing an update as we progress.
And with that, we will now take questions.
Operator, please open the lines.
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qtrly ffo core of $0.23 per share.
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With me on the call today are Denise Paulonis, our new President and Chief Executive Officer and Marlo Cormier, Chief Financial Officer.
I'm thrilled to be here with a little over a month under my belt and I'm looking forward to meeting and talking to our analysts and shareholders in the coming months.
Having served in the Sally Beauty board since 2018, I'm fortunate to be bringing the first hand perspective and a deep working knowledge of the business on day one.
I see a significant opportunity to utilize my leadership skills and retail and finance background to drive the business into a new era of profitable growth, capitalizing on all the new capabilities enabled by the transformation of the business over the past four years.
Virtually every aspect of the company's infrastructure has been retooled across technology, marketing, merchandising, supply chain, HR, finance, and talent, creating a robust platform from which we will grow.
I'm incredibly proud of our exceptional team who took on this challenge and helped us evolve into a modern dynamic omnichannel beauty retailer that is now set up for long-term success.
Before talking a bit more about our future, let me share a few highlights from last year.
In fiscal 2021 full year net sales grew 10%, gross margins exceeded 50% and adjusted earnings per share was up over 97%.
Additionally, we generated strong cash flow from operations of $382 million.
We delivered consistent performance throughout the year and concluded fiscal 2021 with fourth quarter results ahead of expectations, reflecting strong operational execution.
We're particularly pleased to see ongoing momentum and consistency across the business despite the various impact of the pandemic.
As we embark on our new fiscal year, our mission to recruit and retain color customers remains a core component of our roadmap and continued tailwinds around self-expression through hair, product sustainability and innovation and the growing number of independent stylists continue to reinforce the strength of our color and care business.
Putting the customer first and enhancing their experience with us is critical to our success.
We're continuing to prioritize the customer through personalization, inspiration, education and training.
We're also focused on creating the easiest shopping experience for our customers through our robust omnichannel platform and multiple fulfillment options our customers can get product, how they want it and when they want it, faster than ever before.
Against that backdrop, we'll be focusing on four strategic growth pillars to drive the top line in fiscal 2022.
Leveraging our digital platform, driving loyalty and personalization, delivering product innovation and advancing our supply chain.
First, I'll talk about digital.
As we increasingly become the unrivaled forced for color inspiration, education and training, our goal is to create an easy, reliable omnichannel platform for our DIY enthusiasts and stylists.
At BSG, we completed a critical set of strategic initiatives in fiscal 2021 that positioned us to become the go-to-platform for stylists.
We redesigned the CosmoProf website, introduced new value-added services around ordering and rolled out focus into our delivery.
In addition, we'll be connecting our store network to the CosmoProf app this month to further enhance focus into our delivery.
In short, our BSG stylists can now access everything sold by CosmoProf on their phone and within two hours.
Bringing together all these initiatives, truly positions BSG as a compelling resource for the stylist community, providing them with the tools they need to run their businesses most efficiently and profitably.
At Sally, we've seen a positive customer response to our expanded fulfillment model and we're continuing to gain traction across BOPIS, ship from store and rapid two-hour delivery.
In our most recent quarter, Sally U.S. and Canada stores fulfilled 34% of e-commerce sales as BOPIS fulfilled the 34% of e-commerce sales, as BOPIS comprised 22% and ship from store accounted for 8%.
Rapid two-hour delivery was launched in the middle of the quarter and represented 4% of Sally U.S. and Canada E-commerce sales.
Additionally, the adoption of these new fulfillment options exhibits our power of scaling our new tools and capabilities to meet the strong desire our customers have for this incredible convenience.
We're also laser focused on improving in stocks across our store and DC network through our new JDA platform.
So our customers are able to access our inventory.
However, they choose to shop and get most products in just two to three hours.
As we continue to scale and optimize a full suite of omnichannel services for both our Sally and BSG customers, we believe e-commerce can reach 15% or more of sales in the coming years.
In fiscal 2021, global e-commerce sales penetration was just over 7%.
Importantly, we know that an omnichannel customer at Sally U.S. and Canada spends approximately 75% to 80% more with us annually than a brick and mortar customer.
So this is not just a sales channel shift, it is a tremendous opportunity for growth.
Moving now to our second growth pillar: loyalty and personalization, which [Technical Issues] directly to our digital strategy.
As many of you know, the rise of personalization has changed the table stakes in retail.
With our rapidly growing loyalty program and a new push toward personalization, we have a significant opportunity to drive and increase customer engagement in sales.
At Sally U.S. and Canada, approximately 74% of our fourth quarter sales came from our loyalty program.
At BSG, because stylist have to register a shop with us, we have data on 100% of our customers.
Additionally, approximately 8% of our BSG's sales in the quarter came from our Rewards Credit Card that was launched about a year ago.
These are remarkable numbers and we've only scratched the surface in leveraging this asset.
In fiscal 2022, we'll be utilizing data science to engage our customers with inspiration, education and personalized offers at every touch point.
At Sally, this includes recommendations on product usage, reminders to replenish on time and incorporating DIY an educational component at key moments in their journey.
At BSG, this mean showcasing new product arrivals, reminding stylist to restock their backbar and notifications to replenish key styles products.
We believe these actions will drive higher customer lifetime value by minimizing attrition, growing spend per transaction and increasing purchase frequency.
Fiscal 2022 will also see us investing further in digital marketing and social media campaigns to drive traffic and sales.
Our current marketing campaign YOU by Sally continues to generate a tremendous amount of attention from customers and the trade.
Celebrating the transformative power of hair color, the campaign has received extensive coverage from Beauty editors and generated millions of views on social media.
Our third growth pillar is product innovation.
Fiscal 2022 will be highlighted by a big infusion of innovation across Sally and BSG and we'll be driving a large part of that ourselves.
The pipeline of new products is robust and includes our own and third-party brands across multiple categories.
We will continue to emphasize and support sustainable and clean products, which are increasingly being selected and commanding a premium from customers.
Importantly, we believe our authority in color and care provides a logical path and powerful platform for standing up new brands that go beyond our four walls.
The first initiative is our new exclusive brand line of vivid colors of Sally called Strawberry Leopard launched to positive response in October, this is a useful Gen Z focused brand that speaks to our ability to increasingly attract younger consumers through value of self-expression.
Concurrently with the launch, we created an individual digital platform for Strawberry Leopard that immersed the consumers in the brand ethos, enables a direct shopping experience.
As the brand gains velocity, we expect to unlock potential opportunities for expansion into additional distribution channels, including math, beauty and third party e-commerce.
The innovation pipeline at BSG is equally exciting, starting with Olaplex's new toning shampoo that just launched in September.
Olaplex is a great example of a high-profile brand that continues to innovate and remains a key partner to us.
Looking ahead, we're continuing to focus on being at the forefront of innovation with new product and brand launches to excite the consumer planned for 2022 and beyond.
Turning now to our fourth growth pillar, another critical element of our focus on putting the customer first is supercharging our supply chain to ensure that we are in stock in color and care every time.
A great deal of the heavy lifting has been done and we're now executing the final phase of JDA implementation.
The system is up and running in all BSG's locations and the majority of our Sally stores.
We're currently rolling out JDA to our remaining locations and fully integrating with our North Texas, DC.
Once completed, we'll have a highly automated integrated network with the best-in-class capabilities across inventory forecasting, localized assortment, pricing and promotions and in stock.
We believe that our initiatives underneath four growth pillars will allow us to drive top line growth of 3% to 4% and generate strong operating cash flows this year.
This reflects our ability to maintain strong gross margins, while mitigating inflationary pressures through careful cost controls, pricing levers and store optimization.
To that end, our 90-store optimization pilot remains in progress.
We are continuing to gather and analyze data from the sample and I'm pleased to note that we are significantly exceeding our sales transfer targets.
In fiscal 2022, we expect to launch a multi-year program designed to maximize the value of our large store portfolio, while offsetting inflationary headwinds.
By rationalizing the fleet, we can improve productivity and profitability, while delivering a convenient omnichannel experience that benefits our customers.
We're entering fiscal 2022 with solid infrastructure, a well-defined roadmap for growth and favorable industry dynamics that support the significant opportunity in front of us.
In the coming months, I look forward to working with the team to build out additional growth opportunities that will fuel our business and create meaningful shareholder value in 2023 and beyond.
We're pleased to conclude the year with strong fourth quarter performance, which exceeded the expectations we provided on our last earnings call and reflect strong consumer demand coming out of the pandemic.
Topline growth, solid gross margins and careful cost control, drove strong earnings and cash flow.
Net sales increased 3.4% and same-store sales rose 2.1% reflecting strong consumer demand with only some minor impact from pandemic related restrictions in Europe.
Fourth quarter traffic and conversion trends remain consistent with what we've experienced throughout the pandemic.
Traffic was down, but units per transaction, average unit retail and average ticket all increased versus prior year.
Basically, customers are still shopping less frequently, but are buying more when they transact with us.
Global e-commerce sales were $71 million, representing 7.1% of total net sales as compared to $63 million in the prior year.
The year-over-year increase reflects ongoing strength as we continue to scale our digital capabilities and implement our strategic initiatives around fulfillment and customer engagement.
Looking at gross profit, we achieved fourth quarter gross margin of 50.6%, reflecting our ability to maintain solid performance above our 50% target level.
On a year-over-year basis, gross margin deleveraged by 50 basis points, reflecting a higher mix of BSG sales, which carried a lower margin profile in the quarter.
Moving to operating expense, fourth quarter SG&A totaled $387 million, up 5% versus a year ago, primarily reflecting higher labor costs and planned increases in marketing spend.
Looking at the new fiscal year, we anticipate that SG&A dollars will increase and rate will be up slightly on a year-over-year basis.
Our expectation takes into account increased labor and freight costs, increased expense planned in our international markets related to a full reopening in 2022, as well as investments across our growth pillars that Denise discussed earlier.
We believe our store optimization program will serve as an important offset to wage inflation beginning in the latter part of 2022 and then more significantly in 2023.
Turning now to earnings.
We delivered strong profitability in Q4.
Adjusted operating margin came in at 11.7%, adjusted EBITDA margin was 14.5% and adjusted diluted earnings per share increased to $0.64.
Looking at segment results.
At Sally Beauty, we saw strong consumer demand in the U.S. Same-store sales increased 2.3% and e-commerce sales totaled $29 million for the quarter.
For Sally U.S. and Canada, the color category increased 4%, while vivid colors grew 5%, representing 28% of our total color sales as comparisons normalized to prior year.
Other categories also performed well.
Styling tools increased by 31% and textured hair was up 16%.
Gross margin declined slightly at Sally, which reflected strong product margins, offset by higher distribution and freight costs.
Segment operating margin increased to 18.1% compared to 18% in the prior year.
In the BSG segment, same-store sales increased 1.7% as salons returned to more normalized capacity levels in virtually all of our U.S. markets.
E-commerce sales totaled $42 million for the quarter.
The color category grew 9%, hair care was up 5% driven by Olaplex and styling tools increased 9%.
Gross margin and profitability at BSG reflected same dynamics we saw in Q3.
Specifically, we're experiencing higher sales from our larger volume, full service customers coming out of the pandemic and those customers tend to be lower margin.
Segment operating margin was down slightly versus prior year at 13.3%.
Moving to the balance sheet and cash flow.
We ended fiscal 2021 in strong financial condition.
For the full fiscal year, we generated $308 million of free cash flow and retired approximately $420 million of debt.
We ended the quarter with $401 million of cash and cash equivalents and a zero balance outstanding under our asset-based revolving line of credit.
Inventories at September 30th totaled $871 million, up 7% versus a year ago as we reinvested in our inventory levels coming out of the disruptions from the pandemic.
In addition, we were pleased that our strong performance over the course of fiscal 2021 helped drive our net debt leverage ratio down to 1.69 times at the end of September.
Now turning to our full year fiscal 2022 guidance.
We are confident about how the business is positioned heading into 2022 and we expect to achieve the following: net sales growth in the range of 3% to 4%, net store count to decrease by approximately 1% to 2% driven primarily by Sally U.S. stores as we continue to optimize our portfolio.
Gross margin expansion of 40 to 60 basis points, GAAP operating margin growth of 90 to 110 basis points, and adjusted operating margin approximately flat to 2021.
The business has demonstrated remarkable resilience during the past 18 plus months and our teams have done a terrific job of navigating the dynamic macro environment.
As the business continues to strengthen and generate strong cash flows, you can expect to see us prioritize strategic growth investments, as well as return cash to shareholders through the restart of our share buyback program.
As a reminder, during the fourth quarter, our Board of Directors approved an extension of our share repurchase program through September of 2025, which currently has over $700 million remaining under the authorization.
Additionally, we are evaluating opportunities to further optimize our capital structure, which could result in incremental interest expense savings.
Finally, I want to call out a housekeeping item related to disclosure.
Beginning in fiscal 2022, we will be replacing our same-store sales metric with comparable sales, which will include sales from our full-service divisions and franchise operations including any related e-commerce sales.
In 2022, for each quarter.
We will disclose both current and prior-year comparable sales under the new definition.
Now, I'll ask the operator to open the call for Q&A.
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compname reports q2 adjusted earnings per share $0.57.
q2 adjusted earnings per share $0.57.
q2 same store sales rose 6.5 percent.
qtrly consolidated same store sales increased 6.5%.
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dollargeneral.com under news and events.
We also will reference certain non-GAAP financial measures.
dollargeneral.com under news and events.
Our fourth quarter performance was impacted by sustained and rising inflation, ongoing global supply chain pressure and a surge in Omicron cases, which impacted staffing levels at our distribution centers, contributing to elevated out-of-stocks.
Despite these challenging conditions, our teams continued to focus on controlling what we can control and being there for our customers.
Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond.
And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook, we're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan.
In fact, I'm pleased to report our staffing levels are back to 2019 pre-COVID levels in both our stores and distribution centers, and we are seeing a meaningful improvement in our in-stock positions.
Additionally, although we experienced higher-than-expected product and supply chain cost in Q4, we are very confident in our price position as our price indexes, relative to competitors and other classes of trade, remain in line with our targeted and historical ranges.
And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important to our customers, and they will continue to have a significant presence in our assortment.
In fact, approximately 20% of our overall assortment is $1 or less.
And moving forward, we expect to continue to foster and grow this program where appropriate.
population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, even in a challenging economic environment.
Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating Dollar General from the rest of the retail landscape.
Turning now to our fourth quarter performance.
Net sales increased 2.8% to $8.7 billion, following a 17.6% increase in Q4 of 2020.
Comp sales declined 1.4% compared to the prior year period, which translates into a robust 11.3% increase on a two-year stack basis.
From a monthly cadence perspective, Comp sales were lowest in January, with December being our strongest month of performance.
Our fourth quarter sales results include a decline in customer traffic, which was largely offset by growth in average basket size.
Notably, our average basket size at year-end was approximately $16 and consisted of nearly six items.
This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and a degree of inflation.
In addition, we are pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years in an effort to provide customers with an even wider variety of options.
And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two-year basis.
We are also pleased with the retention rates of new customers acquired in 2020, which continues to exceed our initial expectations.
For the full year, net sales increased 1.4% to $34.2 billion, which was on the high end of our full year guidance and on top of a robust 21.6% increase in fiscal 2020.
Comp sales for the year decreased 2.8%, which translates into a very healthy 13.5% increase on a two-year stack basis.
In total, we completed more than 2,900 real estate projects during the year, including the opening of our 18,000th Dollar General store and 50 stand-alone pOpshelf locations as we continue to build and strengthen the foundation for future growth.
From a position of strength, we also made targeted investments in key areas, including the acceleration of our pOpshelf concept, as well as our most recent initiatives focused on health and international expansion as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.
Overall, we are proud of our fourth quarter and full year results, which further validate our belief that our strategic actions and targeted investments positions us well for continued success while supporting long-term shareholder value creation.
We operate in one of the most attractive sectors in retail.
And while our mission and culture remain unchanged as the foundation for our success, with our robust portfolio of short and long-term initiatives, I believe Dollar General is a much different company and is in a much stronger competitive position than it was just a few short years ago.
As a result, I've never felt better about the underlying business model, and we are excited about the enormous growth opportunities we see ahead.
Now, that Todd has taken you through a few highlights of the quarter and the full year, let me take you through some of its important financial details.
Unless we specifically note otherwise, all comparisons are year over year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit.
As a reminder, gross profit in Q4 2020 and fiscal year 2020 were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28%, respectively, in our combined non-consumables categories.
For Q4 2021, gross profit as a percentage of sales was 31.2%, a decrease of 131 basis points.
The decrease compared to Q4 2020 was primarily attributable to a higher LIFO provision, increased transportation and distribution costs and a greater proportion of sales coming from our consumables category.
Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million.
These factors were partially offset by a reduction in markdowns as a percentage of sales in higher inventory markups.
SG&A as a percentage of sales was 22% in the quarter, a decrease of 16 basis points.
This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane-related expenses and a reduction in incentive compensation.
These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor, occupancy costs, and depreciation and amortization.
Moving down the income statement.
Operating profit for the fourth quarter decreased 8.7% to $797 million.
As a percentage of sales, operating profit was 9.2%, a decrease of 116 basis points.
Our effective tax rate for the quarter was 21.2% and compares to 22.7% in the fourth quarter last year.
Finally, earnings per share for the fourth quarter decreased 1.9% to $2.57, which reflects a compound annual growth rate of 10.6% over a two-year period.
Turning now to our balance sheet and cash flow, which remained strong and provided us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders.
Merchandise inventories were $5.6 billion at the end of the year, an increase of 7% overall and 1.4% on a per store basis.
Importantly, as Todd noted, we have begun to see a meaningful improvement in our in-stock levels since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to serve our customers with the products they want and need.
In 2021, we generated significant cash flow from operations totaling $2.9 billion.
Total capital expenditures for the year were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 2.2 million shares of our common stock for $490 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million.
At the end of the year, the remaining share repurchase authorization was $2.1 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.
Moving to our financial outlook for fiscal 2022.
First, I want to remind everyone that our fiscal year 2022 includes a 53rd week which will occur during the last period of the fourth quarter.
We also continue to operate in a time of uncertainty regarding, among other things, the impacts on the business arising from the current geopolitical conflict and the recovery from the global COVID pandemic, including recovery of the U.S. economy, changes in consumer behavior, labor markets and government stimulus and assistance programs.
Despite these uncertainties, including cost inflation, ongoing pressure in the supply chain and rising fuel costs, we are pleased to provide annual guidance that reflects our confidence in the business.
With that in mind, we expect the following for 2022.
Net sales growth of approximately 10%, including an estimated benefit of approximately two percentage points from the 53rd week, same-store sales growth of approximately 2.5%, and earnings per share growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 53rd week.
Our earnings per share guidance assumes an effective tax rate range of 22.5% to 23%.
We also expect capital spending to be in the range of $1.4 billion to $1.5 billion, which includes the impact of increases in the cost of certain building materials, as well as continued investment in our strategic initiatives and core business to support and drive future growth.
With regards to shareholder returns, our board of directors recently approved a quarterly dividend payment of $0.55 per share, which represents an increase of 31%.
We also plan to repurchase a total of approximately $2.75 billion of our common stock this year, reflecting our continued strong liquidity position, the benefit from the 53rd week and our confidence in the long-term growth opportunity for our business.
Let me now provide some additional context as it relates to our outlook.
In terms of quarterly cadence, we anticipate both comp sales and earnings per share growth to be much stronger in the second half of the year than the first half.
As a reminder, we are lapping a significant stimulus benefit from Q1 2021, including gross margin expansion of 208 basis points.
We also anticipate ongoing cost inflation, including elevated supply chain and fuel costs.
While we do not typically provide quarterly guidance, given the unusual lap in the significant inflationary environment in Q1, we are providing more specific detail on our expectations for the first quarter.
To that end, we expect a comp sales decline of 1% to 2% in Q1 with an earnings per share in the range of approximately $2.25 to $2.35.
Turning now to gross margin for 2022.
We expect to continue realizing benefits from our initiatives, including DG Fresh and NCI.
In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet, could drive additional benefits over the year despite continued cost pressures in the near term.
Partially offsetting some of these benefits are rising fuel costs, as well as an expected return to recent historical rates of markdowns and shrink, all of which are expected to be headwinds in 2022.
With regards to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts.
However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2022 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track.
And we believe these savings in 2022 will offset a portion of an expected increase in wage inflation.
In summary, we are proud of our fourth quarter and full year results in 2021, which are a testament to the perseverance and execution by the team.
Looking ahead, we are excited about our plans for 2022, including our outlook for sales and earnings per share growth, as well as our planned significant returns to shareholders via an increased dividend payout and increased share repurchases.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in our business and employees for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives, including our plans for 2022.
Our first operating priority is driving profitable sales growth.
We have a growing portfolio of initiatives which are contributing to our strong results, as well as strengthening the foundation for future growth.
Let me take you through some of the recent highlights, as well as some of our next steps.
Starting with our non-consumables initiative, or NCI, which was available in more than 11,700 stores at the end of 2021.
We continued to be very pleased with the strong sales and margin performance we are seeing across the NCI store base.
Notably, NCI stores outperformed non-NCI stores in both average ticket and customer traffic, driving an incremental 2.5% total comp sales increase on average in NCI stores, along with a meaningful improvement in gross margin rate.
We expect to realize ongoing sales and margin benefits from NCI in 2022, and we are on track to complete the rollout across nearly the entire chain by the end of the year.
Moving to our newest store concept, pOpshelf, which further builds on our success and learnings with NCI.
As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value, with the vast majority of our items priced at $5 or less.
During the quarter, we opened 25 new pOpshelf locations, bringing the total number of stores to 55 and exceeding our initial goal of 50 stores.
Additionally, we opened 11 new store within a store concepts during Q4, bringing the total number of Dollar General Market stores with a smaller-footprint pOpshelf store included to a total of 25 at the end of the year.
And we continue to be pleased with the results.
In 2022, we plan to nearly triple the pOpshelf store count and open up to an additional 25 store-within-a-store concepts, which would bring us to a total of more than 150 stand-alone pOpshelf locations and a total of approximately 50 store-within-a-store concepts.
We continue to anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the average gross margin rate for these stores to exceed 40%.
In addition to the early success of pOpshelf, we have been able to take some of our learnings and apply them in our Dollar General store base, particularly in further enhancing our nonconsumables offering.
Overall, we are very pleased with the results from this unique and differentiated concept, and we are excited about our goal of approximately 1,000 pOpshelf locations by year-end 2025.
Turning now to DG Fresh, which is a strategic, multi-phased shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas.
As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to more than 18,000 stores from 12 facilities.
The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing.
Notably, DG Fresh was a meaningful positive contributor to our gross margin rate in 2021, and we expect to see continued benefits in 2022.
Another important goal of DG Fresh is to increase sales in our frozen and refrigerated categories.
We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department.
In fact, our perishables department had a high single-digit comp increase in Q4 and contributed more comp sales dollars than any other department for both Q4 and the full year.
Importantly, the sales penetration of these categories has increased to approximately 9% as compared to approximately 8% prior to the rollout of DG Fresh.
In 2022, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale and deliver an even wider product selection.
And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time.
To that end, at the end of Q4, we offered produce in more than 2,100 stores, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022.
Finally, DG Fresh has also extended the reach of our cooler expansion program.
During 2021, we added more than 65,000 cooler doors across our store base.
In 2022, we again expect to install more than 65,000 additional doors as we continue to build on our multiyear track record of growth in cooler doors and associated sales.
Turning now to an update on our expanded health offering, which consists of up to 30% more feet of selling space and up to 400 additional items as compared to our standard offering.
This offering was available in nearly 1,200 stores at the end of 2021, with plans to expand to a total of more than 4,000 stores by the end of 2022.
As we move toward becoming more of a health destination, particularly in rural America, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services over time.
In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink reduction.
Our second priority is capturing growth opportunities.
Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business.
In 2021, we completed a total of 2,902 real estate projects, including 1,050 new stores, 1,752 remodels and 100 relocations.
For 2022, we remain on track to execute nearly 3,000 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations.
As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger, 8,500 square foot store format, allowing for an expanded assortment and room to accommodate future growth as we respond to our customers' desire for an even wider product selection.
Importantly, we continue to be very pleased with the sales productivity of all of our larger-format stores as average sales per square foot are about 15% above an average traditional store.
In addition to our planned Dollar General and pOpshelf growth in 2022, and included in our expected new store total, we are very excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2022.
Overall, our real estate pipeline remains robust with more brick-and-mortar stores than any retailer in the country.
And we are excited about our ability to capture significant growth opportunities in the years ahead.
Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
We ended 2021 with over million monthly active users on the app and expect this number to grow as we look to further enhance our digital offerings.
As with everything we do, the customer is at the center of our digital initiative.
Our partnership with DoorDash is the latest example of these efforts as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less.
This offering was available in more than 10,700 stores at the end of Q4, and we are very pleased with the early results, including our ability to generate profitable transactions, as well as better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base.
In addition, our DG Media Network is becoming increasingly more relevant in connecting our brand partners with our customers.
To that end, we significantly grew the reach of this network in 2021, increasing from 6 million unique active profiles to more than 75 million, enabling our vendors to now reach over 90% of our DG customers through the DG Media Network.
After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond as we expand the program and enhance the value proposition for both our customers and brand partners while increasing the overall net financial benefit for the business.
Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
And we are pleased with the growing engagement we are seeing across our digital properties.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending which continues to govern our disciplined approach to spending decisions.
This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset.
Notably, the Save to Serve program contributed more than $800 million in cumulative cost savings from its inception in 2015 through the end of 2021.
Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates.
Self-checkout was available in more than 6,100 stores at the end of 2021.
We continue to be pleased with our results, including strong and growing customer adoption rates and high scores on speed and ease of checkout.
In 2022, we plan to expand this offering to a total of up to 11,000 stores by the end of the year as we look to further extend our position as an innovative leader in small box discount retail.
Looking ahead, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders in 2022.
When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail associates and leaders.
I also want to highlight our growing private fleet, which consisted of more than 700 tractors and accounted for approximately 20% of our outbound transportation fleet at the end of 2021.
We are focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors, we expect will account for approximately 40% of our outbound transportation fleet by the end of the year.
Importantly, we save an average of 20% of associated costs every time we replace a third-party tractor with one from our private fleet.
Moving forward, we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational control in our supply chain while further optimizing our cost structure.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we created thousands of new jobs in 2021, providing career growth opportunities for existing associates and the start of a career for many others.
In 2022, we now expect to create more than 10,000 net new jobs as a result of our continued growth.
Our internal promotion pipeline remains robust, as evidenced by our internal placement of more than 75% of our store associates at or above the lead sales associate position.
We also continue to innovate on development for our teams to provide ongoing opportunities for career advancement, and in turn, meaningful wage growth.
These investments include offering an enhanced college tuition benefit for our associates and their families, as well as continuing to facilitate driver training programs for associates who would like to become drivers in our private fleet.
In addition to our focus on development, we continue to focus on further enhancing the associate experience and our strong workplace culture.
Collectively, these investments continue to yield positive results across our organization, including healthy applicant flow and strong critical staffing levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we made significant progress against our operating priorities and strategic initiatives in 2021.
These efforts have further strengthened our foundation and position heading into 2022 as we continue to drive long-term sustainable growth.
In closing, I'm proud of the team's strong and resilient performance in 2021.
As we enter 2022, we are laser-focused on executing and delivering our robust plans, which we believe will further enhance our unique combination of value and convenience for our customers while delivering strong returns for our shareholders.
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q4 same store sales fell 1.4 percent.
sees q1 earnings per share $2.25 to $2.35.
q4 earnings per share $2.57.
q4 sales rose 2.8 percent to $8.7 billion.
q4 same-store sales decreased 1.4%; increased 11.3% on a two-year stack basis.
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Should one more of our risk or assumptions prove incorrect, or should this information be changing, the results may differ significantly from results expressed or implied in these communications.
In addition, we may use certain non-GAAP financial measures in this conference call.
Just a note on the 10-Q availability, we've been attempting to file the 10-Q with the SEC since 5:00 p.m. yesterday, but an SEC filing system breach has prevented the filing from being uploaded and accessible.
We expect this will be resolved shortly.
These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes.
I hope and pray that everyone's family is healthy and safe.
We are truly in a challenging and unprecedented time as we continue to manage through the COVID-19 pandemic.
During this time, the safety of our team members has been our top priority.
I have to say, I'm so proud of the men and women of MasTec, their sacrifices, resilience, creativity and commitment have been inspiring.
Millions of families throughout the U.S. rely on the power, communication, entertainment and other services we help our customers provide.
First, a quick recap of our second quarter.
Revenue for the quarter was $1.569 billion.
Adjusted EBITDA was $166 million.
Adjusted earnings per share was $0.95.
Cash flow from operations was roughly $295 million, and year-to-date cash flow from operations was $497 million.
And backlog at quarter end was a second quarter record at $8.2 billion.
We had a solid second quarter, meeting our revenue guidance and exceeding our guidance for EBITDA and EPS.
It's important to keep in mind that most of our services have been deemed essential under state and local pandemic mitigation orders, and all of our business segments have continued to operate.
We are managing through the COVID-19 challenges, including: first and foremost, the safety of our employees and their families; and other challenges, including governmental permitting, crew social distancing mitigation and the impact that, that may have on project schedules and any potential project delays.
Our 2020 guidance, which George will cover in detail, assumes the impact of these risks based on the best information we have as of today.
While I'll cover our segments in more detail in a minute, I'd like to focus on how I feel MasTec is positioned for long-term success.
I'm extremely optimistic about our future prospects.
We are very well positioned to take advantage of the continued and growing investment in telephony networks, including Internet connectivity and 5G, the continued investment in grid reliability in the energy sector and the growth of the clean energy sector.
As it relates to clean energy, during the second quarter, we made a decision to rebrand our Power Generation and Industrial group to Clean Energy and Infrastructure.
We believe this better represents what we are actually doing today as this segment becomes a much larger and important part of MasTec's future.
As one of the nation's leading clean energy construction companies, we have experienced significant growth over the last few years, growing revenues from $300 million in 2017 to over $1.5 billion of expected revenues this year.
We expect continued growth in 2021 and believe that, by 2022, this segment will exceed the size of what our Oil and Gas segment is today.
Today, we also announced record Oil and Gas backlog levels.
I'd like to offer some color on this segment's backlog.
First, we are highly confident that all of the projects in our current backlog will be built.
We believe this backlog represents our strength in the market and our ability to offer value while still attaining solid margins.
We view this level of backlog as a significant competitive advantage as we do believe new work will slow down through the first half of 2021.
There will still be new work awarded but less of it.
Basically, if you don't have a lot of backlog today, the next 1.5 years will be tough.
We do expect an improvement in the market as conditions improve and demand increases in a post-COVID environment.
In the meantime, between what we have in backlog and other work we have been negotiating with our customers, we believe revenue levels for our Oil and Gas segment in 2021 will be similar to 2020 levels.
While George will cover guidance in detail later, we have lowered our annual revenue guidance in Oil and Gas based on the delay of two projects, which have been impacted by regulatory and judicial issues.
As I think about our 2020 guidance, I think there are some important takeaways to highlight.
First, in the midst of a pandemic, our revenue guidance for 2020 is only down about $200 million or 3% less than 2019 full year revenue.
Within that, our Oil and Gas revenue expectation is that it will be down approximately $800 million in 2020 from 2019.
That means the rest of our segment revenues will be up approximately $600 million versus last year in the middle of a challenging environment.
More importantly, margins on a year-over-year basis are expected to be relatively flat at 11.4% EBITDA margins versus 11.7% last year.
Between both the pandemic challenges and the impacts of demand and regulatory issues on our oil and gas markets, I think our financial guidance demonstrates the strength of our diversified portfolio and the efforts we have made over the years of having a strong, diversified service offering.
Now I'd like to cover some industry specifics.
Our Communications revenue for the quarter was $654 million.
More importantly, margins came in strong, and we're up 370 basis points year-over-year and 380 basis points sequentially.
We are seeing strong demand from our customers as they work to meet the demands in this changing environment.
COVID has helped highlight the importance of our nation's telecommunications networks, and our customers are working hard at providing their customers with reliable and high-speed connectivity.
We expect this trend to continue and believe there will be a renewed focus on continuing fiber expansions in the residential markets.
This, coupled with the continued opportunities around 5G deployment, provide us with significant opportunities to grow our business.
While margins were much improved in the quarter, our revenue has been negatively impacted by COVID.
Our installation business has been impacted by strict mitigation efforts related to entering customers' homes, and we continue to have a couple of large markets where work has been very limited.
Our guidance assumes these impacts continue through year-end and also include the potential impacts of local permitting delays as some areas slow reopenings or even move back to more strict closures.
We have been working with these cities and municipalities to bolster remote permitting capabilities.
Revenue in our Electrical Transmission segment was $124 million versus $100 million in last year's second quarter.
While margins have been improving over the course of the last year, we had a project that negatively impacted margins based on the change in environmental requirements.
We believe these increased costs are mostly recoverable and expect to benefit in the second half of the year.
Backlog improved both year-over-year and sequentially, and we made good progress on diversification within this segment.
We have been awarded four new MSAs, or master service agreements, as this has been a focus for us to drive consistent recurring work.
We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewables and system hardening.
Between our strong backlog and the opportunities we see in the market, we expect to be able to deliver both strong revenue growth, coupled with margin expansion in the coming years.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $426 million for the second quarter versus $250 million in the prior year, a 70% year-over-year increase.
We continue to achieve significant growth rates in this segment, and backlog at quarter end exceeded $1 billion.
Margins for this segment were strong at 7.1%, and we continue to expect margins to improve over 2019 by over 100 basis points.
The size and scope of the opportunities we are seeing in this segment continues to grow.
We have made significant investments in this segment to profitably grow our business through organic opportunities.
We continue to add talent and resources to meet the increasing demand for our services.
While we've highlighted this segment more over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio.
Between both the opportunities provided by future clean energy initiatives and the potential for an infrastructure bill after the election, we believe this segment provides significant opportunities for long-term growth.
Our Oil and Gas pipeline segment revenue was down, as expected.
Second quarter revenue was $369 million compared to revenues of $937 million in last year's second quarter.
We ended second quarter with backlog of almost $2.7 billion.
As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines, with the majority of our business being tied to natural gas.
We have also focused on growing both our distribution and integrity business over the last few years, and we are encouraged by our progress.
To recap, we had a good second quarter and are confident we are mitigating the effects and impacts of the COVID-19 virus.
While times are challenging and uncertain, opportunities always arise from these challenges.
Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them.
In that lies our opportunity.
Our greatest strength has been to understand the trends in our industry and our customers' needs.
Our ability to provide services, whether existing or new, has always been a strength.
I'm excited for what the future holds for MasTec.
Keep up the good work.
Today, I'll cover second quarter results, our guidance expectation for the balance of 2020, including the ongoing impact of the COVID-19 pandemic, as well as our strong cash flow performance, capital structure and liquidity.
As Marc indicated at the beginning of our call, the discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, our second quarter 2020 results were better than expected, with adjusted EBITDA being the high end of our guidance expectation by $6 million, and adjusted diluted earnings per share exceeding the high end of our guidance expectation by $0.06.
These results also exceeded Street consensus, with adjusted EBITDA of $166 million beating Street consensus estimates by $14 million, and adjusted diluted earnings per share of $0.95 beating Street consensus by $0.15.
Second quarter 2020 results also continue our strong cash flow performance, generating $293 million in cash flow from operations and reducing sequential total debt levels by $177 million.
Our first half 2020 cash flow from operations of $497 million represents a record performance level for MasTec.
And we reduced total debt levels by $190 million during the first half of 2020 despite investing approximately $130 million in share repurchases and M&A.
This strong performance gives us confidence in our expectation that annual 2020 cash flow from operations will be at a new record level, approximating $600 million.
Subsequent to quarter end, we took advantage of favorable credit market conditions to refinance our four 7/8% $400 million senior unsecured notes, which we have called for redemption in mid-August.
Due to the strong demand for the new issue, our new senior unsecured notes offering was upsized by 50% to $600 million, with a lower interest rate of 4.5% and extended maturity to 2028 and overall better terms.
Our new senior notes offering is expected to close in early August.
I will make further remarks on our capital structure later, but suffice it to say that our cash flow, capital structure and liquidity are in excellent shape, even stronger than last quarter.
And this combination affords us full flexibility to invest in strategic opportunities as well as giving us a strong advantage as we navigate through the uncertain economic climate resulting from the COVID-19 pandemic.
Now I will cover some highlights regarding our second quarter segment results and guidance expectations for the balance of 2020.
Second quarter 2020 Communications segment revenue of $654 million was basically flat with the same period last year.
Second quarter 2020 Communications segment adjusted EBITDA margin rate was 11.7% of revenue, representing a sequential increase of 380 basis points when compared to the first quarter of 2020 and a 370 basis point improvement when compared to last year's second quarter.
As Jose mentioned in his remarks, this performance level includes disruption and lost revenue related to the COVID-19 pandemic as we had selected markets in which construction work slowed and, in some cases, stopped due to local municipality permitting approval delays.
We believe that the evolution toward 5G technology, coupled with increasing remote workplace and education trends in the U.S. because of the COVID-19 pandemic, will drive significant long-term demand for our wireless and wireline services in 2021 and beyond as the COVID-19 pandemic effects begin to normalize.
As we look to the remainder of 2020, we expect second half 2020 Communications segment revenue levels will approximate first half 2020 revenue levels, with some continued disruption and lost revenue primarily from local municipality permitting issues related to the COVID-19 pandemic.
We are also increasing our annual 2020 Communications segment adjusted EBITDA margin rate expectation by approximately 100 basis points and now expect that Communications segment annual 2020 adjusted EBITDA margin rate will approximate 10% of revenue, which equates to a 200 basis point improvement over last year.
While we are pleased with the expected 200 basis point improvement in 2020 Communications segment adjusted EBITDA margin rate, especially in light of challenging conditions in 2020, it is important to note that this performance level still leaves ample room for future improvement in 2021 and beyond as pandemic conditions normalize and telecommunications market trends continue to develop.
As expected and previously communicated, second quarter 2020 Oil and Gas segment revenue of $369 million decreased 61% compared to the same period last year based on project start time.
Second quarter 2020 Oil and Gas segment adjusted EBITDA margin rate was 21.7% of revenue, continuing our strong performance trend with this performance, including the benefit of project mix comprised of reduced levels of lower-margin, cost-plus activity and continued strong project productivity on numerous smaller pipeline projects.
During the second quarter, we were awarded approximately $450 million in new Oil and Gas project awards, bringing the total of new backlog additions during the first half of 2020 to approximately $1.5 billion.
Second quarter 2020 Oil and Gas segment backlog of $2.66 billion represented a new all-time segment backlog record.
First half 2020 Oil and Gas segment award activity gives us strong visibility for solid project activity over the next 12 to 18 months.
That said, predicting the project start timing has become more difficult due to the impact of regulatory and judicial challenges.
Given the size of our large projects, a 30-day delay in project activity could impact monthly revenue by as much as $100 million to $150 million.
Our current annual 2020 revenue guidance expectation incorporates revised project start dates for two large projects with late summer, early fall start dates.
This results in annual 2020 Oil and Gas segment revenue now expected to approximate $2.3 billion, with solid backlog activity shifting into 2021.
Given that the majority of project activity shifting to 2021 is related to lower-margin, cost-plus activity, we are increasing our annual 2020 Oil and Gas segment adjusted EBITDA margin rate expectation from the high teens to the low 20% range.
Second quarter 2020 Electrical Transmission segment revenue increased approximately 24% compared to the same period last year to approximately $124 million, and segment adjusted EBITDA was a slight loss of approximately $3 million.
As Jose indicated, during the quarter, we experienced production inefficiencies as we worked toward completion of a project.
The project is approximately 90% complete as of the end of the second quarter, and we expect to recover a portion of these inefficiencies from our customer during the back half of 2020.
As we look toward the remainder of 2020, we expect Electrical Transmission segment second half 2020 revenue will approximate first half 2020 levels, with second half 2020 adjusted EBITDA margin rate for this segment expected in the high single-digit range.
Our second quarter 2020 electrical distribution segment backlog of $551 million increased sequentially 27% or $117 million when compared to the first quarter, and this supports our continued belief that end-market conditions for this segment are supportive for strong 2021 revenue and adjusted EBITDA growth in this segment.
Second quarter 2020 Clean Energy and Infrastructure segment revenue of $426 million increased approximately 70% compared to the same period last year.
Second quarter 2020 adjusted EBITDA margin rate was 7.1% of revenue, a sequential increase of 540 basis points relative to the prior quarter and 360 basis points compared to the same period last year.
We are pleased with the second quarter 2020 adjusted EBITDA margin rate improvement in this segment, which begins to reflect our longer-term expectation of potential for this segment in the high single-digit range.
As Jose indicated in his remarks, we expect strong annual 2020 revenue growth and improved adjusted EBITDA margin rate performance when compared to last year, with continued growth expectations into 2021 and a very active clean energy market.
Now I will discuss a summary of our top 10 largest customers for the 2020 second quarter period as a percentage of revenue.
AT&T revenue, derived from wireless and wireline fiber services, was approximately 16% and install-to-the-home services was approximately 3%.
On a combined basis, these three separate service offerings totaled approximately 19% of our total revenue.
As a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe.
Permian Highway Pipeline was 10% of revenue.
Verizon, comprised of both wireline fiber and wireless services, was 6%.
Iberdrola, Comcast and Xcel Energy were each 5%.
And NextEra Energy, NG, Duke Energy and Enterprise Products were each at 4%.
Individual construction projects comprised 64% of our revenue, with master service agreements comprising 36%, once again highlighting that we have a substantial portion of our revenue derived on a recurring basis.
Lastly, it is worth noting, as we operate in a COVID-19-induced period of macroeconomic uncertainty, that all of our top 10 customers, which represented over 66% of our second quarter revenue, have investment-grade credit profiles.
Now I'll discuss our cash flow, liquidity, working capital usage and capital investments.
During the second quarter, we generated $293 million in cash flow from operations and ended the quarter with net debt, defined as total debt less cash of $1.19 billion, which equates to a very comfortable book leverage ratio of 1.6 times.
We ended the quarter with DSOs at 90 days compared to 102 days last quarter.
During the first half of 2020, we generated a record-level $497 million in cash flow from operations, which allowed us to reduce our total debt levels by approximately $190 million, while investing in approximately $130 million in share repurchases and M&A.
During the first half of 2020, we repurchased approximately 3.6 million shares, or approximately 5% of our outstanding share base, with the vast majority of this activity occurring in the first quarter.
Regarding our share repurchase program, we expect to opportunistically invest in this program as conditions warrant, while also prudently managing our balance sheet.
We currently have $158 million in open repurchase authorizations.
And as of today, have not executed any share repurchases during the third quarter.
We are fortunate that our business operations profile typically generates significant cash flow from operations, affording us the flexibility to invest strategically in efforts to maximize shareholder value.
Based on our strong first half 2020 cash flow performance, we are increasing our expectation for annual 2020 cash flow from operations to approximate $600 million, a new record level.
This cash flow performance expectation incorporates our view that second half 2020 revenue levels will accelerate, thereby increasing our working capital investment as we close out the 2020 year.
As previously indicated, we opportunistically took advantage of market conditions after the end of the second quarter to further strengthen our capital structure through a successful offering of $600 million in new senior unsecured notes, maturing in 2028 with a favorable 4.5% coupon.
This offering is expected to close in early August and will allow us to redeem our existing $400 million four 7/8% senior notes at a lower interest rate, extend our maturity profile and will increase our overall liquidity by approximately $200 million, which should approximate $1.3 billion post closing.
In summary, our record 2020 cash flow expectation, coupled with solid long-term capital structure, low interest rates, no significant near-term maturities and ample liquidity, places MasTec's balance sheet in an extremely strong position.
Regarding capital spending, during the second quarter, we incurred net cash capex, defined as cash capex net of equipment disposals, of approximately $63 million, and we incurred an additional $80 million in equipment purchases under finance leases.
We currently anticipate incurring approximately $175 million in net cash capex in 2020, with an additional $115 million to $135 million to be incurred under finance leases.
Moving to our current 2020 guidance.
Our third quarter 2020 revenue expectation is approximately $1.9 billion, with adjusted EBITDA guidance approximately $254 million or 13.4% of revenue and adjusted earnings per share guidance at $1.67.
We are projecting annual 2020 revenue to approximate $7 billion, with adjusted EBITDA expected to approximate $800 million or 11.4% of revenue and adjusted diluted earnings per share to approximate $4.93.
These guidance expectations incorporate the impact of projected lower second half 2020 Oil and Gas segment revenue as regulatory delays on two large projects are expected to lower 2020 project activity and shift awarded work into 2021, as well as improved 2020 EBITDA margin rate expectations in our Oil and Gas and Communications segments.
As we have previously provided some color as to our 2020 segment expectations, I will now briefly cover some other guidance expectations, as highlighted in our release yesterday.
Based on our expected strong cash flow, lower nominal interest rates and our recent senior notes offering, we expect annual 2020 interest expense levels to approximate $63 million, with this level only including currently executed share repurchase activity.
Our estimate for full year 2020 share count is now 73.6 million shares.
It should be noted that, for valuation modeling purposes that based on the timing of repurchases, our year-end 2020 share count will approximate 73 million shares, and that's inclusive of the full impact of the repurchases made to date.
We expect annual 2020 depreciation expense to approximate 3.7% of revenue due to the combination of lower expected 2020 revenue levels and timing impact of capital additions and acquisition activity.
Lastly, we continue to expect that our annual 2020 adjusted income tax rate will approximate 24%.
This expectation includes our existing first half 2020 adjusted tax rate as well as the expectation that quarterly adjusted income tax rates for the balance of 2020 will approximate 26%, and this blend leads to an annual 2020 adjusted tax rate that approximates 24%.
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sees q3 2020 revenue about $1.9 billion.
sees q3 2020 adjusted non-gaap earnings per share $1.67.
sees fy 2020 adjusted non-gaap earnings per share $4.93.
mastec - covid-19 pandemic has had a negative impact on co's operations and expects some continued negative impact for remainder of 2020.
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I'm Dan Glaser, President and CEO of Marsh McLennan.
Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman.
Nick has led many of Oliver Wyman's major practices in his 23 years with the business and I look forward to seeing Oliver Wyman continue to grow and thrive under his leadership.
Marsh McLennan had an outstanding second quarter.
We are well positioned in benefiting from the abundance of opportunities.
We are stronger and have broader capabilities post the JLT acquisition.
We are benefiting from what may be the strongest economic rebound in nearly four decades, led by our largest region, the U.S. There is high demand for our advice and solutions in this time of uncertainty and in the face of challenging market conditions.
We are seeing a flight to quality and stability, which is contributing to high levels of new business growth and client retention and is helping us to attract talent.
And there is a long runway for growth as we think about major protection gaps around the world, new emerging risks, digitization, workforce of the future and underpenetrated markets such as small commercial.
We are focused on capitalizing on these opportunities, and I am proud of our execution in the quarter.
We generated record second quarter revenue and earnings, the best underlying growth of any quarter in two decades, and we are poised for an excellent year.
The strength of our results was broad-based with each of our businesses and virtually all of our major geographies seeing an acceleration in growth.
Our adjusted earnings per share increased by an impressive 33%, and we generated margin expansion despite challenging expense comparisons.
As we look ahead, the economic outlook for the U.S. and most of the major countries we operate in is encouraging.
However, the pandemic is not over yet.
Vaccine hesitancy creates risk and there are many parts of the world where vaccine availability is limited.
As a result, much of the world is experiencing another wave of the pandemic with rising case counts due to the spread of variants.
In addition, the shape of this economic recovery is very different from any we have seen before.
Some industries are thriving, while others are being impacted by supply chain disruption, inventory issues and labor shortages.
Navigating this dynamic landscape is challenging, even confounding for some businesses.
The growth opportunity for Marsh McLennan is significant during this time of uncertainty and recovery.
We are aiding and guiding our clients through the complexities of the new normal as well as helping them tackle issues like climate risk, cyber, diversity and inclusion, employee safety and well-being and workforce disruption.
Our ability to provide differentiated high-quality solutions to our clients rest on our talent and expertise.
Our colleagues are our Number one competitive advantage.
And with the potential for industry consolidation, we see a meaningful opportunity to invest in hiring and deepen our world-class talent pool.
We have strong momentum.
And as we mentioned last quarter, our efforts are focused on resurgence and expansion.
Let me provide some examples of how we are helping our clients address complex issues of the day, specifically two major challenges: cybersecurity and climate change.
Cybersecurity is one of the greatest risks facing society.
Supply chain and ransomware attacks continue to rise with a number of recent high-profile attacks affecting organizations across all sectors and segments from technology to critical infrastructure and healthcare.
Marsh & McLennan is helping clients manage cyber risk.
Increasingly, we are bringing our businesses together to leverage all of our expertise, data and relationships with public and private partners to help clients become more resilient.
Our growth in participation in cyber extends well beyond the placement of insurance, under the leadership of Tom Doyle, we are leveraging the collective capabilities of Marsh, Guy Carpenter and Oliver Wyman to bring cyber solutions from across our enterprise to clients.
Not only are we helping clients with risk transfer through our insurance businesses, but through our cyber risk assessment tools, we help clients measure and quantify their cyber risk exposure to better inform decisions about cybersecurity, risk mitigation and transfer strategies.
We also help clients with incident response before, during and after events as well as part of our broader efforts to help clients build resilience in the face of a constantly evolving threat landscape.
A second defining challenge of our time is climate change.
Climate and the broader topic of ESG are complex multidimensional challenges, virtually all companies face.
The threats to the changing time may present obvious questions for companies touching everything from strategy to resilience to their workforce and how they communicate.
Even if climate change is a long-term threat, the issue is proximate and has immediate consequences as firms deal with calls for action, strategies to respond and more input from various stakeholders.
Led by Nick Studer, we are bringing together our businesses to help our clients anticipate climate risks and opportunities.
For example, Oliver Wyman is working with our insurance businesses to support clients in the transition to a low-carbon economy and manage climate risk.
We are assisting clients with the development of carbon-light business models and to derisk investment in sustainable technologies.
At Marsh and Guy Carpenter, we are helping to develop innovative climate solutions to bridge protection gaps.
We assist clients with stress testing models, outline the impact of climate change, and providing risk management and insurance services to protect against climate impacts.
And Mercer's responsible investment business helps steward the fiduciaries of investment pools understand how a change in climate could impact investment returns in the future and anticipate them today.
Overall, we are uniquely positioned to help our clients with their most pressing challenges.
Let me spend a moment on current P&C insurance market conditions.
The second quarter marks the 15th consecutive quarter of rate increases in the commercial P&C insurance marketplace.
The Marsh Global Insurance Market Index showed price increases of 13% year-over-year versus 18% in the first quarter.
The pace of price increases continue to moderate but still remains high, reflecting elevated loss activity and concerns about inflation and low interest rates.
Global property insurance was up 12% and global financial and professional lines were up 34%, driven in part by steep cyber increases, while global casualty rates are up 6% on average and U.S. workers' compensation rates declined modestly in the quarter.
Keep in mind, our index skews to large account business.
However, U.S. small middle market insurance pricing continues to rise as well, although the magnitude of price increases is less with the large complex accounts.
Guy Carpenter's global property catastrophe rate online index increased 6% at midyear.
In the second quarter, the market was more orderly and balanced than a year ago, reflecting adequate capital and an increased willingness to deploy capacity.
Measured and moderate single-digit rate increases were typical after two years of double-digit rate increases.
However, programs that had significant losses saw higher increases and capacity remains constrained on certain lines of business, most notably, cyber.
Concerns remain around inflation, losses in certain lines, extreme weather events and the beginning of a new hurricane season.
It is in times like these where our expertise and capabilities shine.
We are working hard to help our clients navigate the current environment.
Now let me turn to our fantastic second quarter financial performance.
We generated adjusted earnings per share of $1.75, which is up 33% versus a year ago, driven by strong top line growth and continued low levels of T&E.
Total revenue increased 20% versus a year ago and rose 13% on an underlying basis, the highest quarterly growth in two decades.
Underlying revenue grew 13% in RIS and 12% in consulting.
Marsh grew 14% in the quarter on an underlying basis, the highest quarterly underlying growth in nearly two decades and benefited from stronger business and renewal growth.
Guy Carpenter grew 12% on an underlying basis in the quarter, continuing its string of excellent results.
Mercer underlying revenue grew 6% in the quarter, the highest in almost a decade.
Oliver Wyman posted record reported underlying revenue growth of 28%.
Overall, the second quarter saw adjusted operating income growth of 24%, and our adjusted operating margin expanded 90 basis points year-over-year.
As we look out for the rest of 2021, we are well positioned.
With 9% underlying revenue growth year-to-date, our full year growth will be strong.
We expect favorable market dynamics to persist for at least the remainder of the year.
Although the pace of growth could moderate versus the second quarter as year-over-year comparisons become more challenging.
We also expect to generate margin expansion for the full year and strong growth in adjusted EPS.
Our results were excellent with record second quarter revenue to earnings, the best quarterly underlying growth in two decades, meaningful margin expansion, and significant growth in adjusted earnings.
Highlights from our second quarter performance included the strongest underlying growth at Marsh since the first quarter of 2003; the strongest at Guy Carpenter in 15 years; solid rebound at 6% at Mercer; and record reported underlying growth at Oliver Wyman.
Second quarter growth in adjusted earnings per share was also impressive, rising at the fastest pace of any quarter in more than a decade.
Consolidated revenue increased 20% in the second quarter to $5 billion, reflecting underlying growth of 13%.
Operating income in the quarter was $1.2 billion, an increase of 39% over the prior year.
Adjusted operating income increased 24% to $1.2 billion, and our adjusted operating margin increased 90 basis points to 26.4%.
GAAP earnings per share was $1.50 in the quarter and adjusted earnings per share increased 33% to $1.75.
For the first six months of 2021, underlying revenue growth was 9%, and adjusted operating income grew 22% to $2.6 billion.
Our adjusted operating margin increased 170 basis points.
Our adjusted earnings per share increased 26% to $3.74.
Looking at Risk Insurance Services.
Second quarter revenue was $3.1 billion, up 21% compared with a year ago or 13% on an underlying basis.
Operating income increased 37% to $950 million.
Adjusted operating income increased 22% to $927 million, and our adjusted operating margin expanded 30 basis points to 32.4%.
For the first six months of the year, revenue was $6.4 billion, with underlying growth of 10%.
Adjusted operating income for the first half of the year increased 19% to $2 billion with a margin of 34.5%, up 110 basis points from the same period a year ago.
At Marsh, revenue in the quarter was $2.7 billion, up 23% compared with a year ago, 14% on an underlying basis.
Even excluding the impact of the revenue adjustment we reported a year ago, underlying revenue at Marsh was up 12%.
Growth in the quarter was broad-based and was driven by robust new business growth and solid retention.
The U.S. and Canada region delivered another exceptional quarter with underlying revenue growth of 15%, the highest result since we began reporting this segment.
In international, underlying growth was 13%, EMEA was up 16%, Asia Pacific was up 10% and Latin America grew 2%.
For the first six months of the year, Marsh's revenue was $5 billion, with underlying growth of 11%.
U.S. and Canada underlying growth was 12% and international was up 9%.
Guy Carpenter's second quarter revenue was $488 million, up 13% compared with a year ago or 12% on an underlying basis.
Growth was broad-based across all geographies and specialties.
Guy Partner has now achieved 7% or higher underlying growth in six of the last eight quarters.
For the first six months of the year, Guy Carpenter generated $1.4 billion of revenue and 8% underlying growth.
In the Consulting segment, revenue in the quarter was $1.9 billion, up 17% from a year ago or 12% on an underlying basis.
Operating income increased 35% to $344 million.
Adjusted operating income increased 34% to $356 million, and the adjusted operating margin expanded by 220 basis points to 19.5%.
Consulting generated revenue of $3.8 billion for the first six months of 2021, representing underlying growth of 8%.
Adjusted operating income for the first half of the year increased 31% to $726 million.
Mercer's revenue was $1.3 billion in the quarter, up 6% on an underlying basis, representing a meaningful acceleration from the first quarter.
Career grew 15% on an underlying basis, reflecting the rebound in the economy and business confidence.
Wealth increased 4% on an underlying basis, reflecting strong growth in investment management offset by a modest decline in defined benefit.
Our assets under delegated management grew to $393 billion at the end of the second quarter, up 28% year-over-year and 3% sequentially, benefiting from net new inflows and market gains.
Health underlying revenue growth was 4% in the quarter, driven by strength internationally.
Oliver Wyman's revenue in the quarter was $618 million, an increase of 28% on an underlying basis.
The second quarter results represent a sharp rebound from the contraction we saw in the second quarter last year.
For the first six months of the year, revenue at Oliver Widen was $1.2 billion, an increase of 19% on an underlying basis.
Adjusted corporate expense was $62 million in the second quarter.
Foreign exchange was a modest benefit to earnings in the quarter.
Assuming exchange rates remain at current levels, we expect FX to have a minimal impact on earnings per share for the remainder of the year.
However, the net benefit credit was $71 million in the quarter.
For the remaining two quarters of the year, we expect our other net benefit credit will be mostly consistent with the level in the second quarter.
Investment income was $19 million in the second quarter on a GAAP basis and $18 million on an adjusted basis and mainly reflects gains on our private equity portfolio.
Interest expense in the second quarter was $110 million compared to $132 million in the second quarter of 2020, reflecting lower debt levels in the period.
Based on our current forecast, we expect approximately $110 million of interest expense in the third quarter.
Our adjusted effective tax rate in the second quarter was 24.4% compared with 25% in the second quarter last year.
Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation.
Excluding discrete items, our effective adjusted tax rate was approximately 25.5%.
Our GAAP tax rate was 31.6% in the second quarter, up from 26.2% in the second quarter of 2020.
The increase reflects a $100 million impact from the revaluation of deferred tax liabilities due to an increase in the U.K. statutory tax rate that goes into effect in 2023.
Through the first half of the year, our adjusted effective tax rate was 24.4% compared with 24% last year.
Based on the current environment, we continue to expect an adjusted effective tax rate between 25% and 26% for 2021, excluding discrete items.
As we currently look out for the balance of the year, we expect our top line growth to remain strong, reflecting the economic rebound and favorable environment.
Keep in mind the second quarter faced the most favorable year-over-year comparison for revenue growth.
As we progress through the rest of the year, this, combined with continued normalization of expenses will result in more challenging comparisons.
However, our businesses have momentum, and we expect positive trends to continue, resulting in strong performance in the second half and a terrific full year.
Turning to capital management, our balance sheet.
We ended the quarter with $10.8 billion of total debt.
This reflects repayment of $500 million of senior notes in April, which completed our JLT-related deleveraging.
Our next scheduled debt maturity is in January of 2022 when $500 million of senior notes mature.
We continue to expect to deploy approximately $3.5 billion and possibly more capital in 2021, of which at least $3 billion will be deployed across dividends, acquisitions and share repurchases.
The ultimate level of share repurchases will depend on how the M&A pipeline develops.
Last week, we raised our dividend 15%, which is the largest increase since the third quarter of 1998.
We also repurchased 2.4 million shares of our stock for $322 million in the second quarter.
Our cash position at the end of the second quarter was $888 million.
Uses of cash in the quarter totaled $993 million and included $241 million for dividends, $322 million for share repurchases and $430 million for acquisitions.
For the first six months, uses of cash totaled $1.4 billion and included $478 million for dividend, $434 million for share repurchases and $473 million for acquisitions.
Overall, we had an exceptional second quarter, positioning us well to deliver strong growth in both revenue and adjusted earnings in 2021.
And operator, we are ready to begin Q&A.
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q1 adjusted earnings per share $1.99.
q1 gaap earnings per share $1.91.
q1 revenue rose 9 percent to $5.1 billion.
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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 q3 earnings per share $1.22 excluding items.
compname reports third-quarter results; record 760 net-new units and same-store sales growth of 5%.
driving system sales growth of 8%.
sustained digital system sales of over $5 billion.
q3 earnings per share $1.22 excluding items.
qtrly worldwide system sales excluding foreign currency translation grew 8%.
q3 results, led by record-breaking unit development and sustained momentum in digital sales.
qtrly worldwide system sales excluding foreign currency translation grew 8%, with kfc at 11%, taco bell at 8% and pizza hut at 4%.
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Those factors are described in Sally Beauty Holdings' filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer.
Chris will start by offering some thoughts on our very respectable fourth quarter.
He will also touch on our thoughts about the current economic environment and our outlook on fiscal year 2021 and finish with our focus on our key focus and investments in fiscal year 2021 as we move toward the completion of our transformation plan.
Aaron will then discuss our fourth quarter and full-year financial results, touch on our cash liquidity and also provide some perspective on fiscal year 2021.
Your efforts have turned us into an agile operator with real strength in both digital and physical retail.
And you have set us up well for the future.
I could not be more proud of our team and what they accomplished in spite of the countless challenges we experienced in fiscal year 2020.
During our last earnings call, we discussed the nimbleness and agility displayed by our teams and associates during the third quarter.
As our business responded to store closures and consumer uncertainty, our our teams quickly pivoted to launch new e-commerce capabilities and service models.
In June, we saw strong sales as a majority of our stores reopened.
As we moved into July and the fourth quarter, we continued to see strong sales with the business normalizing.
Of course, the environment continued to evolve around us as exemplified by California shutting down salons in many counties for parts of July and August.
All in, we delivered enterprise positive same-store sales of 1.3% with strength in retail, helping to compensate for soft, but still positive same-store sales in the wholesale business.
Here are some of the key highlights regarding our fourth quarter.
Our Sally Beauty retail business in the U.S. and Canada delivered same-store sales growth of 3.7% for the quarter.
We saw continued strength in our core category of hair color, where we continue to gain share in the retail and pro channels.
For the fourth quarter, hair color was up over 22% in Sally Beauty's U.S. and Canadian retail business, with unit growth and increased AUR.
We also saw strength in the nail category for Sally Beauty's U.S. and Canadian retail business, which was up 11%.
We continue to see solid stream and growth in our global e-commerce business.
We delivered the highest gross margin in SBH history, driven primarily by the U.S. and Canadian retail business and our strategy of Fewer, Deeper, Bigger promotions.
We grew adjusted earnings per share over the prior year by 9%.
We ended the quarter with less debt and a strong balance sheet.
And we continued our focus on cost controls, cash management and liquidity, and generated over $131 million in free cash flow.
Operationally, we also continue to invest in our business and launch new programs.
Following our fast launch of Ship-From-Store and Same-Day Delivery in Q3, we launched 'Buy Online / Pickup In-Store' at Sally Beauty and it will reach all U.S. stores nationwide within a few weeks.
We completed the national rollout of our new Private Label Rewards Credit Card Program to both Sally and BSG customers in the U.S. In just the first month, we had approvals for over 80,000 new card members with a slight weighting to the professional stylists over the retail consumer.
We launched the second addition of Cultivate, which offers financial support, product distribution and mentorship for female-owned beauty brands.
We executed a number of small acquisitions on the BSG side, gaining brand distribution rights, a small number of stores and new customers.
We expanded our Ship-From-Store capabilities to 2,400 stores in the U.S. and nine provinces in Canada.
And we successfully placed our new North Texas distribution center into service in August.
Now, let's turn to our thoughts on the current economic environment and our outlook for next year.
Looking ahead to fiscal 2021, we will have to remain agile as our consumers continue to deal with the impacts of COVID-19.
While our business is certainly defensive and more resilient than many retail peers, we expect an increased level of volatility, particularly in the first half of the year.
Regardless of COVID-19, we remain confident in the direction we are headed, the investments we have made in our transformation plan over the past few years, and the resiliency of our categories.
As we stated on our last earnings call, we feel we are well-positioned to handle the uncertainty of the near term due to three key factors.
First, our businesses are on trend.
The Sally Beauty business is the industry leader of professional color for home use, and is perfectly aligned with the increasing DIY trends.
Our customers can find all of their needed solutions or products for hair, nail and skin either online or in our stores.
Additionally, they can find How-To content on our digital sites, starting with Hair Color 101 all the way through more complex application techniques.
Alternatively a consumer can talk to a Sally associate at a store, who has been trained in hair color.
We plan to retain and build on the new customers who have discovered us as they experiment with DIY hair and nails and try out new exciting colors.
And we are ready to serve our traditional customers with more convenient service options as they become increasingly comfortable with returning to stores over time.
On the BSG side, while the salon business seems to be recovering more slowly, we are the industry leader in stylists' safety with our largest assortment of PPE including hand sanitizer, barbicide, gloves, masks and case.
In addition, we have added more convenience -- we have more convenient store locations, more DSC's that are now digitally enabled and many of which are now trained and certified in salon safety protocols.
And now we offer improved delivery service options to ensure we are convenient and safe for our professional customers.
We will continue to build on this leadership position.
Second, we have the ability to operate effectively in an environment that will continue to be impacted by COVID-19.
Customers and team members can feel confident in our stores, which have instituted the protocols required to operate safely.
We have proven that we can rapidly evolve our service model to provide our customers with more choice on how they interact with us and more access to our inventory chainwide.
Third, we are sitting in an excellent liquidity position, with strong cash flow and cash on the balance sheet.
Aaron will discuss this more during his remarks.
Finally, I will spend a few minutes talking about the key projects and investments that we will focus on in fiscal year 2021.
First, we will continue our digital transformation by optimizing the guest experience and service offerings such as 'Buy Online / Pickup In-Store', which is rolling out across all Sally stores in the U.S. in November, and optimizing the impact of digital to the income statement by addressing operating changes, which will lead to cost savings.
We will also replatform the BSG digital experience focused firmly on the pro and add further fulfillment options for BSG in the second half of fiscal year 2021.
Second, now that we have completed the rollout of our Private Label Rewards Credit Card Program in the U.S., we will be intensely focused on growing and optimizing the portfolio and program.
On the Sally side, the program will enhance the existing Sally Beauty Rewards loyalty program by adding additional reward points to the customer spend.
Additionally, the Sally e-commerce site is already set up to provide instant credit for online applications and accessibility to shop with their card online.
On the BSG side, card benefits include an additional 3% discount on purchases and adds better flexibility for stylists and pros to manage their cash flow and business.
Through benchmark data, we know that private label credit card holders typically spend more per transaction, as well as having better retention rates.
Therefore, our focus will be on driving activations while increasing basket size and share of wallet.
This also translates to the P&L benefits related to interchange relief from traditional bank cards, as well as adding royalties from new account openings.
Third, as a significant part of our company's history, growth, and current assortment, our Sally Beauty division is partnered with over 25 black-owned brands in our current textured hair category.
In fiscal year 2021, we have committed to growing these successful partnerships and expanding our offering to additional black-owned brands across both the Sally Beauty and BSG businesses.
Fourth, now that we have JDA, our new merchandising and supply chain platform, and our new North Texas distribution center, both up and live on a limited scale, our focus will be on expanding both of these initiatives.
Once fully rolled out, JDA will improve product assortment by store location, improve out-of-stocks and greatly improve visibility and forecasting of inventory.
Once fully functional, the North Texas DC will be our first distribution center that services all channels for both business segments and will deliver the benefits of increased speed to market, lower operating costs and will reduce the demand on our other DCs in our network.
In summary, while we continue to operate in an uncertain environment, at Sally Beauty Holdings, we believe we are a stronger company with even greater ability to deliver long term sustainable growth, driven by our enhanced capabilities and how we connect with our customers digitally, through our loyalty and credit card programs and expanded differentiated offerings, our enhanced infrastructure and omnichannel capabilities, and increased talent base, all of which are supported by a strong balance sheet and cash flow.
The bottom line, the challenges we faced in 2020 has simply made us better.
They pushed us to accelerate our digital transformation to simplify and focus our business strategy and build a team that is prepared to win in a transformed retail environment.
I am delighted to be here to talk about the great work that the Sally Beauty Pro-Duo and Beauty Systems Group teams accomplished during the fourth quarter.
Consolidated same-store sales went up.
They increased by 1.3%.
Consolidated revenue was $958 million for the quarter, a decrease of less than 1% from the prior year.
The increase in same-store sales, led by our Sally Beauty U.S. and Canadian retail business was offset by COVID-19's modest impact on parts of our Beauty Systems Group business during the quarter, and a smaller store base with 23 fewer stores compared to the prior year.
Finally, we saw a favorable impact from foreign currency translation of approximately 20 basis points on reported sales.
During the quarter, brick-and-mortar traffic was choppy and was down from the prior year due to the lingering impact of COVID-19, but average basket remained up due to an increase in units per transactions and an increase in average unit retail, which happened alongside an increase in units in our core differentiated category of hair color.
As expected, customers are generally making fewer trips but buying more when they do come in and shop.
In contrast, we did see increased traffic to our digital channels.
At the start of the quarter, even with the vast majority of our store network back open, our global e-commerce business grew rapidly.
For the fourth quarter, e-commerce sales were $63 million, representing growth of 69% over the prior year, led by our Sally U.S. and Canadian e-commerce platform which delivered growth of over 113%.
Last quarter, we mentioned that during the peak of the COVID crisis, we had new e-commerce customers in our online U.S. retail channel that had signed up for our Sally Beauty Rewards loyalty program.
Retaining these new customers was obviously a key focus for us and in the fourth quarter, we saw repeat purchases from approximately 60% of that new customer group.
Similarly, last quarter we saw opportunity from competitor disruptions in the pro-channel where BSG saw 40,000 new hair color customers walk into our stores during the quarter.
During the fourth quarter, we saw repeat purchases from approximately 50% of those new customers.
Let's turn now to gross margin, which is a simple story.
It went up dramatically.
Consolidated gross margin for the quarter was 51.1%, which is the highest gross margin rate in at least eight years.
This represented a 150 basis point increase as compared to the prior year.
The improvement was expected and is a signal of our increasing retail fundamental capabilities.
It was driven primarily by better coordination and execution of fewer promotions across all businesses and an intentional positive mix shift toward higher margin categories like hair color in the quarter, but partially offset by a reduction in vendor allowances from fewer promotions and reduced inventory purchases.
Consolidated gross profit for the fourth quarter was $489.1 million, an increase of approximately $10 million from the prior year.
As a percentage of sales, selling, general and administrative expenses were 38.3% compared to 37.7% in the prior year, driven primarily by higher e-commerce delivery expenses, which were expected and are something that we're working speedily upon, continued transformation investments and the deleveraging impact of lower sales volume compared to the prior year.
GAAP operating earnings and operating margin in the fourth quarter were $119.7 million and 12.5%, respectively, compared to $116.1 million and 12%, respectively in the prior year.
After excluding charges related to the company's previously announced restructuring efforts in both years and COVID-19-related income in the current year from a Canadian wage subsidy, adjusted operating earnings and adjusted operating margin were $120.3 million and 12.6%, respectively compared to $115.3 million and 11.9%, respectively in the prior year.
Both GAAP and adjusted diluted earnings per share in the fourth quarter went up.
GAAP diluted earnings were $0.62 per share and adjusted diluted earnings were $0.63 per share, both compared to $0.58 in the prior year, representing growth of approximately 7% and 9%, respectively as compared to the prior year.
Stronger gross margin rate, lower income tax expense and a lower average share count all contributed, partially offset by modestly higher selling, general and administrative expenses, and an increase in interest expense.
In the fourth quarter, the company had net earnings of $70.2 million compared to $69 million in the prior year, an increase of 1.7%.
Adjusted EBITDA was modestly higher at $146.6 million in the quarter compared to $144 million in the prior year.
Adjusted EBITDA margin also increased to 15.3%.
Now, turning to segment performance.
Global Sally Beauty segment same-store sales increased by 1.7% for the fourth quarter.
The Sally Beauty business in the U.S. and Canada, which represent 80% of the segment sales for the quarter had a same-store sales increase of 3.7% in Q4.
Europe had a decrease in same-store sales for the quarter, while Latin America had a significant decline in same-store sales, given approximately 15% of the stores were closed for more than half the quarter due to COVID-19.
Our global Sally Beauty segment generated revenue of $577 million in the quarter, an increase of about 1% compared to the prior year, driven primarily by the increase in same-store sales, a favorable foreign exchange impact of approximately 40 basis points, partially offset by 42 fewer stores compared to the prior year.
Our global Sally Beauty e-commerce business continued to show strength with growth of 86% in the quarter, led by our U.S. and Canadian e-commerce platforms, which delivered growth of 113%.
For the quarter, gross margin for the accounting segment landed at 57.6%, an increase of 180 basis points compared to the prior year.
We saw Sally Beauty business in the U.S. and Canada also hitting a record gross margin level of 61%.
Segment operating earnings were $103.9 million in the quarter, an increase of 10.6% compared to the prior year, for all the reasons that I've just discussed.
Segment operating margin increased to 18% compared to 16.4% in the prior year.
Now turning to our Beauty Systems Group segment.
Total segment same-store sales increased by 0.6% for the quarter.
While we had higher expectations for the quarter from Beauty Systems Group, there were a number of headwinds impacting comp sales.
First, the COVID-19-related shut-downs of California salons in many counties in July and August had an unfavorable impact of approximately 90 basis points on the segment's same-store sales.
We also tested a variety of techniques in stores, which will set us up for success in subsequent quarters.
Net sales for the segment were $381 million in the quarter, a decrease of 3.3% compared to the prior year.
The decline in non-comp sales was driven by COVID-19.
COVID-19 and the necessary social distancing guidelines forced the cancellation of a significant trade show at which BSG sells goods.
It also constrained the reopening and velocity of customer appointments at our national chain customers.
We also saw the creation of full service back orders during the quarter resulting from some inventory gaps.
Finally, we saw an unfavorable foreign exchange impact of approximately 10 basis points.
BSG's e-commerce platform grew by 55% for the fourth quarter driven by consistent demand throughout the quarter.
BSG's gross margin increased by 60 basis points to 41.2% in the quarter, driven primarily by fewer promotions, but partially offset by lower vendor allowances.
Segment operating earnings for BSG were $50.6 million, a decrease of 14.4% compared to the prior year, driven primarily by the decrease in net sales, but partly offset by the increased gross margin rate.
Segment operating margin declined to 13.3% compared to 15% in the prior year.
Let's talk about cash.
We generated a lot of it.
During the fourth quarter, the company delivered cash flow from operations of $153 million, an increase of 31% compared to the prior year.
Payments for capital expenditures in the quarter totaled $21 million as we continued to invest against our business transformation.
Investments in the quarter included further work on our digital capabilities and e-commerce platforms, and optimizing our supply chain through our JDA and North Texas distribution center efforts.
Free cash flow was $131 million in the quarter, which represented a 67% increase as compared to the prior year.
I should note that we saw a significant cash benefit from a reduction in inventory, which carried over from Q3 into Q4.
The combination of our efforts to manage cash, purposeful SKU rationalization as part of our merchandising transformation, and some soft supplier disruption put us in a position where our inventory levels came down too far, and we are acting during Q1 to fix that.
More on that to come.
During the fourth quarter, the company used a portion of its cash to reduce its debt levels by $445 million, including paying off its outstanding balance on its revolving line of credit by $375 million, the entire FILO loan balance of $20 million and $50 million of the fixed portion of its Term Loan B. The company did not repurchase any shares during the quarter.
In addition, the company also completed a small acquisition in Quebec, Canada, which added 10 stores, 17 direct sales consultants and exclusive distribution rights to premier professional hair color and hair care brands such as Wella Professional and Goldwell.
At the end of the fourth quarter, the company remains in a very strong liquidity position with $514 million cash on the balance sheet and a zero balance on its $600 million revolving line of credit.
Generally, the company ended the quarter with a leverage ratio of 2.88 times, reflecting our significant cash balance.
For comparison purposes, the leverage ratio that we often cite, as defined in our loan agreement, where the impact of cash on hand is capped at $100 million for net debt calculation purposes was 3.79 times.
Turning to our consolidated full year financial results.
For the full fiscal year, consolidated same-store sales decreased by 8.1% due almost entirely to COVID.
Consolidated net sales were $3.51 billion, a decrease of 9.3%, driven primarily by the impact of COVID-19 shut-downs, operating 23 fewer stores and an unfavorable impact from foreign currency translation of approximately 10 basis points.
Global e-commerce sales grew by 103% compared to the prior year, once again led by our U.S. and Canadian e-commerce platforms, which delivered growth of 184%.
GAAP diluted earnings per share for the full fiscal year were $0.99, a decline of 56.2% compared to the prior year, driven primarily by the disrupted operations caused by COVID-19.
Adjusted diluted earnings per share, excluding COVID-19 net expenses in the current year and charges related to the company's transformation efforts in both years, were $1.22, a decline of 46% compared to the prior year.
For the full fiscal year, cash flow from operations was $427 million, an increase of 33% compared to the prior year.
Net payments for capital expenditures totaled $111 million.
Operating free cash flow was $316 million, an increase of 39% compared to the prior year.
For the full fiscal year, the company repurchased 4.7 million shares at an aggregate cost of $61.4 million.
Let's turn now to observations on fiscal year 2021.
Whether it is lingering COVID-19 concerns or how long it will take the economy to fully recover or possible follow on from the November elections, fiscal year 2021 will certainly present its share of twists and turns.
We can already see this in the current operational status of the fleet.
All stores in the United States and Canada are currently operating.
However, stores in the few metropolitan areas, like El Paso, can only operate as curbside locations.
Additionally, we are seeing occupancy restrictions in parts of New Mexico and Colorado.
Europe has been more aggressive.
We have seen stores in Belgium, Northern Ireland and Wales closed due to local restrictions, only to reopen shortly afterwards.
Currently, of our 450 stores in Europe, approximately 180 stores are completely closed due to COVID-19 restrictions with the remaining stores either fully open or operating curbside, where permissible.
The majority of the closures currently are in England and France.
The result is we are seeing e-commerce accelerate again in Europe, similar to what we saw back in the third quarter.
Given all of this, we are not able to provide detailed financial guidance for fiscal 2021.
However, the company can offer a couple of broad observations.
Without adjusting for the impact of COVID restrictions, which are impossible to predict, the company would expect that sales in 2021 should be higher than 2019, even with the fewer stores in the fleet.
While we can't predict COVID, we are far better prepared than we were in fiscal '19 or even in March of fiscal 2020.
Regarding our store fleet, the company has revised its short-term plans with respect to new stores.
The company now expects that net store count will be approximately flat for the year, with a small number of new stores being added to the footprint, which will be offset by a similar number of store closures as we optimize core locations.
The company will, however, take advantage of the current leasing environment and relocate approximately 70 stores.
Remodels were mostly put on hold for the time being.
We expect our digital business to continue to grow and are continuing to invest in that area.
The company expects continued strength in gross margins, particularly in the first three quarters compared to last year, and particularly in Sally Beauty U.S. and Canada.
The company expects SG&A investments will, on a full-year basis, rise to reflect our continued investments, particularly in labor and e-commerce distribution.
However, the company is working hard on offsets to those investments and use it as an area of opportunity with more work for us to do.
The company expects to continue to generate strong cash flow, so also expect to be back-end loaded, given the company's significant upfront investment in inventory that I referenced earlier.
Finally, let's address capital allocation.
Our priorities are relatively unchanged.
The company will invest in this business.
As I noted earlier in Q1, this will take a formidable investing in new inventory.
We will also continue our business transformation, though, with some efforts to scale back to reflect the uncertain environment until a vaccine is available.
We will continue to hold significant cash on our balance sheet while we monitor how COVID-19 plays out over the first and second quarters.
As we grow increasingly confident that the environment has stabilized to our satisfaction, we will consider deploying additional excess cash to reduce our debt levels in the direction of moving our leverage ratio to 2.5 times.
That all being said, as we look at the stock price versus our underlying business fundamentals, we may smartly consider share repurchases from time to time.
We have not repurchased any shares so far this fiscal year.
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q4 adjusted earnings per share $0.64.
q4 sales rose 3.4 percent to $990 million.
sees fy sales up 3 to 4 percent.
qtrly same store sales increase of 2.1%.
beginning in fiscal 2022, company will be replacing same store sales metric with comparable sales.
sees fy 2022 gross margin expected to expand by 40 to 60 basis points compared to prior year.
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On the call, today, are Scott Buckhout, CIRCOR's president and CEO, and Abhishek Khandelwal, the company's chief financial officer.
The slides we'll be referring to today are available on CIRCOR's website at www.
These expectations are subject to known, and unknown risks, uncertainties, and other factors.
For a full discussion of these factors, the company advises you to review CIRCOR's Form 10-K, 10-Qs, and other SEC filings.
The company's filings are available on its website at circor.com.
Actual results could differ materially from those anticipated, or implied by today's remarks.
These non-GAAP metrics exclude certain special charges and recoveries.
CIRCOR delivered a strong third-quarter despite unprecedented macro challenges.
The work we've done to transform our portfolio during the last three years has paid off.
We now have a stronger more resilient portfolio of essential products.
Our diversification across geographies, and markets, and products is mitigating the ongoing weakness of the pandemic.
In addition, we've been able to raise prices through the downturn because our product portfolio has strong market positions and differentiated technology.
We're executing well through the downturn.
Our continued focus on productivity and cost resulted in a companywide decremental of 19% in the quarter.
The $45 million cost plan for 2020 that we communicated in May remains on track.
Our pricing initiatives remain on the plan in both Aerospace & Defense and industrial.
The CIRCOR operating system is delivering improved operating performance across most metrics, and we expanded the margin of our aerospace & Defense business by 360-basis-points in the quarter despite the lower volume.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
With 13 new product launches in Q3, we remain on track to deliver on our commitment to launching 45 new products this year.
We continue to invest in front-end resources and strategic growth initiatives.
We're closely collaborating with suppliers and customers to ensure alignment as markets change.
And finally, we continue to focus on deleveraging the balance sheet.
Now, I'd like to provide some highlights from the third quarter.
Please turn to Page 4.
We booked orders of $167 million, down 19% organically due to the impact of COVID-19 on our Industrial and Commercial Aerospace businesses.
Defense orders relatively low in the quarter due to the timing of large defense programs.
The growth outlook for defense remains strong.
Sales came in as expected at $187 million flat to the prior quarter and down 15% organically.
We continue to believe Q3 is the bottom for sales and orders.
We expect sequential improvement across both businesses in Q4, which we'll talk about in more detail later in the call.
Adjusted operating income was slightly more than $17 million, representing a margin of 9.3%, up 80-basis-points from the prior quarter, and down 130-basis-points from last year driven by lower sales volume in industrial.
The Companywide decremental was 19% in the quarter, which is significantly lower than our contribution margin driven by productivity, aggressive cost actions, and price.
Before I review the outlook for our end market.
Let's begin by reviewing our segment results.
All figures up from continuing operations and exclude divestitures.
Starting with industrial on Slide 5.
In Q3, Industrial segment orders were down 23% organically due to the impact of COVID-19 on most end markets.
Downstream orders were especially impacted in the quarter, due timing of capital projects and maintenance turnaround delays.
Excluding our Downstream business, orders an industrial were down 15% organically.
The benefit of the industrial portfolios regional diversity was evident in the quarter.
We saw sequential improvement in Germany, India, and China with orders increasing in the low double-digit range, partially offsetting pressure in North America.
While oil and capital projects remain depressed, we experienced a sequential improvement in the aftermarket side of the business on a global basis.
As expected, the industrial segment had sales of $124 million flat to the prior quarter, and down 18% organically.
The EOM margin was 7.9% down 210-basis-points sequentially, and a decline of 460-basis-points versus last year.
The margin decline versus the prior year was primarily driven by lower sales volume and the impact on productivity associated with the need to maintain social distancing.
Among other safety protocols on the factory floor, which was partially offset by cost actions and price.
In addition, one of our facilities in North America experienced a COVID-19 outbreak which forced us to idle the factory for most of August, and impacted our EOM by approximately $1.5 million in the quarter.
Adjusted for the $1.5 million of COVID impact, the industrial margin would have been 9.1%, and the decremental would be approximately 30%.
Turning to Slide 6.
In Q3, in our Aerospace & Defense segment, we delivered orders of $59 million, down 9% organically.
Orders were impacted by the timing of large defense programs in the quarter and the continued impact of COVID-19 on Commercial Aerospace.
While the timing of large defense programs resulted in lower orders in the quarter, the business remains strong overall, and we remain confident in the segment's strong growth outlook going forward.
Sales for the Aerospace & Defense were $62 million flat to the prior quarter, and down 9% organically.
Strengthened defense platforms partially offset the impact of COVID-19 on Commercial Aerospace.
The Aerospace & Defense operating margin was 23.7%, up 360-basis-points versus the prior year, and 260-basis-points sequentially.
With $6 million lower revenue, the Aerospace & Defense team delivered $1 million of incremental operating income, driven by price, productivity, and other aggressive cost actions.
Turning to Slide 7.
For Q3, the effective tax rate was approximately 13% lower than the 14.8% in the prior quarter, due to a change in the statutory tax rate where CIRCOR operates.
For Q4, the tax rate is projected to be approximately 15%.
The Company took a non-cash charge of approximately $42 million to create a valuation allowance against its remaining U.S. deferred tax assets.
This non-cash charge was acquired in the GAAP accounting rules, primarily due to recent U.S. tax law changes, and losses in the U.S. from our divested businesses.
This charge does not impact our non-GAAP tax results for the quarter and is not expected to have an impact on our future non-GAAP tax results.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13 million in the quarter.
The acquisition-related amortization and depreciation were a charge of $12 million with the remaining million dollars being associated with restructuring activities in the quarter.
Interest expense for the quarter was $8 million, down $4 million, compared to last year.
This was a result of lower debt balances and a favorable interest rate of 25-basis-points.
Other income was a million-dollar charge in the quarter, primarily due to foreign exchange losses, partially offset by pension income.
Corporate costs in the quarter were $7.2 million, in line with previous guidance provided.
Turning to Slide 8.
Our free cash flow from operations was flat in the third quarter.
Right in line with what we guided in our Q1, and Q2 earnings call.
At the end of the third quarter, our net debt was at $468 million.
This represents a year-over-year debt reduction of $120 million dollars.
In Q3, we paid $52 million, and the revolver further reducing our debt balance and interest expense.
We expect to generate strong free cash flow in the fourth quarter and intend to use that cash to continue to pay down debt.
Now I will hand it back over to Scott, to provide some color on our end markets, and outlook.
Now, I'll provide an overview of what we're seeing in our end markets.
Please turn to Page 9.
Let's start with the industrial.
As Abhishek mentioned, the impact of COVID-19 continued through the third-quarter across most major industrial end markets.
For Q3, orders were down 7% on a sequential basis with both for market and aftermarket orders coming in slightly lower than Q2.
Large projects remain weak, due to ongoing delays in capital spending.
Regionally, we saw weakness in North America and most of Europe, offset by strength in Germany, China, and India across most major sectors.
As we mentioned in last quarter's earnings call, we believe that Q3 marks the bottom and we expect industrial segment orders and revenue to improve sequentially in Q4.
Both market and aftermarket orders are expected to increase double digits sequentially.
From an end market perspective, we expect slight sequential improvement in many of our larger end markets.
Power generation is showing early signs of improvement globally.
Downstream Oil & Gas orders are improving as high priority capital projects, and certain maintenance activity moves forward.
Our shorter cycles of chemical processing in markets that are more closely linked to consumer demand are showing slow improvement.
For industrial revenue in Q4, we expect a moderate improvement sequentially with growth ranging from flat to up 10%.
While year-over-year revenue is expected to be down between 5% and 15%.
Most OEM and aftermarket end markets are expected to improve in Q4, compared to Q3.
Downstream Oil & Gas revenue is expected to be up sequentially, due to the timing of project shipments and higher aftermarket activity in the quarter.
Regionally, we're seeing pockets of economic improvement in China, India, and Germany, which we expect to continue.
Commercial Marine and midstream Oil & Gas are expected to remain at low levels, due to depressed activity and shipbuilding, low ship utilization, and ongoing project delays in midstream Oil & Gas.
Overall, we expect Aerospace & Defense orders in Q4 to be in line with Q3 sequentially, and down versus the prior year driven by the timing and defense program orders, and ongoing COVID related headwinds in the Commercial business.
For Aerospace & Defense revenue in Q4, we expect a significant sequential improvement from Q3.
Defense revenue should see sequential growth of 20% to 25%, and year-over-year growth of 15% to 20%.
Growth in the quarter is driven by strong shipments across our Submarine portfolio, our missile portfolio, and for the Joint Strike Fighter.
Commercial revenue is expected to grow sequentially between 15% and 25%, but we'll be down year over year between 40% and 45%.
The sequential improvement is driven by slightly improving shipments across a variety of business jet, regional jet, and other civil platforms, partially offset by lower shipments to Boeing and Airbus.
The outlook for price remains strong with a net 4% increase for Defense and Commercial Aerospace, driven by improved price management.
To summarize, as the pandemic continues to significantly impact the global economy, CIRCOR remains committed to delivering long-term shareholder value.
Our portfolio transformation is largely complete.
We've completely exited upstream Oil & Gas, and the new CIRCOR is diversified across geographies, end markets, and product technologies.
Our portfolio of products has differentiated technology and strong market positions in the niches where they compete.
As a result, we're able to raise prices across the portfolio despite the current market conditions.
We remain focused on execution.
The $45 million cost plan for 2020 is on track.
Our focus on productivity and cost resulted in a companywide decremental of 19% in the quarter, and the CIRCOR operating system is delivering improved operating performance across most metrics.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
We remain on track to deliver on our commitment to launching a record of 45 new products this year.
We continue to invest in front-end resources and strategic growth initiatives.
We're closely collaborating with suppliers and customers to ensure alignment as markets change, and we continue to focus on deleveraging the balance sheet.
They've been doing an excellent job working every day to ensure that we continue our momentum and meet our customers' needs.
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q3 revenue $187 million versus refinitiv ibes estimate of $186.9 million.
remain on track to achieve $45 million 2020 cost reduction plan.
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Before providing you with an update on our response to COVID-19 and our first quarter financial and operating results, I'm going to spend a few minutes on recent events.
What has happened across the country over the last few weeks has brought into sharp focus that we as a country are still falling well short of our national aspiration of racial equality and equal economic opportunity for all.
It is time for us all to listen, learn, and act.
We can feel heartbroken, fearful or uncomfortable, but we must get busy and take action to change things for the future.
With this in mind, Oxford is making a $1 million commitment of additional support over the next four years to help our local communities address economic and racial inequality through education.
Every child regardless of race or economic circumstance deserves the chance to learn and be successful.
The likelihood of success increases exponentially when a child has access to a quality education.
All too frequently, particularly in economically disadvantaged communities and communities of color that access does not exist.
Our commitment builds on Oxford's long history of supporting education programs that improve access to quality education for economically disadvantaged use and predominantly African-American communities.
Now let's talk about what's going on in our business.
It goes without saying that this year is a very unusual year.
In any other year, our key objective is always delivering the sustained profitable growth that drives long-term shareholder value.
With the shutdown of the economy in response to the COVID pandemic, this is a year that given the nature of our business makes it almost impossible for us to achieve this objective.
That said, we believe this situation is temporary and that by focusing on our people, our brands and our liquidity, we will emerge from this year positioned well to thrive in the new and very different post-COVID marketplace.
With respect to these three objectives, people, brands and liquidity, I am very pleased with what we have accomplished since March and the track we're on for the rest of the year.
With respect to people the COVID pandemic and the resulting shutdown have been incredibly disruptive for people at both personal and professional level.
To navigate through this difficult situation, we have had to take a number of painful but necessary actions that have added to the disruption in people's lives.
These have included layoffs, furloughs, pay reductions and other actions, including work from home that have added to the challenges that people face.
We do not take these actions lightly at all, and I am deeply appreciative of how our teams have rallied.
Their commitment, resourcefulness and focus has far exceeded what I could have possibly hoped for.
As we are beginning to emerge from this shutdown or in the early stages of recovery, I believe our team is stronger than ever and better suited to take on the new challenges facing our industry.
Secondly, with our bricks-and-mortar operations substantially shut down for several months and only now slowly beginning to reopen, we have done a terrific job of protecting and preserving the integrity of our brands and our relationship with our customers to ensure we remain in a strong position for the post-COVID consumer marketplace.
We took actions to help us mitigate an over-inventoried position which would undoubtedly require us to engage in the heavy discounting and promotional activity that could damage the integrity of our brands.
We reduced and canceled existing orders, we reduced the amount of our previously planned forward orders, and we delayed and remerchandised inventory that was already in the pipeline.
Through our digital marketing and e-commerce capabilities, we have also done a great job of keeping our customers engaged with our brands in ways that are relevant during this unusual time.
The key takeaway is that some of the most effective messages were those where we really leaned into our brands and their messages of optimism in the happiness.
Customers really look to our brands as an escape from some of the realities of living in a quarantined, work from home, home-schooled world.
Reemergence from the shutdown has also accelerated our efforts to become truly omni-channel.
We believe that all of these actions put our brands in great shape for the future of the lives ahead.
Finally, and very importantly, we have managed our cash outflows very carefully and as a result have reserved a strong liquidity we had going into the shutdown.
We are confident that we will finish the year with more than adequate liquidity to grow and thrive going forward.
Some of the key steps that we've taken have included painful but necessary reductions in employment expense, including the elimination of cash bonuses and reductions in executive and other employee salaries, reducing the forward inventory commitments, slowing down capital expenditures, negotiating equitable rent arrangements with our landlords and a reduction to our dividend and the Board of Directors' cash compensation.
Many of these actions are ongoing, including our discussions with landlords as we work to resolve the current situation.
To reiterate, our key focus this year is making sure our people, brands and liquidity are in an excellent position for the post shutdown consumer marketplace.
I'm very proud of what we've accomplished and believe we are on the right track toward achieving these critical objectives over the remainder of the year.
Our first quarter of 2020 began strongly.
In February, we were very excited to open two new Tommy Bahama Marlin Bars both in the Fort Lauderdale area.
Our retail and e-commerce businesses were posting positive comps, and we were on track to add to our multi-year positive comp trend.
As we approach mid-March, the spread of COVID-19 started to accelerate and began impacting the retail marketplace.
From March 17, to protect the health of our employees and customers, we temporarily closed all of our North American stores and restaurants.
Our corporate offices successfully adopted work from home strategies and with appropriate safety measures in place, we have been able to keep all of our distribution centers open.
The impact to Oxford from the COVID-19 crisis is exacerbated by the seasonality of our business.
Our Tommy Bahama Lilly Pulitzer and Southern Tide brands are oriented primarily to spring-summer with March through June being four of our strongest months of the year.
Our stores and restaurants, which make up 47% of our overall sales in 2019 just began to reopen in early May, and we expect to have almost all of our locations open by the end of June.
As our stores open, however, they are operating with many restrictions in place and consumer traffic that is rebuilding slowly.
The stores that are open are operating at about half prior-year levels on average, with significant regional variations.
But we don't expect revenue from stores to reach prior year levels at anytime during 2020.
We do anticipate steady improvement as restrictions ease and consumers' comfort level increases around travel and shopping.
Turning to our wholesale channel.
It appears that the pandemic is likely to accelerate the closure of a number of department and specialty stores.
Over the last several years, we have very carefully managed our exposure to these accounts as it become increasingly difficult to find partners with whom we can maintain a mutually beneficial business.
In 2019, wholesale sales at Tommy Bahama decreased to 20% of revenue, and at Lilly Pulitzer 21% of revenue.
Most of our wholesale partners have excess inventory and we believe it will take them a while to work through what they have on hand, but we believe the demand for new product will be soft in 2020 and therefore we expect wholesale revenue to be significantly lower than 2019.
Throughout this challenging period, we were able to successfully use our digital platforms to stay connected with our customers.
E-commerce, which was 23% of our revenue in 2019 grew by 12% in the first quarter and the positive momentum has continued into the second quarter as we reap the benefits of the long-term investments we have made in digital and e-commerce, such as upgrades and redesigns of websites, enhanced search engine optimization and new enterprise order management systems.
In the first quarter, adjusted gross margins declined 220 basis points due to higher inventory markdowns and a modest increase in promotional activities.
We expect to continue to experience pressure on gross margin, as we expect to be modestly more promotional throughout the rest of the year.
We have made significant strides in reducing expenses in the first quarter with the reductions across most spending categories, reducing SG&A by $17 million compared to last year.
Employment costs were reduced by $11 million in the first quarter as we made the difficult decisions affected our employees.
We furloughed substantially all of our retail and restaurant employees, eliminate positions throughout the organization, reduced salaries for certain employees, and we suspended our bonus and 401(k) match programs.
We expect SG&A to be lower year-over-year, with the largest percentage decrease in the second quarter.
Then as we expect all locations to be open for the full third and fourth quarters, the year-over-year percentage decreases in SG&A are expected to narrow.
Managing inventory is a critical component of ensuring the health of our brands, and we have taken meaningful actions to reduce and defer our inventory orders, with approximately a 25% reduction in forward orders.
By repurposing some of Tommy Bahama spring-summer collection, we've taken about $25 million of inventory, moved it out to Tommy Bahama's resort line in December, and we have been working with our vendors to extend payment terms.
We are pleased with our efforts and inventory at quarter end increased only 8% despite the significant sales decline.
While it's incredibly difficult to project results in this uncertain environment, I want to add some color on how we currently view the remainder of the year.
The timing of the COVID-19 pandemic created significant headwinds to our top line and similar to the first quarter, we expect a significant year-over-year decrease in second quarter sales.
However, in the second quarter, we expect a larger percentage year-over-year decrease in SG&A, resulting in a smaller loss than in the first quarter.
The third quarter is always a difficult quarter due to seasonality, and we expect it to be even more difficult this year.
Right now, we are projecting the fourth quarter to be modestly profitable with some recovery in our direct-to-consumer channel, but sales will still be below last year.
As Tom mentioned, preserving a high level liquidity is essential during these uncertain times.
We have ample liquidity to meet our ongoing cash requirements, reflecting the strength of our balance sheet entering the pandemic, as well as the recent actions we have taken to mitigate the COVID-19 impact.
During March 2020, as a proactive measure to oyster cash, and we drew down $200 million of our $325 million asset base revolving credit facility.
At the end of the first quarter, we had $208 million of borrowings outstanding, an additional $114 million of unused availability and $182 million of cash and cash equivalents.
Our cash flow from operations used $46 million in the first quarter compared to a use of $6 million in the prior year period.
As we ended the second quarter, our cash burn rate has decreased and we expect it to continue at lower levels throughout the remainder of fiscal 2020.
In the first quarter of fiscal 2020, net sales in each of our operating groups decreased from prior periods, resulting in significant lower operating results, including operating losses in each group other than Lilly Pulitzer.
As a result this triggered first quarter goodwill and indefinite lot intangible asset impairment assessments in accordance with our accounting policies.
Our assessments included at the fair values of the Southern Tide goodwill indefinite-lived intangible assets as of May 2, 2020 did not exceed their respective carrying values, resulting in a $60 million non-cash impairment charge.
Last quarter, the Board of Directors reduced our quarterly dividend from $0.37 per share to $0.25 per share.
The Board has determined that it's appropriate to keep the dividend payable on July 31 at $0.25 per share.
The Board has also elected to reduce its cash compensation by 50% for the remainder of the fiscal year.
We appreciate your support.
Please stay safe during these challenging times.
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q4 earnings per share $1.30.
q4 sales rose 15.6 percent to $2.06 billion.
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These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors.
John was most recently President of Fleet Management Solutions and brings a wealth of experience to the CFO role, having held various senior operational and financial roles during his 20-year tenure at Ryder.
Tom brings a great depth of experience to the leadership role in FMS from his 28-year career at Ryder, having most recently served as Senior Vice President and Global Chief of Operations for the FMS business.
John will take you through our second-quarter results, which exceeded our expectations.
I'll then review our updated outlook for 2021, discuss the significant progress we're making on actions to achieve our ROE target, and review our initiatives to mitigate the impact of future cyclical downturns on our business.
With that, let's turn to our strategic update.
Secular trends continue to support our strategy to accelerate growth in our supply chain and dedicated businesses while targeting moderate growth and increased returns in our fleet management business.
We're seeing strong sales and pipeline growth across all our businesses, driven by secular trends that favor outsourcing as well as increased focus by customers on supply chain resiliency and the use of innovative technology solutions.
Trends that we saw accelerate during the pandemic, such as e-commerce, and the demand for last-mile delivery of big and bulky items remain strong and support the strategic investments we're making in these fast-growing areas.
We remain focused on increasing returns and are pleased with the significant progress we're making to achieve our ROE target.
Multiple years of lease pricing increases that began with a focus on de-risking our portfolio through lower residual assumptions and cost updates are benefiting returns.
Most recently, we began implementing additional pricing actions to improve future lease returns using data analytics around customer segmentation, application, equipment type, and other key drivers of lease returns.
Strong freight conditions combined with our initiatives, resulted in better-than-expected results in used vehicle sales and rental.
We're seeing the benefits of dynamic pricing in used vehicle sales and rental as well as our prior investments to increase retail used vehicle sales capacity.
We now expect to achieve ROE in the range of 16% to 17% this year, above our long-term target of 15%.
Later in the call, we'll review additional enhancements we're making to our playbook to improve returns over the cycle.
Moving on to cash flow.
Our year-to-date free cash flow is $602 million, down $10 million from the prior year as higher vehicle capital spending was largely offset by higher proceeds from the sale of used vehicles and property.
We're increasing our full-year free cash flow forecast to $650 million to $750 million, up from $400 million to $700 million, primarily to reflect the anticipated impact from delays for new vehicle deliveries from the OEMs. We're encouraged by our performance and by the market trends we're seeing in the areas that we're investing for future growth.
We continue to invest in technology and other areas to address industry disruption in order to enhance our business model and position the company for long-term success.
Slide five provides an overview of the investments we're making to drive accelerated growth in our supply chain and dedicated business, a key element in our strategy to generate higher returns and long-term profitable growth, developing new and enhanced products, such as Ryder Last Mile, e-commerce fulfillment and freight brokerage is critical for us to leverage growth trends in supply chain and dedicated.
Innovative technology enables us to deliver value-added logistics solutions that are in high demand.
RyderShare, our visibility and collaboration tool, is a strategic differentiator for us, and its capabilities have moved to the forefront of our sales discussions.
RyderView is our proprietary customer interface that supports self-scheduling and delivery execution for Ryder Last Mile.
Enhanced order management and fulfillment software supports our growing presence in e-commerce fulfillment.
Sales and marketing effectiveness is key to our brand awareness and communicating the broad array of logistics and transportation solutions we offer.
Our Ever better campaign and increased digital marketing presence have driven an increase in qualified sales leads.
We're also expanding our sales force and investing in the capabilities and their capabilities to drive additional growth opportunities.
RyderVentures, our corporate venture capital fund, aims to invest $50 million over the next five years through direct investment in start-ups, primarily where we can partner to develop new products and services for our customers.
We've invested in areas including e-commerce micro fulfillment, a tech-enabled hub and spoke transportation network, and an AI-enabled dispatch product for small- to medium-sized fleets.
In addition, we continue to evaluate strategic M&A opportunities focused on adding new capabilities, geographies, and our industry verticals, which we view as another important way to accelerate growth, especially in our supply chain and dedicated business.
Slide six takes a closer look at Ryder Last Mile, which provides final mile delivery of big and bulky goods through a nationwide network of hub and agent locations that service every ZIP code in the Continental U.S. The Ryder Last Mile offering was launched in 2018 as a result of a strategic acquisition.
Since then, online purchases of big and bulky goods, such as furniture, exercise equipment, and home appliances have accelerated, driving demand for a seamless home delivery experience.
We've been pleased with the strong revenue growth in Ryder Last Mile.
RyderView is our proprietary customer-facing technology that allows consumers to self-schedule their deliveries and provide them with real-time delivery updates.
Our centralized customer support team is key to the execution of a qualified delivery experience.
We carefully monitor customer delivery feedback to ensure that service levels are maintained.
We're making strategic investments in this area in order to continue to enhance the capabilities and customer experience for this important product offering.
We're enhancing RyderView's capabilities and plan to launch Version 2.0 later this year.
Enhancements include easier and more convenient self-scheduling and rescheduling of deliveries as well as the option to schedule those deliveries at the point of sale.
We're enhancing the software used for the delivery route optimization.
We're also rolling out a customer experience that is branded for our customers, the retailer so that RyderView 2.0 serves as an extension of their brand.
We continue to expand our geographic footprint in order to place us closer to the end customer and improve delivery speed.
We recently announced the addition of two new fulfillment centers in Milwaukee and Philadelphia.
In addition to future geographic expansion, we'll also look at opportunities to add new services and capabilities or industry verticals through strategic M&A or RyderVentures.
We're confident that RyderView 2.0 will be a market differentiator that will enhance the customer experience and propel further profitable growth for Ryder Last Mile.
Total company results for the second quarter on Page seven.
Comparisons reflect COVID effects in the prior year, which most significantly impacted second quarter 2020 results in used vehicle sales, rental, and SCS automotive, all which have recovered quite well since then.
Operating revenue of $1.9 billion in the second quarter increased 18% from the prior year, reflecting double-digit revenue growth across all three of our business segments.
Comparable earnings per share from continuing operations was $2.40 in the second quarter as compared to a loss of $0.95 in the prior year.
Higher earnings reflect improved performance in FMS from higher gain on the sale of used vehicles, a decline in depreciation expense impact related to prior residual value estimate changes, and improved rental and lease results.
Return on equity increase, reflecting the declining depreciation impact, higher gains, and improved lease and rental results.
We expect continued improvement in ROE, our primary financial metric, as we move past the earnings impacts from prior residual value estimate changes and COVID, and continue to benefit from our actions to increase returns.
Year-to-date free cash flow was $602 million below prior year as planned.
Turning to FMS results on Page eight.
Fleet Management Solutions operating revenue increased 14%, primarily reflecting higher rental and lease revenue.
Rental revenue increased 58%, driven by higher demand and pricing.
Rental pricing increased by 13%, which is significantly higher than we've seen historically, reflecting pricing actions taken over the past year, prior year COVID effects, and a larger mix of higher-return pure rental business in the current quarter.
ChoiceLease revenue increased 5%, reflecting higher pricing and miles driven, partially offset by smaller fleet.
FMS realized pre-tax earnings of $158 million are up by $262 million from the prior year.
$131 million of this improvement resulted from lower depreciation expense related to the prior residual value estimate changes and higher used vehicle sales results.
Improved rental and lease results also significantly contributed to increased FMS earnings.
Higher lease pricing and miles driven were partially offset by a smaller fleet.
In rental, higher demand and pricing drove higher results.
Rental utilization on the power fleet was 80% in the quarter, significantly above the prior-year 56%, which included COVID impact, and was close to historical second quarter high.
FMS EBT as a percentage of operating revenue was 12.9% in the second quarter and surpassed the company's long-term target of high single digits.
For the trailing 12-month period, it was 6.3%, primarily reflecting higher depreciation expense from prior residual value estimate changes.
Page nine highlights global used vehicle sales results for the quarter.
Used vehicle market conditions continue to be robust with strong demand meeting tight supply.
Globally, year-over-year proceeds were up 73% for tractors and 72% for trucks.
Sequentially, tractor proceeds were up 22% and truck proceeds were up 27% versus the first quarter.
Higher sales proceeds primarily reflect significantly improved market pricing.
As you may recall, in the second quarter of last year, we provided a sensitivity noting that a 10% price increase for trucks and a 30% price increase for tractors in the U.S. would be needed by 2022 in order to maintain current policy depreciation residual estimates.
Since the second quarter 2020, U.S. truck proceeds were up 59% and tractor proceeds were up 67%.
Although these increases are not age or mix-adjusted, they are generally indicative of pricing improvements that have occurred since the second quarter of 2020.
As such, with these improvements, average pricing in the U.S. for trucks and tractors is above residual values applied for depreciation purposes.
During the quarter, we sold 6,000 used vehicles, down 5% versus the prior year, reflecting lower trailer sales.
Sequentially, sales volumes declined due to lower inventory levels.
Used vehicle inventory held for sale was 4,300 vehicles at quarter-end and is below our target range of 7,000 to 9,000 vehicles.
Inventory is down by 9,700 vehicles from the prior year and down by 1,900 vehicles sequentially.
Turning to supply chain on Page ten.
Operating revenue versus the prior year increased 32% due to new business and increased volumes and COVID effects in the prior year.
Growth was driven by double-digit percentage increases in the automotive, retail, consumer packaged goods, and industrial sectors.
SCS automotive business experienced intermittent customer plant shutdowns in the quarter due to a global shortage of parts.
We have included an estimated impact from potential shutdowns in our balance of year forecast as the situation remains fluid.
SCS pre-tax earnings increased 11%, benefiting from revenue growth, partially offset by strategic investments in marketing and technology as well as increased incentive compensation and medical costs.
SCS EBT as a percent of operating revenue was 7.7% for the quarter and below the company's long-term target of high-single digits.
However, it was 8.2% for the trailing 12-month period, in line with our long-term target of high single digits.
Moving to dedicated on Page 11.
Operating revenue increased 12% due to new business and higher volumes.
Revenue growth from new DTS business can be largely attributed to wins from competitors and private fleet conversions.
DTS earnings before tax decreased 38%, reflecting increased labor costs, higher insurance expense, and strategic investments.
Labor costs are being impacted by an exceptionally tight driver market.
Driver turnover is up significantly, and open positions are taking longer to fill.
We're working with customers to adjust rates where needed to recoup the incremental wage and other costs, and this will take some time to address.
We're also continuing to implement automatic contract triggers that allow for more real-time wage cost adjustments.
We've increased our recruiting headcount and remain focused on maintaining a quality work environment, where most drivers get home every day while providing competitive wages and benefits.
Our strategic investments are positively impacting sales performance, and we expect this to provide accretive earnings in the future.
DTS EBT as a percentage of operating revenue was 5.1% for the quarter.
It was 6.9% for the trailing 12-month period, below our high single-digit target.
Turning to Slide 12.
Lease capital spending of $501 million was above prior year as planned due to increased lease sales activity.
Lease returns are benefiting from pricing initiatives and support a more normalized lease capital investment.
Rental capital spending of $397 million increased significantly year-over-year, reflecting higher planned investment in the rental fleet.
We plan to grow the rental fleet by approximately 13% in 2021, mostly in light- and medium-duty vehicles in order to capture increased demand expected from strong e-commerce and free-market activity.
Our full-year 2021 forecast for gross capital expenditures of $2.2 billion to $2.3 billion is at the high end of our initial forecast range and is shown in the chart at the bottom of the page.
This is up from 2020 when spending was well below normalized replacement levels primarily due to COVID.
Turning to Slide 13.
Our 2021 free cash flow forecast has increased to a range of $650 million to $750 million from our previous forecast of $400 million to $700 million.
This reflects the expected impact from OEM vehicle delivery delay due to the chip shortage.
2021 forecasted free cash flow is below prior year's record level under COVID conditions but is well above our historic levels.
It also reflects our strategy to balance growth in the capital-intensive FMS business, with generating positive free cash flow over the cycle.
Balance sheet leverage this year is expected to finish below 250%, which is the bottom end of our target range.
Importantly, as Robert mentioned, we now expect to achieve ROE of 16% to 17% this year, with a declining depreciation impact and a stronger-than-expected recovery in the used vehicle sales market.
Rental demand recovery and lease pricing initiatives are also expected to contribute to our increased ROE forecast.
Higher year-to-date comparable EBITDA, which excludes the impact of gains and losses on used vehicle sales, reflects revenue growth and improved operating performance.
Turning now to our earnings per share outlook on Page 14.
We're raising our full-year comparable earnings per share forecast to $720 million to $750 million from a prior forecast of $550 to $590 and well above a loss of $0.27 in the prior year, which included COVID effects.
We're also providing a third-quarter comparable earnings per share forecast of $1.95 to $2.05, significantly above our prior year of $1.21.
Third-quarter earnings are expected to be down sequentially, reflecting lower expected gains from fewer used vehicles sold due to lower inventory levels as well as the estimated impact on SCS automotive due to the chip shortage and plant retooling.
Our forecast assumes that strong freight and economic conditions continue into 2022 and a continuation of the current tax policy.
Lease, rental, and used vehicle sales performance are the key drivers of higher expected results.
We expect lease to benefit from our pricing actions, increased sales activity, and improved operating performance.
We also expect pricing in rental and used vehicle sales to remain strong.
We're forecasting quarterly gains around $35 million for the balance of the year, reflecting higher pricing, partially offset by fewer vehicles sold due to low inventory levels.
In FMS, the depreciation impact from prior residual value estimate changes is expected to continue to decline, resulting in a year-over-year benefit of approximately $40 million in the third quarter of 2021.
This benefit does not include any potential impact from gains or losses on sale or valuation adjustments, accelerating outsourcing trend in supply chain, including growth in e-commerce and last-mile delivery, support strategic investments in new products and technology aimed at driving future growth opportunities.
We expect labor markets to remain under pressure, particularly with drivers.
Private fleets are also experiencing this pain point, which we expect will continue to drive additional sales opportunities for our dedicated offering.
We are focused on initiatives to attract and retain drivers and be the employer of choice.
In supply chain and dedicated, we're on track to meet or exceed our high single-digit revenue growth targets.
Supply chain and dedicated returns are also anticipated to be impacted by higher labor costs as well as strategic investments in new technology and our brand awareness campaign.
Finally, the semiconductor shortage is expected to delay the delivery of some vehicles in FMS. We expect the impact of delivery delays to be offset by higher lease sales activity in the first half of the year as well as higher rental utilization and pricing.
Turning to Slide 15.
I'd like to provide a brief reminder regarding our planned actions to increase returns and achieve our ROE target.
As shown on the chart, the biggest driver is moving past higher levels of depreciation impact related to prior residual value estimate changes.
Slide 16 highlights the progress we're making on the five key areas from the prior page.
Strong used vehicle market conditions are expected to continue in 2021, and we're capitalizing on those trends through pricing actions and our expanded retail sales channel.
We expect the earnings benefit from the declining depreciation impact to continue.
In rental, strong year-to-date performance and our planned rental fleet growth are supported by strong pricing and demand trends.
In FMS, results continue to benefit from our lease pricing initiatives.
Revenue on leased vehicles increased year-over-year by mid-single digits, reflecting these pricing actions with additional opportunity going forward as we replace expiring leases at higher pricing levels.
Our multi-year maintenance cost initiative delivered more than $50 million in annual savings through the end of last year, and we are on track to achieve an additional $30 million in savings in 2021.
Cost actions also include exiting underperforming assets in locations that we expect will improve our long-term returns.
We're investing in strategic initiatives to accelerate growth in our higher return supply chain and dedicated businesses.
Slide 17 provides an updated view of the expected performance of our lease portfolio as a result of the pricing actions taken.
Substantially, all leases, with the exception of those signed in 2013, are expected to perform above our target return.
The leases signed in 2013 represent only 8% of our lease fleet.
The majority of the power fleet in this cohort will be replaced in the balance of 2021 at higher pricing.
As a result of our pricing and cost actions since 2014 as well as the analytics-driven pricing changes we are incorporating now, we expect the returns on our lease portfolio to continue to increase as the portfolio turns over to more recent and higher returning vintage years.
Although we are encouraged that we expect to exceed our target ROE of 15% in 2021, we remain focused on taking action -- additional actions to position our business to generate long-term returns of 15% ROE over the cycle.
As such, we're implementing actions to mitigate the impact on returns from future cyclical downturns.
These actions include maintaining balance sheet flexibility through a disciplined capital allocation strategy that will enable us to pursue higher return investments and strategic M&A opportunities as well as share repurchases.
In ChoiceLease, we're replacing certain leased vehicles prior to contract expiration during an upcycle in order to reduce the number of used vehicles that we need to sell during a downturn.
In rental, we're planning to shift our asset mix for better returns by growing our light- to medium-duty truck fleet, as we view this asset class as less susceptible and heavy-duty tractors to the impacts of the freight downturn.
This quarter, we completed an analysis of our residual values and life expectancies of our entire fleet, which included, among other factors, reviewing vehicles by class, condition, expected sales, availability of equipment, and technology changes.
As part of this review, we also factored in a potential future cyclical downturn on used vehicle prices.
As a reminder, in recent years, we significantly lowered the residual value estimates for our entire fleet to a level where used tractor prices have only been below these estimates in four of the last 21 years.
However, based on our most recent analysis, we made an additional modest reduction in residual values, primarily for certain tractors.
This change is intended to further reduce the probability of losses or need for accelerated depreciation during a potential cyclical downturn, even if tractor pricing returns to historical trough levels like they did in the early 2000s and in 2020.
We expect these changes will increase depreciation expense in 2021 by $18 million, representing approximately 1% of total depreciation expense for the year.
Before we go to questions, please note that we expect to file our 10-Q later today.
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compname reports q4 earnings per share $0.07.
q4 pro forma earnings per share $0.08 excluding items.
q4 earnings per share $0.07.
in 2021, expect to achieve net income attributable to rayonier of $44 to $56 million.
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Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Mark Culhane, Teradata's Chief Financial Officer, who will discuss our financial results.
We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons.
A replay of this conference call will be available later today on our website.
Teradata is off to a very good start in fiscal 2021.
We had solid growth in revenue and free cash flow and we exceeded our quarterly outlook on public cloud ARR growth, and both GAAP and non-GAAP EPS.
You all saw that we issued a release on April 21, pre-announcing our first quarter 2021 results as our quarterly earnings per share performance was higher than the guidance issued during our fourth quarter 2020 earnings call.
We saw significantly higher earnings per share resulting from strong performance in revenue and gross margin, as well as continued solid expense discipline.
With our customer base among the world's largest enterprises, and with large transactions, we can have non-linear quarters, which is why we encourage you to focus on a full-year outward and results rather than quarterly.
During his remarks, Mark will explain in more detail.
Now, on to the quarter.
Teradata grew in all three geographic regions.
Growth was driven by large cloud and subscription deals from customers making meaningful commitments to Teradata, adding to or expanding the workloads on Vantage.
We also executed higher margin consulting project data and a small fast-growing contribution from new customers and partners.
Our focus on profitable growth is as strong as ever, and we generated more profit dollars both year-over-year and sequentially.
We are resolute and dedicated to keep that momentum going and are building upon our solid fundamentals to energize growth.
In Q1, we continue to advance our cloud transformation, tightening the aperture on the strategy, and growing close momentum with customers, prospects, and partners by reinforcing our cultural ethos of inclusion and accountability.
We confirmed our market strength and differentiation for Teradata Vantage, our connected multi-cloud data platform for enterprise analytics.
Teradata holds a significant position in a large, important, and growing market.
As enterprises continue the digital transformation, the opportunity in cloud is significant and we are moving with speed and purpose to accelerate our positioning.
Teradata's capabilities in delivering outcomes across multi-cloud and hybrid environments, providing flexibility and lowering risk for the world's leading companies is being recognized with customers and the industry.
As a connected data platform, Vantage brings an integrated set of capabilities with open extensibility enabling partnerships with cloud-service providers, systems integrators, and independent software vendors.
Our heritage is an enterprise analytics with unparalleled skill to cost effectively address business challenges of governance and security for the largest companies in the world.
And their technology differentiation supports the large enterprises and their complex, mixed workloads containing strategic and operational, traditional, and advanced analytics, as we help customers drive business outcomes.
Our Q1 results demonstrate that our strategy is the right one, and it is resonating with current and prospective customers.
With 176% year-over-year growth and public cloud ARR during the first quarter, customer engagement and acceptance continues to grow and become more evident.
Customers are recognizing that our Vantage Cloud Platform is a great fit for their needs, and delivers business value from enterprise analytics in today's connected multi-cloud world.
Vantage offers the deployment flexibility they need.
Vantage software is consistent across all environments, whether multi-cloud, public-cloud, or on prem, supporting fast, easy, and low-risk migrations to the cloud.
Our flexible cloud pricing options are also strongly resonating with customers and could use just two quarters ago, customers liked having choice in selecting a more predictable blended pricing, or our usage based pay as you go option.
The unmatched power and skill in our Vantage platform, combined with deployment flexibility, and the pricing options we offer are all contributing to our public cloud ARR growth.
Let's walk through a representative sample of our Vantage cloud wins.
The team is running cloud business in all regions and with all of the leading cloud service providers, a tangible demonstration of the strength and the strategy and multi-cloud data platform.
A worldwide [Indecipherable] retailer is migrating it's on prem environment to Vantage on as your customer utilizes Vantage for sales and inventory analytics and reporting.
The move to Vantage on Azure allows for incremental and flexible growth needed to support more users and additional customer data driving enhanced insights into buying behavior that will result in more targeted offers.
Teradata is blended pricing model enables their customer to cost effectively move away from the confines of on prem architecture, and easily steal compute and storage as needed.
This customer also considered Snowflake and Azure Synapse Analytics, but ultimately chose to migrate Teradata and take advantage of the capabilities and Vantage as a service, including support for native objects to work new languages like Python and R, utils, like Jupiter and our studio and advanced analytics in machine learning and graph engines as well.
Sirius XM, the leading audio entertainment company in North America, with more than 150 million listeners is migrating to Vantage on AWS as it modernizes its data and analytics ecosystem.
Sirius XM is committed to continue innovation, using technology to understand listeners and drive more personalized communications.
Vantage on AWS will serve as a mission critical foundational component to the customer's hybrid, best of breed analytics ecosystem, supporting increasing users, more sophisticated analytics, and an ever growing amount of data.
Peoples decision to migrate to the cloud is the ability of Vantage to utilize low cost data storage offered with native object store.
Sirius XM considered other cloud native solutions that determined they wanted a multi-cloud environment and Teradata offered the flexibility and support to deploy across multiple public cloud platforms.
An American-based global health services company is migrating to Vantage on AWS for analytics and data science.
Working with Accenture, Teradata won this deal over competition from Snowflake and Amazon Redshift.
The Vantage on AWS environment will serve as the foundation for the customer to create a data superset that will enable innovation to improve patient health and lower healthcare costs to drive win-win growth.
One of Europe's leading mail and package delivery companies is migrating as on prem environment to Vantage on Google Cloud.
Banking serves as a platform for critical analytics used cases that support the company's strategic initiatives to drive an increase in its domestic parcel business.
We partnered with Accenture, and executed a successful personal concept against cloud native offerings.
Together our teams are able to demonstrate to the customer the flexibility and scalability of Vantage on Google cloud.
One f the world's largest auto manufacturers headquartered in Asia Pacific has a strategic plan to enable data analytics at scale, best global manufacturer has added to his Vantage platform on AWS to accommodate the increased volume of IoT data, and additional premiums coming from business users.
Insights from connected car data will drive product innovations and operational improvements in research and development.
With this expansion, the environment has become one of our largest cloud customers in APJ.
As we accelerate our cloud momentum, we are adding strong cloud leadership to the team.
We recently appointed Barry Russell, as General Manager of Cloud and SVP of Business Development.
Barry brings outstanding credentials in driving cloud transformations, and has successfully navigated through change initiatives similar to ours.
Barry is working across all the organizations in the company, unifying our efforts on acquired growth strategies to scale our cloud business.
He is also building partnerships and driving stronger collaboration with leading cloud service providers.
Along with the growth we see in public cloud, we also continue to have strong on prem and private cloud business.
Hybrid capabilities are extremely important to our customers as they move along their digital transformation journey.
We see customers making meaningful long-term commitments to Teradata, and investing in their on prem and private cloud environments as they continue along the transition continuum to public cloud.
These significant investments come as a result of receiving tangible and ongoing business value from Teradata and mutually beneficial business relationships.
For example, one of the top five wireless carriers in the U.S. expanded in the Teradata environment to support the integration of a number of new business units.
This customer is running over 7 million analytical queries and upwards of 20 million total queries per day to support 80 business applications critical to running its operations.
The customer needed the scale and complex workload management that we uniquely provide that support its high growth.
In a go to market transformation, we have added very capable and experienced leaders to augment a cloud first sales momentum and drive consistent value-based customer success.
These senior level appointments include sales leaders in both the EMEA and Americas regions, a worldwide TTM strategy and operations head, and their new global leader of alliances, each bringing a great deal of cloud experience to rapidly move us forward.
We're also going wide and deep in adding cloud [Indecipherable] experience to our selling teams.
Our total TTM headcount or selling capacity is growing sequentially.
We are seeing a cloud pipeline up a very strong double-digit percentage in core key verticals, as we have been addressing perceptions, increasing prospecting, and reinforcing strong customer relationships based on delivering lasting value.
Our GTM leadership has also kept his attention on tuning our consulting organization to contribute very specifically to our efforts in increasing cloud ARR.
We are building partnerships that will extend our reach in and our TTM efforts.
And all regions we are growing collaboration with cloud service providers and are creating joint go to market initiatives.
We are seeing increasing momentum with global systems integrators, gaining customers in the digital transformation journeys and helping them migrate Teradata on prem environments to Teradata in the cloud and in emerging markets such as in APJ, we're increasingly working with distributors to help us scale more rapidly.
In the quarter, we [Indecipherable] an open partnering approach, and announced alliances with core industry verticals that have needs for cloud based data analytics.
But imagine a couple.
We jointly announced new offerings with GE Aviation that we believe will help airlines improve passenger experience and revenue growth.
This partnership illustrates how integrating multiple data types helps organizations enable greater analytics ability.
We recently announced a partnership with Antuit.
Together, we will deploy the latest AI innovation to help retailers and consumer packaged goods companies optimized decision making for demand planning, assortment, allocation, and pricing.
We also joined the open manufacturing platform, where we will be working with other leading manufacturers to drive innovation and industrial IoT and manufacturing an automotive industry for.
zero solutions through cloud based data analytics.
Along with stronger partnerships, our technology innovation engine is going strong.
Our large airline modernizes data architecture by leveraging object stores as a journey to the cloud with advantages native object store feature and accelerated business insights by seamlessly joining data between the Vantage Cloud data warehouse and semi-structured data on object stores on demand.
Along with AWS, Google Cloud and Azure with verified compatibility with seven private cloud S3 compatible object storage technologies.
Our support for cloud native integrations was fathered as we enable our customers to securely collaborate with our consumers and partners, sharing and leveraging data across organizations to augment their analytics.
With Vantage users can now publish data to and subscribe data from cloud native data marketplaces like AWS Data Exchange, and Azure Data Share.
Demonstrating the strength of our technology garnered industry recognition in the quarter, Teradata was again named a leader.
This time Forrester named as a market leader in Cloud Data Warehouse.
In this ranking, we are solidly positioned as a leader along with three major cloud service provider platforms.
This endorsement validates the Teradata the top choice for those that need a multi-Cloud Data Warehouse platform for their enterprise analytics.
The strength of our company is in our people, and to build a continuously strong and vital organization our focus on diversity, equity, and inclusion or DE&I has woven into all that we do.
We know that we are a stronger organization when we embrace DE&I as that enables transparency, belonging, and opportunity, all contributing to business practices that drive consistent, profitable growth.
Last year, we committed to and met our goal of ensuring a diverse slate of candidates for all director and above positions, and we remain committed to working to eliminate unconscious bias throughout our hiring processes.
Within our senior leadership ranks, in the last two quarters, 60% of our appointments were diverse, including 40% female.
DE&I had an ongoing prioritized focus for us, and we are dedicated to actively and systemically ensuring we are driving a culture that values inclusion and supports, diversity, and equity of all forms.
Also, in the environmental, social, and governance arena, we are pleased to again be named one of the 2021 world's most ethical companies by ecosphere.
Operating with integrity at our core has always been our ethos, and we remain committed to doing business the right way.
We were honored to be recognized for the 12th consecutive year with best meaningful designation.
Throughout our transformation, we are reimagining Teradata into a more modern and relevant technology company.
As we grow, we are designing a more modern future of work environment with greater flexibility for our people and greater agility for the company with more hybrid work arrangements.
And as the world looks ahead to emerge from the veil of the COVID-19 pandemic, we're beginning a carefully phased reopening of our offices worldwide.
Unsurprisingly, we're using data and analytics to guide us to return an allocation only when safe for our employees in line with all local government and health advice.
And every situation we put our employees' health and well being first.
Our teams demonstrated great resilience throughout the past year, collaborating across changing work environments, and remaining accountable to our customers and to each other.
Best resilience set us up to thrive despite the challenges of the pandemic.
A year ago tomorrow, I was honored to be named as Teradata's next CEO, and my passion for this company and what we do has grown immensely.
I am very proud to work with this talented team of professionals that are committed to the power of data to transform how businesses work, and people love, and are obsessed with the success of our customers.
And even more proud of this teams unequivocal pivot to the cloud, our results, customer validation, and industry recognition are testimony to the focus and dedication to drive lasting business value for our customers and shareholders.
As I hand the call to Mark to discuss the financial performance in more detail, our Q1 results when another step in our strategy to win in the cloud, and achieve annual profitable growth.
We affirm a fiscal 2021 annual ARR and revenue outlook and reins of fiscal 2021 outlook for earnings per share and free cash flow.
Over to you, Mark.
Additional commentary on key metrics and segment trends can be found in the earnings discussion document on our Investor Relations webpage at investor.
I also want to remind everyone of the financial reporting change that we made for 2021 and announced on our prior earnings call since it appears that some street models use numbers not reflective of the reporting change.
To reiterate, beginning in fiscal 2021, we reclassified managed services related ARR and revenue from recurring revenue and into non-recurring consulting revenue.
And we reclassified third-party software related ARR and revenue out of recurring revenue and into non-recurring perpetual revenue.
Accordingly, the year-over-year comparisons that I will cite in my comments are based on the reclassified amounts for the first quarter of 2020.
And the full-year 2021 outlook that I provided on our prior earnings call is based on a comparison to the reclassified amounts for the full-year 2020.
Let's move on to the results for the quarter.
We are off to a very solid start to the fiscal year as Teradata exceeded the quarterly outlook we provided for public cloud ARR, as well as GAAP earnings per share and non-GAAP EPS.
The company exceeded the outlook we provided due to solid execution by our go to market team, strong product market fit for our customers, our team's continued focus on profitable growth, and a strong focus on cash flow.
We pre-announced our preliminary results two weeks ago once it became evident that we would materially exceed our first quarter expectations in GAAP earnings per share and non-GAAP EPS.
As Steve noted, we released this information during our normal quiet period, and we could only provide limited context as we had not completed our full analysis of results at that time.
I will go through the drivers of the quarter.
But before I do, I want to remind everyone that Teradata engages in large transactions with large enterprise customers.
We provided an annual outlook for fiscal 2021 ARR in revenue versus quarterly forecasts because of the reasons explained during our Q4 2020 earnings call that can create more variability in our quarterly results and make quarterly forecasts more difficult.
Let's start with ARR.
Public cloud ARR grew sequentially by over 18 million, ending the quarter at 124 million as reported or 176% growth year-over-year.
We exceeded our outlook of 165% growth year-over-year, due to continued natural momentum of our Vantage multi-cloud platform.
We continue to see customer demand for Vantage across all three leading public clouds.
While today, we have mostly been focused on our existing customers, we are encouraged by the potential new customer activity we see in the cloud pipeline as we move forward into the future with our new efforts on customer acquisition.
Importantly, we are also very pleased to see continued good organic growth by our annual cloud customer cohorts, especially from those customers who moved to the cloud with Teradata during the first quarter, where we saw strong double-digit growth during the quarter.
Expansion rates continue to be very healthy.
We are very pleased by the value our customers see for Vantage in the cloud, which gives us confidence to reaffirm our outlook for fiscal 2021 public cloud ARR year-over-year growth to be at least 100%.
Total ARR increased to 1.404 billion at March 31, 2021 from 1.254 billion at March 31, 2020.
Total ARR grew 12% year-over-year as reported.
On a sequential basis total ARR was down 1% as reported and flat in constant currency given very strong FX headwinds.
Consistent with prior years, our first quarter ARR sequentially declined, as it is our seasonal low point for ARR, and the fourth quarter is our seasonal high for ARR.
As such, we continue to see and expect growth in subscription and public cloud ARR during 2021 and we reaffirm our full-year 2021 total ARR year-over-year growth of mid-to-high single-digit percentage.
Turning to revenue, we had strong performance in all revenue categories, which increased total revenue to 491 million as reported from 434 million, an increase of 13% year-over-year, and 10% in constant currency.
As a reminder, this is our first quarter reporting with our new revenue classifications, which has no impact on total revenues, but has the net impact of moving certain revenues out of recurring revenues into perpetual and consulting revenues.
I'll refer you to this quarter's supplemental financial schedules, and our prior quarter's earnings discussion document for proper comparisons to prior reporting periods on the investor relations website at investor.
Recurring revenue as reported increased to 372 million from 311 million, a 20% increase year-over-year, and a 17% increase in constant currency.
There were two key drivers for this increase.
First, we had a very strong Q4 2020 ARR growth, both public cloud and subscription, which contributed to the foundation for the strong year-over-year increase in recurring revenue.
And second, as I mentioned in our fourth quarter earnings call, we expected that given our high-end enterprise customer base, we may see many of our existing customers operate Vantage on premises, as well as in the cloud.
And that may change the revenue recognition for some existing on premises contracts to a different ratable recognition period, other than quarterly.
We experienced a few significant transactions, principally driven by two significant renewals, one from a major health services company and another from a major Telco company where these customers made substantial commitments to Teradata and extended and expanded their arrangements with us not only on premises, but also added the ability to use Vantage in the cloud.
Ultimately, the terms of these arrangements resulted in components of on premise software recurring revenue being recognized on a recurring annual basis, rather than on a recurring quarterly basis under U.S. Generally Accepted Accounting Principles.
We have not changed our accounting policies.
These few significant transactions resulted in approximately 24 million of 2021 recurring revenue recognized in the first quarter, rather than ratably across each of the four quarters of 2021.
This will not impact the full-year 2021 recurring revenue associated with these transactions.
Only the timing of recognition within 2021 was impacted.
There will not be any impact of fiscal 2022 and beyond revenue.
We plan to see the same amount of recurring revenue in the first quarter each year in the future during the multi-year term of these contracts.
The variability in recurring revenue caused by these types of arrangements is a significant reason why we stated in our prior earnings call, we were not providing quarterly recurring or total revenue outlooks, but rather encourage you to focus on our annual outlook.
The overall economics of these transactions have not changed.
Only the timing of recognition of recurring revenue.
And importantly, these few transactions are not included and did not impact the 176% year-over-year growth and public cloud ARR we reported this quarter.
Turning to perpetual and consulting revenue, perpetual revenue of 23 million as reported showed flat growth year-over-year, but was ahead of the outlook comments we provided at the beginning of the year.
While we are not emphasizing perpetual in our go-to-market model, perpetual revenue performed better than we anticipated, due primarily to deal mix in EMEA and third party software products.
Consulting revenue as reported decreased to 96 million from 100 million a 4% decrease year-over-year.
As we noted in our outlook comments last quarter, we anticipated consulting revenue to decline by 15% year-over-year in the first quarter of 2021, and to gradually improve throughout fiscal 2021.
Our first quarter performance was well ahead of that trajectory as we saw better execution of engagements around the world, from both direct engagement with customers and joint engagement with partners that resulted in increased revenue in the quarter.
Turning to gross profit, Q1 gross margin was 64.2%, approximately 10 percentage points greater than last year's period and approximately 5 percentage points greater than last quarter.
We generated 315 million in gross profit dollars, which is 80 million higher than the same period last year, and 24 million better than last quarter, despite our total revenues been unchanged sequentially.
The primary reasons were: first, we had a higher amount of recurring revenue at an improved gross margin rate driven by greater subscription and more cloud efficiencies versus prior year.
Second, gross profit dollars benefited directly from the recurring revenue recognized annually in the quarter that I mentioned previously.
And third, perpetual gross profit dollars were higher than anticipated driven by both perpetual revenue and gross margin rate higher than anticipated, driven by deal mix.
And last, consulting margin was higher than anticipated driven by more profitable revenue mix.
Turning to operating expenses, total operating expenses were down 1% year-over-year and 11% sequentially.
This is due primarily to a lower cost based beginning fiscal 2021, spending less in discretionary SG&A year-over-year, less sales commission expense in Q1 2021 when compared to our traditionally high bookings in Q4 2020, and a focus on efficient operational execution.
As a reminder, we undertook some cost actions in Q3 2020 to drive operational efficiencies that funded reinvestment in our strategic cloud initiatives.
Turning to earnings per share, earnings per share of $0.69 significantly exceeded our outlook range of $0.38 to $0.40 provided last quarter, by $0.30 when using the midpoint.
To provide some context are the main drivers of this $0.30 differential, approximately $0.16 is attributable to the few transactions where recurring revenue was recognized on an annual basis in the first quarter instead of on a quarterly basis throughout full-year 2021.
This has no impact on full-year 2021 EPS.
The remaining $0.14 was driven by the following and will impact full-year 2021 EPS.
The higher than expected perpetual revenue and related higher gross margins, higher than expected consulting revenue, and related higher gross margins, and better recurring revenue growth in operational efficiencies.
Turning to free cash flow, we had an excellent quarter of free cash flow generation driven by strong cash collections, higher operating margin, and other favorable working capital dynamics.
Free cash flow in the quarter was 105 million, well ahead of the pace needed to achieve the annual free cash flow outlook of at least 259 we provided at the beginning of the year.
As an update to cash payments related to our Q3 2020 cost actions, we previously expected to make total cash payments of approximately 42 million during fiscal 2021 and that 27 million was to be paid in the first quarter of fiscal 2021.
We now expect total cash payments in fiscal 2021 of 36 million.
We paid 18 million during the first quarter of fiscal 2021, and the remaining 18 million is expected to be paid during the remainder of fiscal 2021.
About 14 million of the remaining 18 million is expected to be paid in the second quarter.
Turning to stock buyback, we bought back 2.6 million shares at an average price of $32.94 or 85 million in total, as we take advantage of our strong balance sheet to buy back stock and offset dilution for shares issued this year.
Turning to our outlook, as a reminder, the outlook we're providing is based on the financial reporting change that we made for 2021 and announced on our prior earnings call.
To reiterate beginning in fiscal 2021, we reclassified managed services related ARR and revenue from recurring revenue and into non-recurring consulting revenue.
And reclassified third party software related ARR and revenue out of recurring revenue and into non-recurring perpetual revenue.
Accordingly, the year-over-year comparisons that I will cite in my comments for the second quarter and full-year 2021 outlook is based on a comparison to the reclassified amounts for the full-year and second quarter of 2020.
For the full-year, we are reaffirming our fiscal 2021 outlook for ARR and revenue.
Probably cloud ARR is expected to grow at least 100% year-over-year from 106 million at December 31, 2020.
Total ARR is anticipated to grow in the mid-to-high single-digit percentage range year-over-year from the restated balance of 1.425 billion at December 31, 2020.
Total recurring revenue is expected to grow in the mid-to-high single-digit percentage range year-over-year from the restated balance of 1.309 billion for the year ending December 31, 2020.
Total revenue is anticipated to grow in the low-single-digit percentage range year-over-year from the 1.836 billion for the year ended December 31, 2020.
We are raising our full-year fiscal 2021 non-GAAP earnings per share and free cash flow outlook.
Non-GAAP earnings per diluted share are expected to be in the range of $1.61 to $1.67, which at the new midpoint of $1.64 is a $0.10 increase from the midpoint of the range previously provided.
As I mentioned in my comments regarding first quarter 2021 results, $0.14 is flowing through to the full-year, but is offset by $0.06 of higher tax rate and weighted average diluted shares outstanding.
We are raising our full year earnings per share outlook further by $0.02 at the midpoint.
Free cash flow for the year is expected to be in the range of 275 million to 300 million, which is an increase from the prior outlook of at least 250 million.
We expect to continue to be opportunistic in share buybacks and have approximately 352 million of share repurchase authorization at March 31, 2021.
Similar to last quarter, we wanted to provide you with a few markers to assist you with your modeling of the second quarter of 2021.
We anticipate Q2 recurring revenue to be slightly down to Q1.
Q2 consulting revenue to be roughly flat to Q1 and Q2 perpetual revenue declined by about a third from the Q1 2021 amount.
We anticipate Q2 gross margins to be up approximately 40 basis points to 50 basis points from the comparable quarter in the prior year, and Q2 operating margins to be up approximately 250 basis points from the comparable quarter in the prior year.
We now expect the full-year tax rate to be approximately 24% to 25%.
Given the rise in our stock price, and its impact in calculating fully diluted weighted average shares outstanding for earnings per share purposes, we now assume about 114 million fully diluted weighted average shares outstanding for both the full-year and the second quarter.
With that, the outlook for the second quarter for 2021 is as follows: Public cloud ARR is expected to grow at least 155% year-over-year or in the range of 15 million to 20 million sequentially.
Non-GAAP earnings per diluted share to be in the range of $0.47 to $0.49.
And with that, operator, we are ready to take questions.
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q1 non-gaap earnings per share $0.69.
q1 gaap earnings per share $0.47.
q1 revenue rose 13 percent to $491 million.
sees q2 non-gaap earnings per share $0.47 to $0.49 excluding items.
fy non-gaap earnings per diluted share, excluding some items, is now expected to be in range of $1.61 to $1.67.
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I'm Christine Marchuska, vice president of investor relations for Diebold Nixdorf.
I would encourage investors to review the shareholder letter as it contains additional information regarding the progress of the company.
We also made an announcement today regarding our upcoming CEO transition.
In a moment, we will share remarks from Gerrard Schmid, president and chief executive officer, as well as Octavio Marquez, who will be succeeding Gerard as Diebold Nixdorf next CEO.
In this message, Gerard will provide commentary on the business environment, our accomplishments in 2021 and then introduce Octavio.
Finally, Jeff Rutherford, chief financial officer, will discuss the company's financial performance, including highlights from the quarter and year, along with our guidance for 2022.
Then take your question.
Additional information on these factors can be found in the company's periodic and annual filings with the SEC.
Participants should be mindful that subsequent events may render this information to be out of date.
And now, I'll hand the call over to Gerrard.
It's a pleasure to speak with you today.
In 2021, we faced unprecedented challenges brought on by the second year of the pandemic.
I'm pleased to report that in the fourth quarter, we delivered on our objectives.
I work over the last few months of 2021.
Was painstaking and meticulous, requiring us to look at every area of opportunity.
from logistics and supply chain, to prepayments, and payables.
What seemed impossible to those outside our company was in fact possible.
And we've once again shown that we're resilient and strong.
While supply chain and logistics challenges were two of the bigger themes in 2021, it is still noteworthy to share that in 2021, we shipped more ATMs, more self-checkout devices, and more point-of-sale devices than we did in 2020.
A testament to the resilience of our model.
While the pandemic has disrupted our world, and caused us to rethink what the future might look like, we have time and again in our ability to build an agile company that challenges the status quo, and goes the extra mile to execute well.
The environment we've been in for nearly two years has brought to the forefront the rapidly changing demands of consumers, and the need for self-service solutions wherever possible.
We are well-positioned to offer these solutions plus growth opportunities for our customers whether at a bank, the grocery store, or retailer.
To help them deliver more digital, flexible, and effective consumer journeys.
In retail, the evolution of consumer behavior, along with the rapidly changing labor dynamics, have led to increased demand for self-service and automation, and growth has been driven by customer momentum for a self-service solutions.
In 2021, we saw growth above market rates in Europe for a self-service hardware, services, and software.
We also continue to make inroads into other markets, such as the United States, and Australia.
In banking, we continue to see strength in demand for cash recyclers as banks rethink their branch footprint, and move more toward automation, and efficiency around their real estate.
As I share with large U.S. customers has increased.
In 2021, our America's order levels were 16% higher than 2020, and 17% higher than pre-pandemic levels in 2019.
financial institution to deploy DN series cash recyclers.
Let me now turn to highlights our world class services organization.
We, as well as our customers, consider this to be one of our best assets, and in many cases, it is a major contributor to DN winning new business, and expanding our current relationships.
It also provides opportunities for new horizontals like electric vehicle, or EV charging stations, which I will comment on later.
In 2021, we continue our journey of delivering superior service by reaching a milestone with connected devices for our all connected data engine.
With approximately 150,000 banking self-service devices connected to the solution, which represents approximately 122% year-on-year growth in connected devices.
Our ancient languages, real time internet-of-things capability to support our predictive maintenance offering, which has been reducing customer downtime significantly.
Equally, in retail, we continue to deliver value and services to our customers.
I would be remiss to not mention an ongoing success story.
We achieved with one of our key customers, a major UK based retailer.
This customer relies on us for flawless execution and service excellence, and has over 25,000 checkout lanes.
I'm pleased to report that this past year we delivered a 100% availability of point-of-sale, and self-checkouts states on a two most demanding shopping days of the year.
We help this retailer improve their end-customer satisfaction with a shorter queues, shorter wait times by increasing their sales for this period, year-over-year.
This is now the 10th consecutive year that we have achieved this performance goal.
And a testament to our services capability.
We also implemented this program with another large European retailer with the same success proving this is a repeatable model for retailers.
We believe delivering or exceeding the service expectations of our customers is one of the best foundations for putting additional technology into the field.
And both of these retailers placed additional self-checkout orders with us in December.
We were glad to see the trust that retailers have in us to continue to deliver quality services to them and their customers.
Further, augmenting our strength in services, I'd like to comment briefly now about the strides he made in the fourth quarter into EV charging stations, especially in Europe.
Today EV charging value chain is fragmented, multiple players, including start-ups, mid-sized companies, and large electronics conglomerates are competing in the space.
Additionally, there are multiple roles along the value chain that are inconsistent.
This is a large and growing market with significant demand.
By 2026, the number of public EV charging stations in Europe, and the United States will be greater than the number of ATM devices.
But more EV drivers, especially in Europe, where there are less likely to have home charging opportunities, and rental and fleet cars, and public transportation, moving to more electric vehicles, there will be a need for more public charging stations.
Currently, there are over 40 relevant [Inaudible] or chargepoint operators globally, and we are working on in talks with many of them.
Our global service capability, including our technicians, and our skills in global spare parts, logistics management and multilingual help desks have resonated with several market participants that lack access to these skills as they look to scale their own businesses As of Q4 2021, we are contracted for several thousand charging stations in Europe and the US with a short term pipeline of three times the size of our current base.
The team has set a target to service over 30,000 charging stations by the end of 2022.
One notable recent win that I would like to pull out is with Compleo, one of the leading full service providers with charging technology in Europe.
Who is this partnership deal will provide a full range of managed services for initially over 1,000 of Compleos DC fast charging stations in public locations across Germany with the potential for expansion.
Lastly, as you know, diversity and sustainability have been an important focus for us as a company.
I'm proud to note that in 2021, females accounted for over 60% of our senior hires, at the vice president and above level.
And we made important strides environmentally, reducing our scope one and two carbon emissions by $0.06.
Our shareholder letter detailed further accomplishments on this front.
And I want to emphasize how grateful I am to our teams for their work and dedication in this important area.
Over the past four years, we have undertaken a comprehensive restructuring and transformation effort.
The company has made significant strategic and operational progress.
We have growing profitability, gain market share through our DN series and self-checkout solutions, and entered new growth markets.
And I'm proud that we've achieved these goals while also delivering four years of consecutive improvements in customer satisfaction.
We entered 2022 with a strong backlog, a seasoned executive team, and operations that have proven to be resilient despite the pandemic, and a challenging macroeconomic backdrop.
As we look ahead to move past the pandemic and build further momentum in growth areas like EV charging services and payments.
While continuing to optimize our core businesses in retail and banking, it is the right time for Octavio to assume the CEO role.
Octavia needs no introduction to many of our customers and to our employees.
He has been leading a global banking segment with responsibility for approximately 70% of the company's revenues, and he's deeply passionate about our customers and our business.
He has a deep understanding of our business, and is the right person to lead people mixed off into the future.
I will remain a member of Diebold Nixdorf, board of directors, until my term expires at the 2022 shareholder meeting.
I'll also be working closely with Octavio, and the rest of the leadership team as an advisor for a few months to ensure a smooth transition.
It has been a tremendous privilege serving as CEO of Diebold Nixdorf.
And, I believe that we have materially advanced the operational, and strategic direction of the organization.
I'd like to now hand the call over to Octavio for a brief introduction.
It has been a pleasure being part of our journey under your leadership.
I am truly excited to lead Diebold Nixdorf going forward.
I have been with Diebold Nixdorf since 2014, and have thoroughly enjoyed contributing to our evolution to a leader of self-service banking and retail technology.
I have had the pleasure of working closely with our customers across the globe.
When I initially joined the [Inaudible] I worked closely with our Latin American customers, and then managed or American banking customer segment, and for the past 18 months have been working closely with our global banking customers.
I have seen first hand how particular role we play for our customers, and how we can continue to innovate to serve them with a broader range of solutions.
We have a passionate and talented employee base that have been instrumental to the progress of the company.
I am also energized by our growth opportunities, like our strong felt check out growth in retail, our managed services, efforts in banking and retail, along with our newer but equally interesting opportunities in payments, and EV charging services.
We have been vigorous in execution on improving our efficiency as a company, and I look forward to further enhancing our execution.
The team and I appreciate your contributions, and wish you well on your future endeavors.
In the year ahead, we look forward to moving past the global macro challenges we've experienced by leveraging our mitigation strategies, and delivering for our customers and shareholders.
Diebold Nixdorf is well-positioned to capitalize on the strong demand for our products and solutions as customers continue to desire our market leading devices, services, and software.
And as the market moves toward a self-service automation focus driven by consumers.
As a reminder, please see our shareholder letter for the full financial details from the quarter and full year.
Here I will highlight a few of our key performance metrics.
In the fourth quarter, total revenue was $1.6 billion, a decrease over fourth quarter 2020 of approximately 4% as reported, and a decrease of approximately 1%, excluding the foreign currency impact of $22 million and $13 million impact from divested businesses.
Adjusted for foreign currency and divestitures, product revenue increased approximately 4%, services revenue decreased the approximately 6%, and software revenue increased approximately 3% over fourth quarter 2020.
During the quarter, we experienced delayed revenue due to extended outbound transport times and inbound component delays.
This primarily impacted the US, Latin America, and certain iAPAC countries, and increased our revenue deferral to 2022 by $30 million to a total of $150 million.
On a sequential basis, total revenue increased the approximately 11%.
Full year 2020 revenue was $3.905 billion that was driven by demand for our DN series ATMs, especially our cash recyclers, our self-checkout devices, and the tax services offset by approximately $150 million of deferred revenue due to supply chain and logistics challenges.
On a year-over-year basis, 2021 revenue was approximately flat as compared to 2020 as reported, and also flat excluding a foreign currency benefit of $74 million, and the $60 million impact from divested businesses.
Adjusted for foreign currency and divestitures, product revenue increased approximately 4%, services revenue decreased approximately 4%, and software revenue increased approximately 2% for the full year 2020.
For the fourth quarter, we reported adjusted of $126 million, and adjusted EBITDA margin of 11.9%.
Fourth quarter adjusted EBITDA results reflect a reduction in operating expenses fully offset by the decline in gross profit due to the revenue deferral and non-billable inflation of approximately $30 million.
Full year 2021 adjusted EBITDA was $450 million, the lower-end of our guidance range primarily due to supply chain challenges, which increases deferral of revenue, as I mentioned earlier to approximately $150 million, non-billable for the year was approximately $15 million.
Last week we delivered free cash flow of $407 million for the fourth quarter, resulting in $101 million for the fiscal year 2021.
This record fourth quarter free cash flow was achieved through tremendous efforts of our sales, operation, and finance organizations.
The fourth quarter marks the conclusion of the DN Now transformation and restructuring program.
As a reminder, going forward, we will not present non-GAAP adjustments to earnings except for the analyzation of intangible purchase accounting assets and when appropriate, non-recurring items such as M&A activities.
Our revenue guidance for the full year 2022 is $4 billion to $4.2 billion, which reflects approximately $150 million in revenue deferral from 2021 to 2022, and organic growth and pricing growth, partially offset by model divestitures and terminated low-profit service contracts, and the potential ongoing logistics and supply chain disruptions.
While we are very encouraged by the demand environment for our solutions, our guidance range also reflects caution regarding the timing of global logistics and supply chain environments.
Our adjusted EBITDA outlook is $440 to $460 million, taking into account gross profit growth due to increased revenue and a model gross margin expansion of approximately 100 basis points, partially offset by an increase in operating expenses.
Adjusted EBITDA will likely be weighted toward the second half of 2022 as our pricing and incremental cost management actions begin to take hold, and volume builds throughout the year.
Our free cash flow outlook is $130 to $150 million, reflecting our EBITDA outlook, normalization of working capital, and combination of the DN Now transformation and restructuring program and related payments.
It should be noted that our free cash flow guidance does not reflect any benefit from a potential debt refinancing.
In terms of the first quarter, we are modeling gross margin to be comparable to the fourth quarter 2021 due to the continuation of non-billable inflation.
Additionally, we will experience an increase in first quarter operating expenses due to wage inflation, and growth in infrastructure investments.
And as such, we expect the first quarter to be the low point for 2022 operating profit and margin.
That concludes my review of the results.
With our transition to a new CEO just been announced.
Operator over to you.
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qtrly gaap loss per share $0.49; qtrly non-gaap earnings per share $0.06.
sees fy 2022 total revenue $4.0 billion - $4.2 billion.
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Joining us on the call today are Rod Larson, president and chief executive officer, who will be providing our prepared comments; and Alan Curtis, senior vice president and chief financial officer.
Our comments today also include non-GAAP financial measures.
We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021.
These results reflect a marked sequential increase in activity as four out of five of our operating segments delivered a revenue increase on average of more than 19%.
As announced yesterday, we are raising our EBITDA guidance range to 200 to $225 million for 2021.
And to avoid any doubt or confusion, we are not changing our free cash flow guidance.
The confidence in increasing our guidance range stems from our strong first-half 2021 financial performance, the increase in demand, energy demand as a result of the increasing number of COVID vaccinations allowing for an easing of restrictions.
The OPEC Plus production discipline yielding supportive commodity prices and the positive trend in the global economic recovery.
Confidence is returning to the energy services industry and especially to those companies that can help their customers with carbon reduction goals.
This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpin our general expectation for increased activity levels over the next several years.
Now I'll focus my comments on our performance for the second quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2021, and Oceaneering's improved consolidated 2021 outlook, including a higher adjusted EBITDA guidance range, continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position.
Now to our second-quarter summary results.
We were very pleased with our adjusted operating results.
For the quarter, we generated adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA of $60.6 million, exceeding consensus estimates.
During the second quarter, we generated $50.5 million in cash from operating activities and used 12.6 million for maintenance and growth in capital expenditures resulting in free cash flow generation of $37.9 million.
In addition, during the quarter, we retired $30.5 million of our 2024 senior notes through open market repurchases.
In total, our cash position increased by $13.3 million, resulting in a cash balance of $456 million at the end of the second quarter.
Liquidity remains strong with no borrowings against our $500 million revolving credit facility and no loan maturities until November of 2024.
The positive operating results were attributable to a seasonally influenced 14% sequential growth in revenue, complemented by continued operating discipline and incremental efficiency gains.
As expected, compared to the first quarter of 2021, our energy segments in aggregate posted double-digit revenue growth and improved adjusted operating results in the second quarter.
Our Aerospace and Defense Technologies or ADTech segment delivered sequential growth and solid adjusted operating results.
Sequentially, consolidated adjusted operating results increased by $9.1 million with all of our operating segments generating positive adjusted operating results and EBITDA.
Now let's look at our business operations by segment for the second quarter of 2021.
Subsea Robotics or SSR, adjusted operating income improved on nearly 20% higher revenue.
Our SSR quarterly adjusted EBITDA margin of 31% was consistent with recent quarters as pricing remains stable.
Operating activity in our SSR segment resulted in sequentially higher ROV days and related tooling activity and higher survey activity.
The SSR revenue split was 80% from our remotely operated vehicles or ROV business and 20% from our combined tooling and survey businesses, compared to the 78-22 split, respectively, in the immediate prior quarter.
As we forecast sequential ROV days on hire increased on standard seasonality and recovering offshore activity.
With an increase in days for both drill support and vessel-based services, days on hire were 14,005, as compared to 11,887 during the first quarter.
Our fleet use was 58% in drill support and 42% in vessel-based services versus 64% and 36%, respectively, in the first quarter.
We maintained our fleet count at 250 ROV systems, and our second-quarter fleet utilization was 62%, up significantly from 53% in the first quarter.
During the second quarter, we retired five of our conventional world-class ROV systems and replace them with three upgraded conventional world-class systems and two Isurus world-class RV systems that are currently engaged in renewables work.
Average ROV revenue per day on hire of 8,056 was 2% higher than average ROV revenue per day on hire of $7,874 achieved during the first quarter.
At the end of June, we had ROV contracts on 73 of the 126 floating rigs under contract or 58% market share, which was flat with the quarter ending March 31st, 2021, when we had ROV contracts on 78 of the 105 floating rigs under contract.
Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%.
Turning to manufactured products.
Sequentially, our second-quarter 2021 adjusted operating income line on lower segment revenue.
Adjusted operating income margin decreased to 1% in the second quarter from 4% in the first quarter of 2021 as lower revenue increased the ability to leverage our cost base.
Activity in our mobility solutions or nonenergy business remained muted during the second quarter of 2021.
Our manufactured products backlog on June 30th, 2021, was $315 million improving on our first-quarter backlog of $248 million.
Our book-to-bill ratio was 1.3 for the six months ended June 30th, 2021, and was 0.8 for the trailing 12 months.
Offshore projects group or OPG's second-quarter 2021 adjusted operating income declined as compared to the first quarter of 2021 despite a meaningful increase in revenue.
Revenue benefited from ongoing field activities in several projects in Angola and a seasonal increase in intervention, maintenance, and repair or IMR work in the Gulf of Mexico.
The sequential decline in adjusted operating income margin from 10% in the first quarter of 2021 to 7% in the second quarter of 2021 and was primarily due to unplanned downtime and related costs associated with the Angola riserless light well intervention project, which was partially offset by higher IMR activities in the Gulf of Mexico.
Integrity management and digital solutions or IMDS, sequential adjusted operating income was higher on a 19% increase in revenue, higher seasonal activity and the start-up of several new multiyear projects contributed to the revenue increase, continuing efficiency improvements, including utilization of field personnel resulted in adjusted operating income margin increasing to 7% in the second quarter of 2021 from 5% in the first quarter of 2021.
Our ADTech second-quarter 2021 adjusted operating income improved from the first quarter of 2021 on a 20% increase in revenue.
Adjusted operating income margin of 18% was better than forecast due to project mix and favorable rate base adjustments.
Adjusted unallocated expenses of $30.3 million was slightly lower sequentially due to lower expense accruals related to incentive-based compensation forfeitures.
Now I'll address our outlook for the third quarter of 2021.
We are projecting a decline in our consolidated adjusted operating results on moderately lower revenues with adjusted EBITDA in the range of 50 million to $55 million.
We expect commodity prices to support good activity levels in our energy segments, particularly for short-cycle work.
For the third quarter of 2021 as compared to the second quarter, we expect relatively flat adjusted operating profitability in our energy segments to be more than offset by lower than -- by lower ADTech adjusted operating results and higher unallocated expenses.
For our third-quarter 2021 operations by segment as compared to the second quarter of 2021, for SSR, we are projecting relatively flat activity and adjusted operating profitability in our ROV, survey and tooling businesses with similar ROV utilization as compared to the second quarter.
SSR adjusted EBITDA margin is anticipated to remain consistent with the prior several quarters.
For manufactured products, we anticipate relatively flat revenue and adjusted operating profitability.
Board activity continues to look encouraging in our energy products businesses.
However, activity continues to lag in our mobility solutions businesses.
For OPG, we forecast lower revenue and relatively flat adjusted operating results.
We expect the Gulf of Mexico IMR activity to remain at a relatively high seasonal level through the third quarter.
The riserless well intervention project and field support contract in Angola are expected to continue for a portion of the third quarter.
Our expectations for relatively flat adjusted operating results takes into account the above-described levels of activity and improved uptime as compared to the second quarter.
For IMDS, we expect both revenue and adjusted operating results to remain relatively consistent for the second quarter -- with the second quarter of 2021.
For ADTech, we forecast lower revenue and lower adjusted operating results due to a change in project mix as compared to the second quarter.
Unallocated expenses are expected to be in the mid-$30 million range due primarily to increased information technology infrastructure costs and normalized accruals for incentive-based compensation.
Directionally, for our full-year 2021 operations by segment as compared to 2020, for SSR, we expect adjusted operating results to improve on slightly higher revenue.
Our ROV days on hire are projected to remain relatively flat year-over-year with minor shifts in geographic mix.
Results for tooling-based services are expected to be flat with activity level generally following ROV days on hire.
Survey results are expected to improve on growing international activity.
SSR forecasted adjusted EBITDA margin is expected to remain relatively consistent with what we achieved in 2020.
For ROVs, we expect our 2021 service mix to remain about the same as the 2020 mix of 62% drill support and 38% vessel-based services with higher vessel-based percentages during the seasonally higher second and third quarters.
We estimate overall ROV fleet utilization to be in the mid- to high 50% range, again, with higher seasonal activity during the second and third quarters.
We continue to forecast that our market share for the drill support market will remain around 60% for the foreseeable future.
As of June 30th, 2021, there were approximately 28 Oceaneering ROVs onboard 37 drilling rigs with contract terms expiring by year-end.
During the same period, we expect 33 of our ROEs on 40 floating rigs to begin new contracts.
For manufactured products, we forecast lower operating results due to the long cycle nature of this business and reduced customer capital commitments during 2020.
Operating results in 2020 benefited from contracts awarded in 2019 that allowed for beneficial cost absorption through the year.
In 2021, we expected the improved order intake seen during the first half of the year will drive increased activity in the fourth quarter.
Our nonenergy mobility solutions businesses continue to see reduced activity and order intake, however, is building that we will see order intake improvement in 2022.
We forecast that our operating income margins will be in the low to mid-single-digit range for the year the segment book-to-bill ratio will be in the range of 1.1 to 1.5 for the full year.
OPG, we forecast a meaningful annual improvement in adjusted operating results on higher revenue.
Good vessel utilization is expected to continue through the third quarter with operators remaining active with IMR work in the Gulf of Mexico.
However, we also expect a typical seasonal decline in activity during the fourth quarter.
Our expectations for utilization are driven by the commodity pricing which remains supportive to short-cycle call-out work, which is the majority of the work performed in this segment.
Utilization of our vessels, both owned and chartered has improved to the point that may lead us to entering the spot charters on an as-needed basis this year.
For IMDS, we forecast improved operating results on higher revenue.
We expect second-half 2021 revenue to continue to benefit from incremental multiyear contracts that began during the first half of 2021.
We forecast that our adjusted operating income margin will continue to improve through the end of the year as we continue to drive more efficiency in this business.
Adjusted operating margins are expected to average in the high single-digit range for the year.
For ADTech, we expect to improve adjusted operating results on increased revenue with an annual adjusted operating margin approximately the same as that achieved in 2020.
We continue to see good growth opportunities in all three of our primary ADTech business lines, defense subsea technologies, vessel modification and repair services, and space systems.
Our estimated organic capital expenditure total for 2021 remains between 50 and $70 million.
This includes approximately 35 to $40 million of maintenance capital expenditures and 15 to $30 million of capital expenditures.
We forecast our 2021 income tax payments to be in the range of 40 to $45 million.
We continue to expect $28 million in Cares Act tax refunds.
However, the timing of receipt of these payments, whether in 2021 or 2022 is uncertain.
Unallocated expenses are expected to average in the mid-$30 million range per quarter for the second half of 2021.
Now turning to our balance sheet.
Our net debt position improved during the second quarter as we repurchased $30.5 million of our 2024 senior notes, and we're able to build our cash balance by $13.3 million.
We had $456 million of cash and cash equivalents at the end of the second quarter.
We continue to expect free cash flow generated in 2021 will be in the excess of that generated in 2020.
We are well positioned to address the maturity of our 2024 senior notes and will continue to be opportunistic and proactive as to how and when we will address the remainder of this pending maturity.
And as a reminder, we continue to have our $500 million undrawn revolver available to us until November of 2021 and $450 million available until January 2023.
In summary, based on our first-half financial performance and expectations for the second half of 2021, we are raising our adjusted EBITDA guidance to a range of 200 to $225 million for the full year.
This confidence, despite ongoing uncertainties associated with COVID-19 stems from our strong first-half 2021 performance, positive client interactions support of oil price expectations, and growing backlog.
This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpin our general expectation for increased activity levels over the next several years.
Our focus continues to be on generating positive free cash flow in 2021, retaining and attracting top talent, addressing our 2024 debt maturity, maintaining financial flexibility, and growing our businesses by leveraging our technologies and capabilities into new markets.
We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you might have.
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oceaneering international q1 adjusted earnings per share $0.04.
q1 adjusted earnings per share $0.04.
q1 loss per share $3.71.
q1 revenue $537 million versus refinitiv ibes estimate of $537.4 million.
for q2 and full year of 2020, we are not providing operating or ebitda guidance.
maintain our guidance that unallocated expenses are forecast to be in high-$20 million range per quarter.
revising q2 capital expenditures guidance by lowering range to $45 million to $65 million.
still believe that we should generate positive free cash flow during 2020.
currently targeting a reduction of annualized expenses in range of $125 million to $160 million by end of 2020.
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I'm joined by John Peyton, CEO; Vance Chang, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's.
We're pleased with our strong Q2 results, and I'm excited to hear from Vance Chang, our talented new CFO.
I'll start by defining this moment in time.
The restaurant renaissance is clearly driving our rebound at Dine Brands and Americans are returning to indoor dining.
And now that Americans are back, we're pivoting from triage to acceleration.
And what I mean by that is we're accelerating the innovation and the reinvention of the guest experience.
Today, I'm thrilled to report that our investments in innovation and the resiliency of our franchisees and team members is clearly paying off.
During Q2, both Applebee's and IHOP posted significant improvements in comp sales.
And this is important, both brands are fundamentally improved businesses due to off-premise sales.
And I'm seeing that for myself.
I've been on the road.
I've now met with 61 franchisees and toured our restaurants in Ohio, New York City, Connecticut, New Jersey, Vegas and Atlanta.
And each conversation with a franchisee or a team member or a restaurant manager reinforces for me our unique advantages that ensure our business is built to win.
First, we've got two iconic brands that thrive based on guest connection.
Collectively, Applebee's and IHOP has been serving communities for more than 100 years.
Both brands are beating their comp set because our guests have long-lasting emotional connections that endure even during these tough times.
Second, our guest satisfaction is strong, and that's impressive because many of our restaurants are operating with less labor than they're used to.
And finally, we work side-by-side with experienced, talented franchisees who are doing extraordinary things and as a result, are emerging from the pandemic with stable financial fundamentals.
So here we go.
I'll recap second quarter highlights, including comp sales, EBITDA, free cash flow, off-premise growth and development.
So first, according to Black Box, and this is terrific, Applebee's and IHOP, each outperformed their segments in Q2, and both brands' second quarter comp sales improved compared to the first quarter.
Specifically, Applebee's second quarter comps increased by 10.5%, and IHOP's comps declined by 3.4%, which reflects an improvement of 17.8 percentage points compared to the first quarter.
We achieved revenue of $233.6 million and EBITDA of $71.7 million, which reflects the continued strength of our franchise model and a gradual return to steady state.
We generated free cash flow of $107.3 million during the first six months of the year, which is consistent with Dine's track record of generating strong and stable adjusted free cash flow.
And finally, in Q2, we opened 10 new restaurants signaling the growing confidence our franchisees have in our brands and in putting their capital back to work.
Now despite what is still a fluid and unpredictable environment due to the delta variant and COVID-19, we remain cautiously optimistic, and there are two main reasons why.
First, improving consumer confidence is approaching pre-pandemic levels.
It looks like federal spending will continue this time via the Infrastructure Bill and low unemployment are all meaningful tailwinds.
Now that said, our optimism is somewhat tempered by continued volatility.
For example, the labor shortage is affecting wages, hours of operation and the availability of certain SKUs in our supply chain.
Inflation is also in concern for our guests as well as for our network.
We're seeing its effect on the cost of paper and packaging, oils, poultry, pork products and eggs.
And based upon current conditions, we now expect commodity inflation in the range of approximately four percent to five percent for the full year.
And the final unknown, of course, is the delta variant, which is largely regional at this time.
Our outlook would certainly be impacted if large areas of the country return to lockdowns or restaurant guests become uncomfortable dining out.
And now that I've covered our performance, I want to give you a more complete picture of how we're accelerating innovation through digital technology.
At Dine, we're leaning into our scale.
Our strategy is to build one common digital architecture for both Applebee's and IHOP that enables us to do more for both brands than either brand could invest on its own.
So far, just in 2021, we've implemented a new CRM and digital platform that enables sophisticated offer management, strengthens our digital marketing and marketing analytics and improves our management of customer data while also serving as the backbone for our loyalty programs.
We've also rolled out upgrades to our apps and our websites.
Now we provide a more seamless food order experience.
For example, guests now have more ability to customize their orders, and it takes fewer clicks to navigate the menu.
And these new apps and websites provide us a more comprehensive understanding of our guest purchasing preferences and online behavior.
We've also added cool functionality like geo sensing to track guest arrival in advance of car side or in-restaurant pickup and delivery.
And in our call center, approximately 150 Applebee's are on our new AI and fully automated voice ordering platform.
In 2021, we've also introduced tech to improve the on-premise dining experience.
That includes handheld devices for servers that are now in 500 Applebee's restaurants.
Those handhelds drive faster table turns, additional drink orders and most importantly, one of our servers in Atlanta told me that she's earning more money because she's turning her tables faster.
We also introduced pay-and-go that enables guests to pay at the table using their own device, and the digital wallet that allows guests to redeem offers and coupons from their phone.
And finally, later this year, IHOP will begin to roll out new point-of-sale and kitchen display technology.
We expect the new POS and KDS systems to reduce the cost of labor, ensure food is served hot and with improvements in order accuracy.
And importantly, the new POS and KDS will integrate order flow between digital and on-premise to seamlessly support car side and to-go orders.
All of these digital set capabilities are new in 2021.
And by end of the year, approximately 75% of our digital technology tools will be modernized or new.
And this is the most robust delivery of digital tech in Dine's history.
Our franchisees will be adopting the on-premise technology in the restaurants throughout 2021 and 2022.
I'll wrap up by emphasizing that our performance, our brands and our finances are strong.
We understand that today's environment remains fluid, and we're drawing on our deep experience and guest insights to continue to share -- to continue to grow share today and in the future.
Our new CFO, Vance Chang, is going to share more information about our financial results in just a moment.
But first, let me proudly introduce the newest member of our leadership team.
Vance spent the past 20 years in both banking and building high-growth consumer and healthcare companies.
Vance is here because he's an operations-oriented CFO.
He'll lean into our domestic and international businesses and work with those teams to fuel growth and improve profitability for Dine and for our franchisees.
Vance is a high-impact executive who's got a track record of driving innovation and delivering on execution.
And that's exactly the profile we need as we pivot from the crisis to innovation that accelerates our growth.
I'm excited to be here today, and we look forward to working with all of you in the months and years ahead.
It's great to be with everyone on my first earnings call as CFO of Dine.
During my first month at the company, I've been meeting with team members and franchisees in reviewing plans.
The onboarding process was instrumental and reinforced my confidence in the business and our direction.
I spent the past 20 years in my career in advising, investing and building high-growth consumer healthcare companies providing strategic leadership during times of meaningful change.
While we all continue to emerge from the pandemic, we know there are very real challenges still ahead of us, and I recognize the obligation we have as leaders within our industry.
For me, it's a humbling responsibility as we work together to maximize the full potential of the enterprise and to deliver profitable growth for all of our stakeholders, including our shareholders, franchisees and team members.
John just highlighted some of our baseline results, but let me spend now a few minutes talking about the financials.
I'll begin my remarks with a review of our cash position.
The continued improvement in our business has helped us maintain our strong cash position.
We finished the second quarter with a total unrestricted cash of $259.5 million.
This is a 44% increase over the first quarter's unrestricted cash balance of $179.6 million.
Turning to our operating results.
Franchise revenues for the second quarter were $167 million compared to $67.9 million for the same quarter of 2020.
Turning to the company restaurant segment.
Sales for the second quarter were $38.2 million compared to $16.8 million for the second quarter of 2020.
Rental segment revenue for the second quarter of 2021 were $27.4 million compared to $23.7 million for the same quarter of 2020.
The improvement was due to an increase in percentage rental income based on franchisees' retail sales.
Adjusted earnings per share for the second quarter of 2021 was $1.94 compared to an adjusted net loss per diluted share of $0.87 for the same quarter of 2020.
The improvement was due to an increase in gross profit as our business continued to recover from the effects of the pandemic.
Regarding our GAAP effective tax rate.
Our effective tax rate for the second quarter of 2020 was 24% expense compared to an 8.2% benefit for the same quarter of last year.
The main reason for the variance was due to the nondeductible impairment of goodwill in the second quarter of 2020.
G&A for the second quarter of 2021 was $39.3 million compared to $30.9 million for the same quarter of 2020.
The increase was primarily due to higher personnel costs associated with our incentive compensation accrual based on company performance.
Turning to the cash flow statement.
Cash from operations for the first six months of 2021 was $106 million compared to cash used in operating activities for the first six months of 2020 of $10.5 million.
The improvement was primarily due to the recovery of our business, as discussed earlier.
We believe the positive trend in our liquidity and comp sales will allow us to strategically invest for growth and innovation.
Now I would like to share some thoughts about the back half of the year.
We expect G&A to be higher in Q3 and Q4 relative to the first half of the year.
As a reminder, our G&A does include noncash expenses such as depreciation and stock-based comp that we normally add back as EBITDA, but expected increase in G&A is primarily driven by two factors: first, we pushed professional services and travel expenses to the second half of the year given the uncertainties that we faced during the first half of the year.
Second, higher incentive compensation is expected in the second half which is a variable component of G&A that will fluctuate based on our business performance.
Additionally, I would point out that our Q2 financial performance reflects strong pent-up demand that we may not experience at the same level in Q3 and Q4 in addition to the normal trends that we typically experience in the second half of the year.
We also have more restaurants in the first half than we will have in Q3 and Q4 due to recent closures.
Turning to our 2021 financial performance guidance.
I would like to highlight a revision to our G&A guidance primarily due to the factors discussed earlier.
We now expect G&A to range between $168 million and $178 million.
This compares to our previous expectation for G&A to range between $160 million and $170 million.
Our guidance for capex of approximately $90 million for 2021 remains unchanged.
Moving on to capital allocation.
We took proactive measures to reinforce our financial flexibility in early 2020, which included the temporary suspension of our quarterly cash dividend and share repurchase program.
On past calls, when asked about our plan to return cash to shareholders we have indicated that we wanted to see several quarters of improving performance before reinstating a dividend or buyback program.
Since the start of the year, our fundamentals have continued to improve contributing to our strong adjusted free cash flow position as referenced earlier.
As we enter the back half of the year, we will have a shareholder return strategy to share with you and are considering all options to maximize shareholder return and deliver sustained long-term profitable growth for the system.
We will have more details on our third quarter call.
And a few points on our capital structure.
In early 2020, Dine took pre-emptive steps to mitigate the effects of the pandemic on its operations and its franchisees including voluntarily increasing the interest reserve for our securitized debt from the required $16.4 million to $32.8 million.
I would like to highlight that due to the improved -- strong improvement in our business over the last 12 months, we have decided to reduce the interest reserve back to $16.4 million.
Our leverage ratio as of June 30 was 4.9 times compared to four times as of March 31.
With our leverage ratio back below 5.25 times, we will no longer be required to make principal payments on our 2019 Class A-2 notes after September.
I would also like to highlight that we continue to have significant cushion in our debt service coverage ratio, or DSCR, at 4.6 times as of June 30.
This is an improvement from the DSCR of 3.45 times as of March 31.
As a reminder, the first key DSCR measurement is not tripped until the ratio falls below 1.75 times.
Maintaining our financial flexibility to meet our debt service obligations is one of our highest priorities.
We'll continue our disciplined approach to monitoring liquidity, especially during these times of uncertainty due to the pandemic.
We're very pleased with our achievements and remain cautiously optimistic about our recovery.
We've done a lot of the heavy lifting to build a solid foundation for long-term growth.
Your timing is good.
I'm very pleased to report that Q2 was an exceptional quarter for the Applebee's brand.
When compared with our 2019 baseline, April, May and June comp sales were positive 11.7%, positive 8.1% and positive 11.4%, respectively.
This combined plus 10.5% result marks the best quarterly sales performance throughout the 14-year history of Dine Brands.
Of course, that excludes the anomaly of the 2021 versus 2020 pandemic year.
Restaurant sales delivered approximately $53,000 per week throughout the quarter.
To put this in proper perspective, the months of March, April, May and June in sequence ranked as Applebee's four highest weekly sales months under Dine's ownership.
I'm particularly proud of our franchisee partners and the entire Applebee's team as they continue to showcase their restaurant-level excellence within an obviously challenging environment.
According to Black Box Intelligence, Applebee's has now outperformed the casual dining category on comp sales for 25 consecutive weeks by an average of 596 basis points.
As expected, with guests returning to our dining rooms, we experienced a natural shift from off-premise sales to dine-in sales in Q2.
To better understand this trajectory, dine-in mix moved from 67% in April to 72% in June, with 16% Carside To-Go and 12% delivery in June, reflecting this gradual migration to a normalized post-pandemic mix.
Applebee's off-premise weekly sales in June was $14,700 per restaurant.
And as a percentage of total sales, it's reasonable to assume our off-premise mix may ultimately settle in the low to mid-20% range.
I should note, this represents about double our pre-pandemic off-premise mix of 12%, illustrating Applebee's enhanced relevance within this convenience-driven occasion.
Given the importance of this business, we are expanding our initial drive-through test to include an additional six units in Q4 for a total of seven dedicated Applebee's pickup windows.
Now this off-premise mix includes our Cosmic Wings virtual brand, which we were planning to expand to DoorDash, as you recall, in early May.
However, due to significant chicken wing supply challenges across America, we postponed our DoorDash expansion to a date to be determined contingent upon supply availability.
We anticipate meaningful incremental demand with this expansion, and we want to ensure supply -- sufficient supply to properly satisfy this demand.
In the meantime, I'll hold off commenting further on Cosmic Wings results until we pull this lever with DoorDash hopefully at the end of Q4.
Turning to restaurant execution.
Applebee's continues to resonate with our guests on key operational metrics such as guest satisfaction, brand affinity and visit intent.
This is noteworthy given persistent labor challenges throughout the industry.
To address this challenge, we executed our first National Hiring Day back on May 17.
Leveraging our extensive digital assets, we offered a free appetizer in return for an application and an interview, something we playfully branded, Applebee's app for an app.
Hoping to generate 10,000 applications, our franchise partners ended up securing more than 40,000 applications with a single day event, ultimately hiring about 5,000 new team members that week, a terrific result.
And our success here once again illustrates the benefits of scale and brand reputation in navigating this tough labor environment.
Applebee's continues to lead the casual dining category on affordability, menu variety, to-go awareness, brand awareness and advertising awareness, which remain important attributes for us in this competitive landscape.
With smart and strategic media allocation, our teams introduced a balance of new salads, bowls and beverage innovation throughout Q2 with our newest menu hitting restaurants in two weeks.
We also shifted our brand messaging to focus on the genuine emotional connection Applebee's has with its guests, a connection we believe is more important and relevant than ever given all this country has endured over the past 16 or 17 months.
I'm proud of the authenticity and resonance this work delivered in Q2.
And since music is so much a part of our brand DNA, I also wanted to highlight that the current number one song in iTunes in Billboard's top country music is titled Fancy Like from artist Walker Hayes.
And this is important because this song lyrically is all about date night at Applebee's, and it's gone viral in a big way on social media, TikTok, Instagram and YouTube, providing great buzz for the Applebee's brand.
Additionally, we entered into a very exciting relationship with The Walt Disney Company in support of their current number one film Jungle Cruise as a way to celebrate and encourage the return to dinner and a movie this summer, a wonderfully familiar part of Americana that we all weren't really able to enjoy for a very long time.
Hopefully, you've had a chance to see our advertising featuring Dwayne, The Rock Johnson and Emily Blunt, set to the classic tunes Rock the Boat and Born to be Wild.
Both of those debuted in the NBA championship game on July 20.
And to capitalize on the synergy, we've also developed a business partnership with Dwayne Johnson, the entrepreneur to introduce his new and fastest-growing premium tequila brand, Teremana into all Applebee's restaurants in July.
Dwayne has proven to be a tremendous partner as these signature $7 Mana Margaritas are now available everywhere and proving to be extremely popular with our guests.
As we look forward, you can expect our Q3 and Q4 media spending to remain substantial and favorable when compared with the same quarters in 2019.
To wrap up, while Applebee's momentum remains strong, it would be unrealistic to expect these unprecedented double-digit sales to sustain in the back half of this year.
With that said, Eatin' Good in the Neighborhood has never been more relevant than it is today, and I'm confident in Applebee's ability to continue to thrive in this environment.
I'll now turn it to Jay Johns for an overview of the IHOP business.
Congratulations on another great quarter.
I'm pleased to report that IHOP's solid trajectory continued this quarter.
Our second quarter comp sales improved sequentially by 17.8 percentage points compared to the first quarter and outperformed the family dining category as well by 150 basis points according to Black Box.
Another indication of the health and stand of our business is the growth in domestic average weekly sales every month in the first half of the year.
For the second quarter, average weekly sales were 28% higher than Q1.
Average weekly sales per week were approximately $38,000 in April and increased to just over $39,000 by June, reaching a high for the quarter of approximately $40,000.
As dining room capacity restrictions were eased and consumers satisfied the longing for a sit-down meal to favorite IHOP, our off-premise sales mix moderated as anticipated.
Off-premise sales accounted for 26.1% of sales mix for the second quarter compared to 33.3% for the first quarter.
However, we continue to believe that we'll retain the majority of the off-premise sales growth attained over the last 15 months, partly due to changes in consumer behavior.
According to a May 2021 survey by McKinsey & Company, consumers intend to continue with many digital behaviors even after COVID-19 subsides, including restaurant curbside pickup.
In fact, our net off-premise sales in dollars improved each month in the second quarter.
Additionally, off-premise comp sales increased 169% in the second quarter of 2021 compared to the same period of 2019.
For the second quarter, our sales mix consists of 73.9% dine-in, 13.9% delivery and 12.2% To-Go.
Approximately 85% of our domestic restaurants are open for standard operating hours or greater and approximately 27% are operating 24/7.
We believe that having more restaurants operating on standard hours or longer, reduced capacity restrictions and higher vaccination rates could be a potential tailwind in the second half of the year.
To drive traffic and sustainable long-term growth, we're executing a multi-pronged strategy.
This includes our new approach to marketing, launching a loyalty program, developments and virtual brands.
I'll provide some color on each of these.
We're adopting a new marketing tone aimed at leveraging the emotional connection of our guests that they have for IHOP.
Our new creative is designed to remind consumers why they love the brand.
We're taking a multichannel approach to better utilize our resources such as increasing our digital exposure.
We believe doing so will allow for more effective one-to-one marketing and better targeted messaging to different audiences.
I'm pleased to say the marketing transformation is already underway.
Regarding our loyalty program.
We plan to launch a loyalty program in the fourth quarter to increase guest engagement.
Our goal is to drive trial and importantly, incremental visits from existing IHOP guests.
At IHOP, the pandemic forced us to reflect and refocus on our relationships with our guests within a transforming restaurant industry.
At the same time, we actually grew our investments in CRM and customer-facing technologies, delving down our commitment to modernize our guest relationships.
Over the past 12 months, we've invested in CRM, loyalty and digital experiences.
While much of this work has been foundational, we expect to see some of these elements coming to life later this year.
We're focused on returning to strong unit growth.
I highlighted last quarter, we have the advantage of being able to provide our franchisees with four platforms to accommodate their development needs.
These include our traditional platforms, nontraditional, a new small prototype is scheduled to test this year and our first Flip'd by IHOP locations, which we plan to open in the next few months.
Regarding Flip'd, we now plan to open our first location in Lawrence, Kansas in the third quarter.
This location will be approximately 3,500 square feet and is a freestanding structure with 55 seats.
Our second Flip'd location is now scheduled to open late in the third quarter in New York City.
This location is a conversion space that will be approximately 1,800 square feet with only 25 seats.
Both locations will have the same menu that will address all three dayparts while leveraging the equity of IHOP that guests love.
Importantly, IHOP provides franchisees with conversion opportunities across all of these platforms, which can be very cost effective.
At the sites we've approved for the future this year, approximately 42% are conversions.
For 2021, we believe the brand can develop 40 to 50 new restaurants.
Looking ahead in the next three years, our development strategy includes a blend of our four development platforms.
And with the addition of Flip'd and the introduction of small prototype, we believe the brand can significantly exceed its historical annual run rate over the last decade.
Turning to virtual brands.
While our focus so far this year has been on restarting and have strong development, we believe the time is appropriate to start evaluating third parties with several brands to partner with.
Given that approximately 70% of our domestic restaurants have two full kitchens, we have capacity that can accommodate multiple virtual brands.
We're currently reviewing our daypart strategy and assessing how to best utilize our existing capacity.
Due to the fact we're in the preliminary stage of this, it's too early to discuss who we may work with as a virtual brand partner.
We've made good progress over the last year.
Our business has improved significantly, off-premise sales remained strong even as dining room capacity restrictions were generally eased.
The majority of our domestic restaurants are operating on standard hours or longer, and we believe there's additional upside as well as restaurants resume standard operating hours later than the year.
We have a multipronged plan in place for long-term growth.
The road ahead for IHOP looks bright, and I'm very pleased with our position.
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q2 adjusted earnings per share $1.94.
believes that its consolidated financial results for 2021 could continue to be materially impacted by covid-19.
revises expectations for general and administrative expenses for 2021 to range between about $168 million and $178 million.
qtrly total revenues $233.6 million versus $109.7 million.
dine brands global - looking ahead, optimism is somewhat tempered by continued volatility, which include labor shortages and variants of covid-19.
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We are executing the integration plan and have exceeded many of our targets despite challenges such as the pandemic.
The high-performance culture and leadership team we've created are set to carry this momentum forward, which is elected in today's results.
We reported a strong second quarter.
Organic revenue was up over 6%, with growth across our key end markets and all four business segments.
Funded book-to-bill was 1.0 for the quarter and 1.05 year-to-date.
Margins increased to 18.6%, resulting in earnings per share of $3.26, up 15%.
We had solid free cash flow of $685 million, which contributed to shareholder returns above $1 billion, including repurchases of $850 million in the quarter and over $1.5 billion year-to-date.
Our first half performance, coupled with our expectations for continued execution in the back half, more than offset the divestiture headwinds and supports another raise to our earnings per share guidance, which Jay will cover.
Execution against our strategic priorities, that are on Slide three, continue to deliver results and create value for the company's stakeholders as we make progress and build momentum with top line opportunities, operational performance, announcing and closing divestitures and delivering on our capital return commitments.
In terms of the top line, we had our best quarter since the start of the pandemic, with progress against our key end market growth objectives, while seeing data points that validate our focused R&D strategy.
Our government businesses were up 6% in the second quarter, driven by double-digit growth internationally.
Our international revenue benefited from increased aircraft ISR and radio sales to regions in the Asia Pacific and Europe.
And on the domestic front, the growth was broad-based with our responsive space and maritime programs as well as land modernization for night vision and SATCOM products leading the way.
Our strategy to deliver end-to-end mission solutions utilizing the capabilities and scale across the broader organization continues to gain momentum.
Our space business strategy is working as we grew 10% in the quarter, capturing classified awards totaling over $300 million for ground and responsive satellite solutions.
These awards are also part of the revenue synergy capture efforts and bring awards to date to over $700 million on a win rate of 70% from our growing $7 billion-plus pipeline.
Turning to our Commercial Aerospace and Public Safety businesses, they were up over 5% in aggregate and were led by our Commercial Aerospace business up double digits off a low base and from strength in product sales.
On the Public Safety side, there was a modest decline, but with sequential improvement and increased bid and proposal activity from a more stable backdrop.
Our solid top line was accompanied by backlog growth as we continue to win strategic programs that includes several prime roles.
Backlog increased 7% organically year-over-year to over $20 billion, with notable award activity across all domains.
On the space side, our revenue synergy awards came from combining electronics and optics capabilities across the company to deliver solutions for an increasingly contested environment.
These are incremental to the pathfinder programs we previously won, which have billions of dollars of potential over time.
Customers are viewing L3Harris as a trusted disruptor.
They see us as a company that understands the complexity of the mission and can offer fresh and creative solutions.
With a three year space pipeline of nearly $20 billion, there's more opportunity for continued growth.
Within the air domain, we strengthened our existing F-35 franchise with initial production awards for the Aircraft Memory System and the Panoramic Cockpit Display Electronic Unit under the TR3 program.
This brings total orders year-to-date on the platform to about $500 million.
We're progressing on all three TR3 systems through integration and qualification this year, and in support of the planned lot 15 cut in of the production hardware.
We are also secured a roughly $100 million IDIQ with SOCOM for infrared EO sensors on rotary platforms furthering our modernization opportunities across L3Harris.
Moving over to the land side.
We signed several key contracts that touch both international and domestic markets.
First, we received a $3.3 billion five year IDIQ for foreign military sales to a range of partner countries from our new broader portfolio of products, including radios and SATCOM terminals.
This replaces our prior five year $1.7 billion contract, which supports and validates the continued modernization across geographies and expands our product scope.
Second, in the U.K., we received a logistic support contract covering legacy Bowman and future Morpheus radios, positioning us well for a $1 billion modernization opportunity in that country.
And third, we won a competitive 10-year IDIQ to supply the U.S. Air Force with our T7 multi-mission robots, further expanding our customer reach.
After launching the T7 with the U.K. a few years back, we're now pursuing other international opportunities in the robotic area.
Within the C domain, our team was successful in extending its leading prime position in undersea sensor systems and warfare training for a range of the U.S. Navy platforms and support of distributed maritime operations.
This undersea warfare training range program, called U.S. litter, has an award value of nearly $400 million and further builds our credibility to pursue additional domestic international opportunities.
In the cyber domain, while limited to what we can say due to the classified nature, our $1 billion Intel & Cyber business received over 250 million in orders for complex mission solutions and specialized communications for both domestic and international markets, leading to another quarter of book-to-bill above 1.0 for this business.
We also had a key award in an adjacent market with our Public Safety business with a 15-year $450 million contract from the state of Florida to upgrade and continue operating its law enforcement system for first responders.
Moving over to the budgets.
While the process is ongoing and we await a fight up, we were pleased with the initial request for the FY 2022 budget as a support stability in the DoD, NASA and FAA spending and is aligned with our capabilities and investment priorities.
For the DoD, it's focused on continuing to revolve around and address near-peer threats through high-value technology, which Congress is revealing.
And when we look at the portfolio and the relevant line items, our programs are well supported.
This builds on the trend we've seen in international markets where there's a broad stability in military spending, including key countries such as the U.K., Australia, Canada, Japan, among others.
We're also seeing growing demand for the type of defensive systems we offer for our alignment with the U.S. export policies to ensure partner security.
Our most significant opportunities remain for ISR aircraft missionization and other upgrades, land force modernization and enhanced maritime systems.
All in all, as we consider the trajectory of our top line over the coming years, we remain confident in our ability to outgrow the budget and deliver reasonable growth through our domestic positioning, revenue synergies and international expansion that drive a large pipeline of opportunities underpinned by our leading R&D investments.
Shifting to operational performance.
We continue to surpass milestones for priority programs.
For example, at SAS, the team completed a successful preliminary design review for an advanced EW solution called Viper Shield that can deliver self-protection capability for Block 70 F-16s.
At IMS, we advanced our unmanned maritime strategy with several customer engagements and demonstrations, highlighting differentiators in predictive autonomy on USVs as well as a submerged Torpedo tube launch and recovery for our small UUVs.
We also successfully completed a prototype demonstration for SOCOM multi-role aircraft in a variety of challenging conditions, while utilizing the breadth of L3Harris offerings.
And financially, we had another quarter of strong margins as the team continues to offset mix impacts from early stage programs with three key initiatives, including program excellence and factory productivity, allowing us to flow through cost synergies totaling an incremental $27 million in the quarter.
In addition, the first half synergy run rate is now $350 million, driven by progress on facilities, consolidation and IT efficiencies.
We see this as the minimum level we'll deliver on this year, up from the $320 million to $350 million range we discussed in April and still a year ahead of schedule.
Any upside from here will be incorporated in our E3 program, with our integration blending into operational excellence initiatives.
On margins for the year, this leaves us at about 18.5% for the top end of the prior guide and a level we'll look to build on in the years ahead.
Next, on capital allocation.
Today, we announced the sale of two small businesses within our Aviation Systems segment for $185 million in cash, and these should close before year-end.
When combined with the roughly $2.5 billion divested under our portfolio shaping initiative, total gross proceeds are set to be $2.7 billion.
We have now divested nearly 10% of our revenues.
And with the completion of a few others in process, our portfolio shaping program announced in 2019 is largely complete.
Proceeds from divestitures, including those from the recently completed military training and combat propulsion businesses, will be part of our capital returns program consistent with our shareholder-friendly capital allocation approach.
Our expectation now is for buybacks to be roughly $3.4 billion this year, up versus our prior guide of $2.3 billion.
When combined with dividends, capital returns will be about $4.2 billion in 2021.
So to wrap up, I'm pleased with the execution against our strategic priorities, confident in our ability to consistently deliver double-digit earnings per share and double-digit free cash flow per share growth, and I'm excited about the next phase for L3Harris.
With that, I'll hand it over to Jay.
First, I'll provide more color on the quarter.
I'll cover also the segment results and finish with our updated outlook.
Starting with the second quarter.
Organic revenue was up 6.2%, with a return to growth in all four segments.
IMS led the way up 12%, followed by a return to growth at AS of 4.7%.
Margins expanded 40 basis points to 18.6%, primarily from E3 productivity, program performance and integration benefits, partially offset by higher R&D.
The sequential decline in margin was also due to timing of R&D as expected.
These drivers, along with our share repurchases, led to earnings per share being up 15% or $0.43 to $3.26, as shown on Slide five.
Of this growth, volume, synergies and operations contributed $0.18, a lower share count contributed another $0.18 and pension, tax and interest accounted for the remaining $0.07.
Free cash flow was $685 million, while working capital days stood at 57 due to receivables timing.
And shareholder returns of over $1 billion were comprised of $850 million in share repurchases and $207 million in dividends.
Of note, our last 12 months of share repurchases have totaled over $3 billion at an average price of $195 per share, well below our current share price.
Now turning to the quarterly segment results on Slide six.
Integrated Mission Systems revenue was up 12%, led by double-digit growth in ISR aircraft missionization on a recently awarded NATO program.
In addition to mid-single-digit growth in Maritime from a ramp on key platforms, including the Virginia-class submarine and constellation class frigate.
This more than offset the low single-digit decline in our Electro Optical business that was due to the timing of WESCAM turret deliveries, which we expect to increase in the back half.
Operating income was up 2%, while margins contracted 150 basis points to 15.3%, reflecting expected mix impacts, including a ramp on growth platforms and programs.
Pointed book-to-bill was 0.81 in the quarter and 1.06 for the first half with strength across the segment.
In Space and Airborne Systems, organic revenue increased 3.2% from our missile defense and other responsive programs, driving 10% growth in space, along with mid-single-digit classified growth in Intel & Cyber.
This strength outweighed the impact from modernization program transitions in our airborne businesses, the F-35 Tech Refresh three program within Mission Avionics and F-16 Viper Shield advanced electronic warfare system.
Operating income was up 7.7%, and margins expanded 90 basis points to 19.7% as operational excellence, including program performance, increased pension income and integration benefits more than offset higher R&D investments.
And funded book-to-bill was over one for both the quarter and first half, driven by space.
Next, Communication Systems' organic revenue was up 3.2% with mid-single-digit growth in Tactical Communications that included international up double digits, driven primarily by modernization demand from Asia Pacific and Europe and an anticipated decline in DoD from last year's second quarter 40%-plus growth.
USD -- U.S. DoD modernization continued to benefit the integrated vision and global communication businesses, leading to high single-digit and double-digit growth, respectively.
Conversely, broadband was down low single digits on lower volume for legacy unmanned platforms due to the transition from permissive to contested operating environments, as expected.
And public safety was down 7% from residual pandemic-related impacts.
Operating income was up 8.3% and margins expanded 170 basis points to 25.5% from higher volume, operational excellence and integration benefits.
And funded book-to-bill in the quarter and first half were about 1.3% and 1.1%, respectively.
Finally, in Aviation Systems, organic revenue increased 4.7%, driven primarily by our commercial aerospace business that was up 20% from recovering training and air transport OEM product sales.
We also saw mid-single-digit growth in Defense Aviation from a ramp on fusing inornate programs and emission networks from higher FAA volume.
Operating income was up 17% and margins expanded 200 basis points to 14.5% from operational excellence, integration benefits and higher volume.
Funded book-to-bill was about 0.9 for the quarter and first half.
Shifting over to our 2021 outlook.
Overall, organic revenue growth is unchanged at 3% to 5%, with our top line trending as expected at 4% for the first half and supported by a 1.05 funded book-to-bill year-to-date.
Our U.S. government businesses are expected to accelerate in the back half, driven by space, tactical communications, integrated vision solutions and classified growth within Intel & Cyber and Defense Aviation.
On the international side, we continue to expect mid-single-digit plus growth for the year as a strong first half, led by aircraft ISR and international tactical radios, moderates.
And lastly, the encouraging results in our commercial businesses in the second quarter build confidence in a flattish outlook for the year, with double-digit growth in the back half.
Consistent with our overall guidance at the consolidated level, we've also maintained our segment sales guide as well.
And as we think about the second half of the year, our key watch items will be the timing of awards, the continued performance of our supply chain and the pace of the commercial recovery.
We have raised our outlook to approximately 18.5%, a 25 basis point increase to the top end of the previous range, due to our strong performance to date and confidence in our ability to execute on cost synergies, E3 and program deliverables.
We do continue to expect margins to move lower in the back half due to higher R&D investment and stronger growth on new earlier-stage programs.
From a segment perspective, we're holding to our prior margin guidance ranges across the board, but we're expecting IMS and SAS to be at the upper end of their ranges, given their strong performance to date and are holding AS and CS steady at their midpoints given divestiture dilution at AS and expected mix pressure at CS.
On EPS, we're raising our full year guide to a range of $12.80 to $13, with the midpoint now toward the upper end of our previous range and reflecting 11% growth from 2020, delivering on our double-digit commitment in spite of dilution from divestitures.
As shown on Slide 11, the increase of $0.05 from the prior midpoint is driven by $0.13 improvement in operations and synergies and $0.19 from a lower share count at 203 million shares, along with a lower tax rate of about 16%, all of which more than offset divested earnings of $0.31.
On a stand-alone basis, we expect about $0.15 of net dilution from divestitures.
Moving to free cash flow.
Our guide of $2.8 billion to $2.9 billion is intact, despite divestiture-related headwinds are roughly $80 million.
It continues to reflect the three day working capital improvement from year-end to around 49 and 50 days.
That's now adjusted for divestitures.
capex is expected to be about $365 million, $10 million lower versus the prior guide due to completed divestitures.
Our guidance also now reflects approximately $3.4 billion in share repurchases, an increase of $1.1 billion from our prior guide to account for net proceeds from recently closed divestitures.
All told, we expect to return about $4.2 billion to shareholders this year.
So let me sum it all up.
We delivered strong performance in the quarter and first half, solid revenue and book-to-bill growth, further expansion of industry-leading margins and consistent cash generation and deployment, all enabling another guide raise as we continue to execute on our strategic priorities and drive double-digit annual growth in earnings and free cash flow per share.
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compname reports q2 sales of $1.27 billion.
compname reports q2 sales $1.27 billion.
q2 earnings per share $0.82.
q2 sales $1.27 billion versus refinitiv ibes estimate of $1.23 billion.
sees fy sales $4.9 billion to $5.1 billion.
sees fy adjusted earnings per share $2.70 to $2.90.
sees 2021 earnings per share of $2.86-$3.06.
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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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compname reports q4 earnings per share $1.67.
q4 gross premiums written grew 9.3% and return on equity of 20.6%.
qtrly earnings per share $1.67.
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Steve McMillan, Teradata's President and Chief Executive Officer will lead our call today, followed by Mark Culhane, Teradata's Chief Financial Officer, who will discuss our financial result.
A replay of this conference call will be available later today on our website.
I'm very pleased to lead off call by sharing that Teradata delivered another solid quarter in Q4, culminating in a strong finish to 2020 and we also exceeded earnings per share and free cash flow.
I'm incredibly proud of our team's performance and strong execution, particularly given the impacts of the global pandemic.
We have effectively completed our transition to a subscription model that generates recurring revenue and are vigorously executing on transformation to a cloud-first company.
The team drove another quarter of solid year-over-year and sequential growth in total ARR.
This was especially true for public cloud ARR, which exceeded $100 million.
The growth we are seeing demonstrates that are cloud-first positioning is resonating with the market.
More importantly, it shows that customers are increasingly seeing the value advantage in the public cloud, powering effective analytics at scale and delivering meaningful business returns.
Public cloud ARR of $106 million at the end of 2020 was a 165% increase from the prior year.
To provide some color on our momentum, I'd like to highlight a handful of our public cloud wins.
One of the world's largest airlines committed to Teradata on Azure for its next generation analytics in the cloud.
This win is a great demonstration of the essential role Teradata established for our customers.
Leveraging all relevant data to help our customers navigate through tumultuous times, its crucial, and no one does that better than we do.
We signed a long-term agreement at a Fortune 100 insurer, as it modernizes its IT infrastructure, less competitive win against several cloud native vendors came after the customer recognized that Teradata provides significantly higher value and quality at significantly lower cost than others.
One of the largest non-profit healthcare systems in the US chose Vantage on Azure for his patient experience and the data analytics capabilities enabled by our data platform.
We conducted an extensive evaluation of Vantage on Azure versus credit only competitors.
Our customer selected Teradata for unsurpassed workload management capabilities, platform ability and ability to reliably and securely execute company's more than 26 million queries per day.
Teradata is partnering with Capgemini, one of our global consulting partners on less customers migration to the cloud, and its future growth opportunities.
A North American based global e-commerce marketplace reconnected to Teradata to modernize its analytics environment.
After it tested the cloud native offering, experienced in technical challenges and extended migration delays brought the customer to the realization that it would not achieve the business value they expected from its intended move to Snowflake.
Selecting Vantage on AWS offered a seamless transition to the cloud ensures its mission critical production workload is maintained and allows its people to focus on creating gold forward business value.
A Fortune 50 healthcare company selected to Teradata on AWS to continue to run its business intelligence reporting and analytics for claims, case management and provider efficiency.
This too, was a competitive win against multiple cloud native vendors with Teradata's ability to scale and handle very high workload volumes as the main differentiators for this growing customer.
And we are helping a leading retailer and APJ transition to the cloud with Vantage on Azure.
This customer chose our consumption pricing model pervasive elasticity to quickly scale and address the changing retail market environment.
These are just a few examples that illustrate how well our teams kept the focus and executed to drive the pandemic.
Organization, who is proving offerings and capabilities to customers.
The company's resolute cloud first focus and commitment came to the forefront throughout 2020, and was manifested across the entire business.
Some of our advances from the last few months include, launching of Vantage trial program.
This trial program places the power of Teradata, directly in the hands of customers to help companies quickly, easily and at no cost experienced the capabilities of Vantage in the cloud.
This free trial is preloaded with ready to use examples to get customers started.
Users can also upload their own data to see how Vantage advanced analytic functions enable faster evaluation and accelerated time to value.
And as with every Teradata environment, there is no limit to the number of complexity of queries that maybe submitted.
Only Vantage enables analytics across multi cloud, on-prem and hybrid environments, and to offer maximum flexibility and choice for our customers.
Vantage is available across the top public cloud vendors, Google Cloud, AWS, and Microsoft Azure.
We also recently announced that Teradata Vantage is now available in AWS, Azure, and Google Cloud marketplaces.
These new purchasing channels offer another means to make it easy for customers to purchase and use Vantage.
With full multi-cloud support, their software is consistent across all of these environments, making processes easier, reducing risk and de-levering faster team to value and all with the scale, security, availability and performance customers rely on from Teradata.
This is a tremendous benefit to our customers as many have multi-cloud strategies and roadmaps.
With Vantage, companies can leverage all of the data, all of the time and that scale being need to achieve breakthrough business results from their analytics.
Our support of multi-cloud environment combined with our new flexible pricing options make it easy for customers to benefit from data analytics in the cloud as we unlock that value in the data assets.
Additionally, with the latest release of Teradata QueryGrid, we are making it easier for customers to connect to data sources, regardless of where the data resides and the quote and multiple clouds are on-prem.
This is important as organizations increasingly transition to the cloud and need to be able to access and combine information from all of the data environments at the same time and its scale.
Our R&D team is relentlessly working to ensure that Vantage is the fastest, lowest risk, highest performing and most cost effective path to the cloud.
The focused organization has delivered more cloud capabilities in 2020 than ever before.
It's a driving force behind our cloud growth and will continue to accelerate as we architect our software for the cloud.
I am confident in our accelerating cloud roadmap, a rapid cloud migration work and the growth it will deliver.
Our development efforts remain centered on driving complete and compelling cloud offerings at scale and the team is bringing forth cloud native integrations at record pace.
Companies must take advantage of all of the data that is available to them to succeed.
And we will remain steadfast in providing the enterprise scale and flexibility they need with our cloud data warehouse and the analytic capabilities we enable as a platform.
As I referenced last quarter, we undertook a careful review of our operations to align our cost to better support our cloud growth objectives.
We will be investing 75% of all R&D spends or over $200 million in fiscal 2021 in our cloud initiatives.
We are making these investments while also planning to improve operating margins and increased free cash flow.
Looking ahead, as we begin 2021, we anticipate significant year-over-year growth in public cloud ARR.
Additionally, we expect year-over-year growth in total revenue, profitability and free cash flow.
Going forward, a majority of our revenue will be recurring and we expect total revenue growth for the first time since 2018, as the shift to a subscription model is no longer a headwind for our reported results.
Mark will talk more about that in his comments, along with financial reporting changes we anticipate making in 2021 as a result of the way I am looking at and operating the business.
We are a cloud software platform company and our future lies in bringing enterprise data warehousing and analytics software to the world's leading organizations.
Consulting services and third party software sales don't equate to high quality recurring product revenue.
Therefore, we believe the changes Mark will describe for eight new and seeing our true progress.
We have taken clear actions to prepare for growth in 2021.
One of the ways, we strengthened our execution during 2020 was focusing on driving awareness and demand for our cloud offerings.
We have made meaningful headway and are stepping up our efforts to further focus our marketing and sales teams, refined our sales compensating our salespeople to grow also simplified and aligned our marketing message to cloud first and are taking the message to the market to drive awareness and demand for Teradata Vantage on public cloud within our target markets and customers.
Additionally, we received a significant industry endorsement of Teradata's emerging strength as a leading cloud First Data platform as Teradata was named a leader in Gartner's cloud database management magic quadrant.
The report noted that our move to the cloud, a new pricing models make our price performance more apparent and furthermore the report encouraging customers to run a proof of concept to understand how competitive Teradata's price performance is.
Teradata garnered the highest scores in three out of four use cases in Gartner's report on critical capabilities for Cloud Database Management Systems for analytical use cases.
This evaluation clearly demonstrates Teradata's ability to meet the largest and most demanding customer's data analytics needs from all industries.
We are continuing to add strong leadership to our executive ranks.
I am very pleased that we named Todd Cione as Chief Revenue Officer.
Todd brings to Teradata more than 25 years of experience in global sales, marketing, channel and operations at large multinational technology organizations, including most recently at Apple and previously with Oracle, Rackspace and Microsoft.
He drive for results has a track record of delivering predictable and profitable growth, and has successfully led organizations through cloud-based transformations, with an intense focus on delivering lasting value for customers, Todd has already hit the ground running and is deeply engaged with our go-to-market teams.
I would like to highlight the recognition Teradata recently received regarding our ongoing Environmental, Social and Governance, or ESG efforts.
I am pleased to share that Teradata was named in the Dow Jones North American Sustainability Index for the 11th consecutive year, and we have also been included in the Corporate Equality Index for the first time.
We believe social responsibility, sustainable business practices and responsible governance are good for our world and right for our business.
We will continue to build on our commitment to sustainable corporate citizenship that leads to long-term value creation for all of Teradata stakeholders.
We look forward to share more on our corporate strategy including ESG at an Analyst Day later this year.
In closing, I would like to reinforce critical dimensions, whether that'd be data volume, the number or complexity of queries, response times or managing SLAs of different business needs.
This is where Teradata technology excels, and a rapidly growing cloud ARR shows the customers are recognizing this value from Teradata.
Additional commentary on key metrics and segment trends can be found in the earnings discussion document on our Investor Relations webpage at investor.
IShares' view that Teradata had a strong finish to 2020 in our global environment impacted by the pandemic.
I am pleased to report that the company delivered another quarter with better than expected recurring revenue, earnings per share and free cash flow, while effectively completing our pivot from a perpetual license model to a subscription license model.
We also exceeded our original guidance for the full year for ARR growth, earnings per share and free cash flow despite the impact of COVID-19.
We ended the year with $1.587 billion in ARR, which was 11% growth year-over-year at the beginning of the year, delivered $86 million.
And -- the $1.58 7 billion of ARR breaks down as follows; $960 million represents subscription and cloud ARR.
As Steve noted in his introductory remarks to give investors better insight into our Cloud business in momentum, we are disclosing our public cloud ARR for the first time.
Public Cloud ARR totaled $106 million at the end of 2020, which was a 165% increase from the end of 2019.
Public Cloud-related ARR is comprised of Teradata Vantage running on the public cloud, AWS, Azure and Google Cloud, and does not include private cloud, which continues to be included in subscription ARR.
We are not including private cloud as our cloud first strategic focus is on public cloud.
The remaining subscription amount of $854 million represents on premises and private cloud subscriptions in grew 30% year-over-year.
The remaining ARR balance of $627 million represents; maintenance, software upgrade rights and other ARR down 14% year-over-year, and reflects our strategic move to subscription and the cloud.
Moving into recurring revenue.
In Q4, we generated $383 million in recurring revenue, which was above our guidance range of $371 million to $373 million and represented 9% growth year-over-year.
Better than expected ARR growth and consistent sales execution throughout the quarter both positively contributed to the increase in recurring revenue.
Moving on to consulting revenue.
Consulting revenues declined 27% year-over-year, as expected, as we continue to refocus our Consulting business on higher margins engagements that also drive increased software consumption within our customer base.
In addition, we experienced the impact from the ongoing COVID-19 pandemic as some customers cancelled or delayed certain projects as they continue to manage their discretionary spending, especially for onsite consulting engagements.
We expect consulting revenues to start to stabilize during 2021 and expect consulting revenues to decline at a significantly lower rate than we have experienced over the last few years.
Turning to gross margins.
Total gross margin came in at 59.3%, up 610 basis points a year-over-year.
The improvement was driven by the continued favorable revenue mix shift to higher margin recurring revenues and away from lower margin perpetual and consulting revenues, as well as increased recurring revenue and perpetual revenue gross margins year-over-year.
Cost savings of about $6 million from the actions announced during our Q3 2020 earnings call aided our gross margin in the fourth quarter, and will also benefit our gross margin dollars in 2021.
Recurring revenue gross margins was 17.5%, up 190 basis points from the fourth quarter of 2019 and up 10 basis points sequentially.
The year-over-year increase in recurring revenue gross margin the expected recurring revenue growth.
However, the greater than expected recurring revenue dollars and our cost saving actions both drove the better than expected recurring revenue gross margin.
Consulting gross margin was 8.4% versus 14.9% in the fourth quarter of 2019.
Consulting margins declined year-over-year and sequentially as revenue decreases outpaced cost reductions.
As part of our restructuring actions, we have moved to a more variable consulting cost structure starting in 2021 to improve the future profitability of our Consulting business and enable more consulting with third-party partners.
Turning to operating expenses, total operating expenses were up 4% year-over-year.
The primary driver of this increase were additional incentive plan expenses, given our strong Q4 performance.
Excluding incentive plan expenses, total operating expenses decreased slightly year-over-year.
On our Q3 earnings call, we disclosed that the restructuring efforts we announced were expected to result in expense reduction between $80 million to $90 million on an annualized basis.
We expected to invest a portion of these savings into our cloud first and related go-to-market initiatives and return the remainder to investors through increased earnings.
As an update, the actions taken resulted in approximately $80 million of total cost savings.
Of this amount, approximately $12 million benefited operating income in the fourth quarter.
We will discuss the impact in 2021 when I get to guidance shortly.
Turning to earnings per share, earnings per share of $0.38 exceeded our guidance range of $0.23 to $0.25 provided last quarter.
We cleanly beat expectations as we generated about $0.09 from better than expected revenue growth and about $0.08 of earnings per share from the cost actions discussed on the Q3 earnings call, partially offset by the primarily lower consulting margins and higher incentive planning expenses as previously mentioned.
Turning to free cash flow, we had another solid quarter of free cash flow generation driven by higher operating margin, strong cash collection, and other favorable working capital timing differences.
Free cash flow in the fourth quarter was $45 million, which contributed to full year free cash flow of $216 million, well ahead of the annual free cash flow guidance of $150 million we provided at the beginning of the year.
As a reminder, we expected to make cash payments of approximately $75 million related to the restructuring actions that we discussed during our Q3 earnings call, of which approximately $15 million were expected in the fourth quarter.
Our current forecast for total cash usage is now approximately $65 million, down $10 million from the prior estimate.
Of the $65 million, $23 million was paid in the fourth quarter.
The remaining $42 million is expected to be paid during 2021.
However, even after taking the restructuring cash payments into account, our Q4 free cash flow was still better than we expected.
Let's start by discussing the two key assumptions underpinning our 2021 outlook.
First, I would like to inform you of our financial reporting change starting in Q1 2021 that Steve mentioned in his introductory remarks.
To better align our financial reporting with how Steve is managing the business going forward, we will be reclassifying managed services related ARR and revenue out of recurring revenue and into non-recurring consulting revenue as these services are principally consulting delivered services.
In addition, that ARR and into other non-recurring software will not be a focus for us, but rather will be driven directly to the third-party software partner.
The reporting change will result in no change to previously reported total revenue or total gross profit or gross margin percentage.
We are making this change to better reflect and disclose the important revenue and margin metrics that Steve and our company are focused on driving moving forward.
See the earnings discussion document on the Investor Relations webpage for more information regarding the revenue and gross margin component impacts of this change.
I would like to provide you the reclassified amount of ARR at December 31, 2020 by category reflecting these changes.
After reclassifying managed services and third-party software ARR, total AAR was $1.425 billion at the end of 2020 which still grew over 11% year-over-year.
And it consisted of the following $917 million of subscription and cloud related ARR, which increased 38% from the end of the prior year with public cloud ARR of $106 million of this total and $508 million of maintenance and software upgrade rights related ARR, which decreased 17% as expected, due to our shift to a subscription model.
Second, we look to continue our growth in the cloud as we accelerate our product roadmap, focus our go-to market to grow cloud while protecting our base and drive awareness and demand for our platform, a mix the ongoing pandemic.
Given our cloud momentum and the purchasing behavior of our high-end enterprise customer base as more of them move to Vantage in the cloud, we expect that we will contract differently with our customer base versus what we have historically done on-premises.
We anticipate that some or many of our customers may choose to purchase or use committed volumes of cloud instances directly from the public cloud providers rather than through us.
This could create variability in our total ARR and recurring revenue in subsequent quarters.
As only the ARR and recurring revenue associated with our Vantage software will flow through our P&L rather than that plus the cloud infrastructure.
However, we are happy to take that trade-off as that recurring revenue has a higher gross margin for Teradata and it is easier for our customers to a elastically consume Teradata in the public clouds versus on-premises.
Additionally, as more customers and workloads move to the cloud, it is likely more of our business will be consumption based and will not necessarily be recognized ratably creating more variability in the recurring revenue we report by quarter.
Furthermore, many of our customers will operate Vantage on-premises as well as in the cloud.
And thus we expect that may change our on-premises contracts with customers, which could result in on premise revenue recognized other than ratably which also may create more variability in the recurring revenue we report by quarter.
As a result we anticipate it becoming more difficult to forecast our recurring revenue, especially on a quarterly basis.
Therefore, we will not be providing guidance for recurring revenue by quarter.
With that said, our 2021 annual guidance, which considers the week is expected to grow total ARR is anticipated to grow in the mid to high single-digit percentage range year-over-year.
We expect total recurring revenue to grow in the mid to high single-digit percentage range year-over-year.
We expect total revenue growth for the first time since 2018.
We anticipate total revenue to grow in the low single-digit percentage range year-over-year.
Non-GAAP earnings per share are expected to be in the range of a $1.50 to $1.58 which would be about 18% year-over-year growth at the midpoint and we expect free cash flow of at least $250 million.
Now I'd like to provide some color on 2021 to help you understand our business, which again considers the reclassification I recently mentioned we expect public cloud AR to become a more meaningful part of total AR within the total revenue guidance we provided, we anticipate mid single-digit percentage reduction in consulting revenue year-over-year and a continued reduction of perpetual and other revenue, by at least half in 2021 versus 2020.
We expect our total gross margin rate in 2021 to be approximately the same as in 2020, given our significant movement to the cloud.
And we also expect recurring revenue gross margins to be in the low 70% range.
Perpetual another gross margin is expected to be in the mid 20% range and consulting gross margin to be in the low teens percentage range.
We expect to improve operating margins by 100 to 150 basis points as we continue to drive efficiencies in our operating model to drive profitable growth, while increasing our investment in cloud sales and R&D capabilities.
As previously discussed, the majority of the $80 million of expected annual run rate cost savings are being reinvested back into R&D and go to market, cloud initiatives.
However on a net basis, we anticipate 5 to 10 said some benefit to 2021 EPS.
This is on top of the benefit recognized in earnings per share for the fourth quarter of 2020.
Non-GAAP earnings per share includes the cost savings I just mentioned.
The free cash flow guide, I mentioned, reflection is reduced by the $42 million of restructuring cash payments previously discussed.
We anticipate approximately $27 million of the $42 million being paid during the first quarter.
We expect our non-GAAP effective tax rate to be approximately 23% for the full year and assume $112 million fully diluted shares outstanding.
We plan to be opportunistic about share buybacks during 2020, while we are focused on executing against our full year guidance we wanted to provide you with a few markers to assist you with your modeling of Q1 2021, which again considers the reclassifications I previously mentioned.
They cloudy are is expected to grow 155% or more from the $44 million in Q1, 2020 probably cloud ARR or about 10 million to 15 million increase sequentially from the end of 2020.
Total revenue in the first quarter is expected to be higher year-over-year, but lower sequentially which is consistent with our historical seasonal pattern however, we anticipate that decline rate for total revenue from Q4, 2020 to Q1 2021 while we expect -- and with that operator, we are ready to take questions.
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q4 non-gaap earnings per share $0.38.
sees fy 2021 non-gaap earnings per share $1.50 to $1.58 excluding items.
sees q1 non-gaap earnings per share $0.38 to $0.40 excluding items.
annual recurring revenue (arr) increased 11% from prior year period.
public cloud arr increased to $106 million, a 165% increase from end of 2019.
fourth-quarter recurring revenue of $383 million exceeded company's guidance range.
fy 2021 total revenue is expected to grow at a low-single-digit percentage year-over-year.
fy 2021 total arr is expected to grow at a mid- to high-single-digit percentage year-over-year.
fy 2021 public cloud arr is expected to increase by at least 100% year-over-year.
q1 public cloud arr is expected to increase by at least 165% year-over-year.
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It is one that has brought significant change and sacrifices.
From navigating the pandemic and resulting short-term cost-saving initiatives earlier this year to changes in leadership, the Waters team has responded with drive, determination, and an indomitable spirit.
I am impressed by and grateful for our team's resilience and commitment to our customers and to each other.
During today's call, I will provide a brief overview of our 4th quarter and full-year operating results as well as an update on the, on the stabilization that we have seen in the LC market and a few factors influencing our thinking for 2021.
Mike will then review our financial results in detail and provide comments on our first quarter and full-year financial outlook.
Briefly reviewing our operating results for the 4th quarter, revenue grew 10% as reported, 7% on a constant currency basis and adjusted, adjusted earnings per share grew 14%.
For the full year, revenue declined 2% and adjusted earnings per share was up 1%.
The strong finish to the end of a challenging year was driven by the pharmaceutical market improvement, capital spending recovery in the second half of the year, strong -- strong execution and early contributions from our near-term growth initiatives.
Looking more closely at our top line results, first from a customer perspective.
Our largest market category pharma was the primary growth driver in the quarter with 15% growth.
Our industrial market grew 5% while academia and government declined 15%.
On a constant currency basis, sales in Asia were up 12% with China, up 19%.
Meanwhile, sales in the Americas grew 3% for the US growing 4% and European sales grew at 6%.
From a product perspective, our Waters branded products and services grew approximately 8% while TA declined by around 1% on a constant currency basis.
While still navigating the global pandemic, we are seeing clear signs of improving customer activity, positive growth trends in our recurring revenues, and an evidence of stabilization in LC instrument demand.
Services grew 10% while consumables business grew approximately 14% driven largely by global pharma strength, including sales of our recently launched PREMIER Columns, which performed exceedingly well in the first quarter on the market.
LC Instruments grew most -- grew across most of our major geographies with high single-digit growth.
This improvement in capital equipment purchasing reflects the combination of the return of some of the planned capital spending that was delayed from the first half of the year, a normal pharma year end budget flush, and early contributions from our LC replacement initiatives.
Following last June's release of the Arc HPLC System in the core HPLC market with a particular focus on the small molecule development and QA-QC space, we look forward to the continued expansion of our liquid chromatography portfolio.
On February 10, we will launch ACQUITY PREMIER, a next generation UPLC system that offers customers an extraordinary breakthrough in efficiency, sensitivity, and overall capability.
This new system will benefit both large and small molecule discovery and development as well as biomedical research.
This new system has even more profound benefits when paired with our ACQUITY PREMIER Columns, which I mentioned earlier and were launched in the 4th quarter.
The combined solution will alleviate non-specific binding absorption losses and provide a significant leap forward with enhanced reproducibility, reduced passivation, and an increased confidence in analytical results.
After a very strong 3rd quarter, mass spec sales were about flat in Q4.
As you know, the mass spec business can be lumpy, which we saw with biomedical research.
There was also a general softness in clinical diagnostics as budgets were diverted to COVID-19 testing.
Notably, however, mass spec sales to pharma customers grew double-digits, driven by the strong double-digit growth of both BioAccord and the QDA.
Finally, to TA, revenues declined low single digits, which was -- which was much improved from earlier in the year.
We saw the core thermal business start to pick up driven by market improvement in Asia.
In particular, life sciences including pharma and medical devices grew double-digits.
Combined these, comprised approximately 10% to 15% of TA's total revenues.
However, this was not enough to offset declines from TA's industrial customers.
Looking now, at our geographies, all major regions grew.
The Americas grew low single digits, Europe grew mid-single digits, and Asia grew double-digits.
In the US, the growth was driven by pharma, which was partially offset by declines in material science, environmental, academic, and government.
Though Latin America continued to decline, it improved meaningfully relative to earlier in the year.
Europe also experienced strong pharma performance, partially offset by material science, food, and academic and government.
In both US and Europe, pharma growth was broad-based including strength in big pharma, large molecule customers, genetics, and contract labs.
China had an impressive quarter with strong double-digit growth driven by continuing acceleration in pharma as well as strong environmental growth.
The pharma growth was driven by both small and large molecule customers including particularly strong growth at contract labs.
India also continued to grow double-digits.
In summary, overall in the 4th quarter, we saw further relative strength in the market and benefited from strong year end spending trends.
Now for the year, our pharmaceutical market category achieved 1% growth with the US, Europe, and India all seeing positive growth.
Industrial declined 3% for the full year and academic and government declined 16%.
Notably, our pharma market category grew 10% in the second half compared to the first half decline of 8% owed in part to strength in small molecules, the industry recovered from lock-downs.
Industrial also grew in the second half at 4% while academic and government declined 12% compared to the first half declines of 10% and 22% respectively.
Geographically for the year, Asia sales were down 4% with China -- China sales down 8%.
Sales in Americas were down 4%; for the US, down 2%.
Europe sales were up 2%.
Notably, all our major geographies grew in the second half of the year with the US up 4% and Europe up 6% following first half declines of 9% and 3% respectively.
China market grew in the second half, up 11%, reversing much of its sharp 31% decline in the first half of the year.
Now, I would like to share some of the progress we've made in our transformation program, as several of the initiatives we're putting interaction are starting to contribute to growth.
First, I would talk about our instrument replacement initiative, then our progress in contract lab expansion followed by e-commerce and lastly, I'll give you a BioAccord update.
First, as it relates to our instrument replacement initiative, which is the most advanced initiative under way, we delivered our first quarterly LC Instrument revenue growth in two years and our LC Instrument win-loss was the highest it has been in three years.
Initial customer feedback has been very positive on the Arc HPLC as well.
Second, as part of our contract lab expansion initiatives, we have made important progress in targeting this high growth customer group.
We have contacted a number of customers globally, particularly in China and have strengthened our value proposition with expanded alternative revenue and service offerings, which have -- which have been well received by the segment.
It is still early days, but we're pleased with the progress we're making.
Third, our e-commerce initiative is still in the early stages, but waters.com traffic is up double digits, driven by search engine optimization and paid search.
While there isn't a one-to-one relationship between traffic and revenue, increased traffic is an important first step in driving revenue growth through the e-commerce channel.
In tandem with our e-commerce actions, we've also enhanced our e-procurement platform on which we have expanded our coverage of customers leveraging this channel.
This supported strong e-procurement growth indicating that it's now easier to work with Waters.
Fourth, driving launch excellence.
BioAccord sales exceeded expectations in the quarter as our market development efforts and our specialty sales model have started to take effect, particularly in the US and Europe.
Many customers are increasingly adopting BioAccord for manufacturing and several have placed follow-on orders.
Once we get BioAccord applications on an enterprise software platform, we believe we will be, we will be seeing more follow-on orders.
More importantly, customer activity continues to be encouraging, which makes us optimistic about 2021.
Lastly, I'd like to highlight our efforts to help mitigate the public health crisis.
In addition to the significant efforts by our innovation response team, we are encouraged to see Waters consumable specked in on QA-QC methods for COVID vaccines and therapeutics.
We're also seeing an uptick in COVID driven demand for our instruments and consumables.
This peaked in the 4th quarter were COVID revenues contributed an estimated 1 to 2 percentage points to the growth, driven by those pharmaceutical customers developing COVID vaccines and therapeutics who saw meaningfully higher growth than manufacturers that don't have COVID-related programs.
In summary, as a wrap up to 2020, we've done a great job at keeping our employees safe and our operations running.
Our teams have focused not only on getting products out the door, but we have also assisted our customers engaged in COVID-related efforts.
Meanwhile, our base business is showing signs of recovery, and our transformation is well under way.
Turning to 2021, while the business environment remains uncertain, we look forward to building on the 4th quarter momentum.
Mike will provide further details on our outlook for 2021, which is based on three key factors.
One, we're assuming a gradual improvement in customer activity led by the pharma market.
Two, we expect all major geographies to perform better than they did in 2020, led by growth in China.
Lastly, our near-term growth initiatives are expected to continue to ramp up, led by our LC replacement initiative, which we expect to increasingly contribute to performance.
In the 4th quarter, we recorded net sales of $787 million, an increase of approximately 7% in constant currency.
Currency translation increased sales growth by approximately 3% resulting in sales growth of 10% as reported.
For the full year, sales declined about 2% in constant currency and as reported.
Looking at product line growth, our reoccurring revenue, which represents the combination of precision chemistry products and service revenue increased by 11% in the quarter while instrument sales increased 4%.
For the full year, reoccurring revenue grew 3% while instrument sales declined 9%.
Chemistry revenue were up 14% in the quarter, driven by strong pharma growth.
On the service side of our business, revenues were up 10%, as customers continue to reopen labs, catch up on performance maintenance in professional services, and repair visits.
As we noted last quarter, recurring sales were impacted by two additional calendar days in the quarter, which resulted in a slight increase in service revenue sales.
Looking ahead, there are five additional calendar days in the first quarter and six fewer calendar days in the 4th quarter of 2021 compared to 2020.
Breaking 4th quarter product sales down further, sales related to Waters' branded products and services grew 8% while sales of TA-branded products and services declined 1%.
Combined LC and LCMs instrument sales were up 5% while TA system sales declined 4%.
Now, I'd like to comment on our 4th quarter and full year non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 59.2%, an increase compared to the 58.2% in the 4th quarter of 2019, primarily due to the higher sales volume in FX.
On non -- on a full year basis, gross margin was 57.4% compared to 58% in the prior year on lower overall sales volumes in 2020.
Moving down the 4th quarter P&L, operating expenses increased by approximately 6% on a constant currency basis and 8% on a reported basis.
The increase was primarily attributed to variable expenses related to the strong sales performance.
For the year, operating expenses were 1% lower before currency translation and flat after.
In the quarter and for the full year, our effective operating tax rate was 14.9% and 14.8% respectively, an increase from last year at the comparable period included some favorable discrete items.
Net interest expense was $7 million for the quarter, a decrease of about 3 million, as anticipated on lower outstanding debt balances.
Our average share count came in at 62.5 million shares, a reduction of approximately 3% or about 2 million shares lower than in the 4th quarter of last year.
This is a result of shares repurchased through the end of the first quarter of 2020 subsequent to which we paused our share repurchase program.
Our non-GAAP earnings per fully diluted share for the 4th quarter increased 40% to $3.65 in comparison to the $3.20 last year.
On a GAAP basis, our earnings per fully diluted share increased to $3.49 compared to $3.12 last year.
For the full year, our non-GAAP earnings per fully diluted share were up 1% at $9.05 per share versus $8.99 last year.
On a GAAP basis, full year earnings per share were $8.36 versus $8.69 in 2019.
Turning to free cash flow, capital deployment in our balance sheet, I would like to summarize our 4th quarter results and activities.
We define free cash flow as cash from operations less capital expenditures and excluding special items.
In the 4th quarter of 2020, free cash flow grew 52% year-over-year to $240 million after funding $47 million of capital expenditures.
Excluded from free cash flow was $19 million related to the investment in our Taunton precision chemistry operation.
In the 4th quarter, this resulted in $0.30 of each dollar of sales converted into free cash flow.
For the full year in 2020, free cash flow generation was $726 million after funding $172 million of capital expenditures.
This represents a 26% increase and $0.31 per dollar of sales converted into free cash flow.
Excluded from free cash flow was $70 million related to our investment in our Taunton chemistry operations and a $38 million transition tax payment related to the 2017 US tax reform.
Our increased free cash flow is primarily a result of our cost actions -- cost saving actions and improvements in our cash conversion cycle.
In the 4th quarter, accounts receivables days sales outstanding came in at 70 days, down seven days compared to the 4th quarter of last year.
Inventories decreased by 16 million in comparison to the prior quarter -- prior year quarter, reflecting stronger revenue growth in 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 $443 million and debt of 1.4 billion on our balance sheet at the end of the quarter.
This resulted in a net debt position of $913 million and a net debt to EBITDA ratio of about 1.1 times at the end of the 4th quarter.
Our capital deployment priorities remain consistent and better growth, balance sheet strength and flexibility, and return of capital to shareholders.
We remain committed to deploying capital against these priorities.
As such, our Board of Directors has approved a two-year extension of our January 2019 share repurchase authorization that was set to expire last month.
As of today, we have 1.5 billion remains available credit program for share repurchases.
As we look forward to the year ahead, I'd like to provide some broader context on our thoughts for 2021.
The business environment remains uncertain, and we are assuming a gradual improvement in customer activity led by the pharma market.
We expect all major geographies to perform better than they did in 2020 led by growth in China.
Our outlook does not anticipate a return to lock down seen in 2020.
We had a 1% tailwind from COVID-related revenue in 2000, three-quarters of which was in the second half of the year.
We expect a similar revenue impact in 2021, including a 1% to 2% growth tailwind in Q1.
We anticipate the first-half growth tailwind will moderate through the remainder of the year.
Improved execution on our near-term growth initiatives contributed to our 4th quarter growth, but the quarter also benefited from capital spending that were delayed from the first half into the second half of the year, which we don't expect to continue in 2021.
The second half of 2021, we'll have to content with a challenging comp resulting from the revenue shift that took place in 2020.
These dynamics support full-year 2021 guidance for constant currency sales growth of 5% to 8%.
At current rates, the positive currency translation to 2021 sales growth is expected to be 1 to 2 percentage points.
Gross margin for the full year is expected to be in the range of 57, 5% to 58.9%.
Every year, we look to balance growth, investment, and profitability.
Accordingly, we expect 2021 operating margins of 28% to 29% based on a combination of growth investments, normalization of COVID-related cost actions, and disciplined expense controls.
Moving now below the operating income line, other key assumptions for full-year guidance are net interest expense of 35 million to 38 million, a full year tax rate of between 15% and 16%, which includes our new five-year tax agreement with Singapore that will expire in March 2026, a restart of our share repurchase program in 2021 that will result in an average diluted 2021 share count of 61 to 61.5 million shares outstanding.
Over the course of the year, we will evaluate share repurchase program and provide quarterly updates as appropriate.
Rolling all of this together and on a non-GAAP basis, full year 2021 earnings per fully diluted share are projected in the range of $9.32 to $9.57, which assumes a positive currency impact on full year earnings-per-share growth of approximately 3 percentage points.
Looking at the first quarter of 2021, we expect constant currency sales growth to be 7% to 10%.
At today's rate, currency translation is expected to increase first quarter sales growth by approximately 3 percentage points.
First quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $1.50 to $1.60.
At current rates, the positive currency impact on first quarter earnings-per-share growth is expected to be approximately 15 percentage points.
In summary, we're pleased with our resilience in the second half of 2020 and the strong finish to the year, which is a true testament to the determination of this team.
Though the environment remains variable, pharma markets have shown resilience and our transformation program is already demonstrating results and contributing to growth.
Despite the challenging environment, the progress we've made as an organization over the last five months is nothing short of extraordinary.
I remain ever more confident in the team, our portfolio, and our market position.
There remains a lot of work to do, but we have a tremendous opportunity in front of us to turn the business around.
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q3 non-gaap earnings per share $2.66.
q3 sales rose 11 percent to $659 million.
sees q4 non-gaap earnings per share $3.40 to $3.50.
sees fy non-gaap earnings per share $10.94 to $11.04.
q3 gaap earnings per share $2.60.
sees fy21 constant currency sales growth in range of 15-16%.
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Q2 was a very strong quarter, and it's the best in the history of Brown & Brown.
Our performance for the first six months of 2021 is due to the tremendous effort of our talented 11,000-plus teammates that deliver creative risk management solutions for our customers.
Each of our segments delivered impressive results with strong top and bottom line growth due to more new business, good customer retention, increased premium rates across most lines of coverage, and higher exposure units driven by continued economic expansion.
These results reflect the strength and diversity of our operating model as well as the power of a performance-based culture.
Now let's transition to the results for the quarter.
I'm on slide number three.
We delivered $727 million of revenue, growing 21.5% in total and 14.7% organically.
This is the strongest organic growth that we've ever delivered.
I'll get into more details in a few minutes about the performance of our segments.
Our EBITDAC margin was 32.9%, which is up 340 basis points from the second quarter of 2020.
Our net income per share for the second quarter was $0.49, increasing 44% on an as-reported and adjusted basis, with the latter excluding the change in estimated acquisition earn-out payables.
In summary, we're very pleased with our strong performance and believe we're well-positioned to continue delivering best-in-class solutions for our customers.
I'm on slide four.
Let's start with the economy and what we saw during the quarter.
As companies continue to reopen and strengthen, business confidence is improving.
However, not all companies are back at 100%, and we continue to hear about struggles with certain customer segments in hiring workers.
We think this will work itself out over the coming months and quarters, but these open roles are serving as a bit of a governor on the speed of recovery.
Due to this uncertainty, customers remain very focused on their insurance spend and therefore managing their deductibles and aggregate limits.
Rates were generally in line with what we experienced in the first quarter.
However, we started to see some moderation to the level of increases in certain admitted and non-admitted lines.
Certain customers and industries with high losses remain a placement challenge.
However, we continue to see carriers seeking higher rate increases on renewal business while quoting at or below expiring rates for new business of a similar risk profile.
Admitted rates continue to be up 3% to 7% across most lines.
the outliers are workers' compensation rates which remain down 1% to 3% and commercial auto rates which were up 5% to 10%.
From an E&S perspective, most rates are up 10% to 20%.
Coastal property, both wind and quake, are up 15% to 25%.
However, near the end of the quarter, we started to see less upward rate pressure on renewals.
Professional liability for most accounts remains challenging, the SPAC market in particular.
Professional liability rates are generally up 10% to 25%-plus, cyber rates are generally up 10% to 20%-plus, with increased underwriting questions and some reduction in coverage availability.
Also, excess umbrella coverage remains very difficult to place.
For both of these lines, we're seeing carriers reduce overall limits while seeking significant rate increases.
In the E&S space, California and Florida personal lines continues to be the most challenging.
The appetite for personal lines in CAT areas will continue to be constrained through at least the end of '21.
From an M&A perspective, we closed two transactions during the quarter with the annual revenues of, approximately, $11 million.
Our pipeline remains full, and we feel good about the level of activity engagement with prospective sellers.
Slide five, let's discuss the performance of our four segments.
Retail delivered an outstanding organic growth of 17.6% for the second quarter.
The performance was driven by growth across all lines of business and most customer segment through a combination of strong new business, good retention, rate increases, and higher exposure units as a result of the economic recovery.
National Programs grew 13.3% organically, delivering another great quarter.
Our growth was driven by strong performance from most programs due to robust new business, good retention, and rate increases.
The Wholesale Brokerage segment delivered a solid quarter with 12.3% organic growth.
Brokerage continues to perform very well, delivering strong growth in new business and realizing continued rate increases for most lines of coverage.
Binding Authority had a good quarter, driven by new business and continued economic recovery and personal lines in California and Florida remain very difficult to place, and we don't expect carrier appetite to change in the second half of the year.
The Services segment had a good quarter and delivered organic revenue growth of 4.6%, primarily driven by claims processing revenue.
The growth for the quarter was partially offset by continued headwinds within the Advocacy businesses, primarily the Social Security space.
Overall, it was a very strong quarter across the board.
Like previous quarters, we'll discuss our GAAP results and certain non-GAAP financial highlights.
We're on slide number six.
For the second quarter, we delivered total revenue growth of $128.5 million or 21.5% and organic revenue growth of 14.7%.
EBITDAC increased by 35.4%, which expanded EBITDAC margin by 340 basis points, despite lower margin associated with certain acquisitions completed in the past few quarters and slightly higher travel costs.
The EBITDAC growth was driven by the continued leveraging of our expense base and lower non-cash stock-based compensation.
Income before income taxes increased by 44%, growing faster than EBITDAC due to a lower growth rate in amortization and interest expense, as well as a decrease in acquisition earn-out payables.
Net income increased by $42.5 million or 43.9% and our diluted net income per share increased by 44.1% to $0.49.
The effective tax rate for the second quarter of this year and last year was 25.2%.
We continue to anticipate our full-year effective tax rate for 2021 will be in the 23% to 24% range.
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 second quarter of 2020.
Moving over on slide number seven.
This slide presents our results after the adjustment to remove the change in estimated acquisition earn-out payables for both years.
For the second quarter of this year and last year, the impact was minimal with the adjusted and as-reported diluted net income per share of $0.49 growing 44.1% over the prior year.
Moving over to slide number eight.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 21.3% and our contingent commissions and GSCs increased by 2.2%.
Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates, increased by 14.7%.
Over to slide number nine.
The Retail segment delivered total revenue growth of 28.3%, driven by acquisition activity over the past 12 months and organic revenue growth of 17.6%, which was driven by growth across all lines of business.
Organic growth for the quarter was positively impacted by, approximately, 300 basis points due to the $8 million adjustment recorded in the second quarter of last year for the economic disruption associated with the pandemic.
EBITDAC margin for the quarter increased by 510 basis points and EBITDAC grew 55.1% due to the leveraging of higher organic revenue along with a gain on disposal associated with the sale of certain books of business.
The growth was partially offset by recent acquisitions that have margins lower than the average, higher non-cash stock-based compensation, and slightly higher travel cost.
Income before income tax margin increased 580 basis points, growing faster than EBITDAC, driven primarily by amortization and intercompany interest expense growing at a slower rate than EBITDAC.
Moving over to slide number 10.
Our National Programs segment increased total revenue by 14% and organic revenue by 13.3%.
Regarding outlook for the last two quarters of 2021, we wanted to highlight that we anticipate approximately $4 million to $6 million of revenue shifting from the third quarter to the fourth quarter due to renewal timing for certain accounts.
EBITDAC increased by $7.9 million or 12.6%, growing slightly slower than total revenues due to incremental costs associated with onboarding new customers, increased non-cash stock-based compensation, and slightly higher variable cost.
Income before income taxes increased by $18.4 million or 38%, growing faster than EBITDAC, primarily due to lower estimated acquisition earn-outs payable and lower intercompany interest expense.
Over to slide number 11.
The Wholesale Brokerage segment delivered total revenue growth of 17.7% driven by acquisitions in the past 12 months and organic revenue growth of 12.3%.
EBITDAC grew by 19.1% with a margin increase of 40 basis points, even with lower guaranteed supplemental commissions, slightly higher variable operating expenses, and incremental non-cash stock-based compensation.
Income before income taxes grew by 6.9%, which was slower than total revenue growth primarily due to higher intercompany interest expense and a change in estimated acquisition earn-out payables.
Over on Slide 12.
Our Services segment increased total revenue and organic revenue by 4.6%.
Regarding outlook, we anticipate organic revenue growth to be flat or down slightly for the second half of the year due to continued headwinds in processing claims by the Social Security Administration.
For the quarter, EBITDAC grew by 9.8% driven primarily by leveraging organic revenue growth.
Income before income taxes increased by 19.8%, growing faster than EBITDAC due to lower intercompany interest expense and amortization.
A few comments regarding liquidity and cash conversion for the quarter.
We experienced another strong quarter of cash flow generation and have delivered $466 million of cash flow from operations through the first six months of 2021, growing $50 million or 12% as compared to the first six months of 2020.
Our ratio of cash flow from operations as a percentage of total revenue remained strong at 30.2% for the first six months of 2021.
With the combination of our cash generation and capital availability, we are well positioned to fund continued growth.
From an economic standpoint, we continue to believe the economy will improve over the coming quarters.
This should drive increased confidence among business owners and how they invest in their companies.
A few items we believe will impact the speed and trajectory of the economy are, in no particular order: one, the ability to hire workers in certain industries; two, supply chain issues that continue to constrain production and sales; three, the spread of and response to the delta variant; and four, the impact of inflation.
How these play out will influence the bumps in the road to recovery.
At this stage, we believe there should be further economic improvement throughout the remainder of '21 and into 2022 but not at the same pace experienced in the second quarter.
As a result, we anticipate some moderation of our organic revenue growth during the back half of the year compared to what we delivered in the first half.
As it relates to the underwriting process, we continue to anticipate our carrier partners to be competitive for new business and accounts with low losses.
We also expect rate increases will be fairly similar to the first half of the year with maybe some moderation.
From an M&A perspective, we believe the market will remain very active.
There are a lot of companies looking to do transactions, and we feel that we are well positioned with a good pipeline to attract great companies to join the Brown & Brown team.
We will continue to follow our disciplined approach of focusing on culture and financial alignment as these have been the key to our long-term success in delivering shareholder value.
We've been talking over the last few earnings calls about our technology initiatives and how these are advancing.
We're very pleased with our progress and the teams are doing a great job.
Our holistic focus is to improve the experience for our customers, carrier partners, and teammates.
To achieve this goal, we have prioritized the following areas: optimize and enhance our utilization of data and analytics; expand our digital delivery capabilities around products and services; and engage in initiatives designed to drive greater efficiency and velocity through our underwriting processes.
In summary, we couldn't be happier with the financial performance of the second quarter and the first half of the year.
The results are just outstanding.
Our team is doing an incredible job of leveraging our wide-ranging capabilities to win new customers and retain our existing customers.
We're well positioned to continue delivering good profitable growth.
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compname reports q1 diluted earnings per share of $0.67.
q1 sales $321.5 million.
diluted earnings per share in q1 fiscal 2022 is $0.67.
co's earnings per diluted class a nonvoting common share, excluding amortization guidance for year ending july 31, 2022 remains unchanged.
compname says earnings per diluted class a nonvoting common share on a gaap basis remains unchanged at $2.90 to $3.10 per share for fiscal 2022.
supply chains for certain components remain tight.
experiencing inflation in many areas including wages, freight, utilities, and raw materials.
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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.
Since 2016, Virgil has been a beloved member of the Nike, Jordan and Converse family.
He was a brilliant creative force who shared a passion for challenging the status quo and pushing forward a new vision, while inspiring multiple generations along the way.
But what stood out to me personally about Virgil, was his humility and humanity.
We offer our condolences to the many who shared a connection with Virgil.
He will be missed greatly.
As we look at Q2, the creativity and resilience of our entire NIKE, Inc. team helped deliver another strong quarter.
The results we delivered offer continued proof that our strategy is working, even as we execute through global macroeconomic constraints.
Whenever there's turbulence, I always go back to the fundamentals and for Nike, that means putting the consumer at the center and leveraging our long-term competitive advantages, which include a culture deeply rooted in innovation, a brand that deeply connects with consumers, fueled by compelling storytelling, and an unmatched sports marketing portfolio and we believe a fourth emerging competitive advantage for us is Digital, as we are one of the few brands that can directly connect with and serve consumers at scale.
We also continue to benefit from structural tailwinds that have accelerated during the pandemic.
Tailwinds that include a larger movement of health and fitness that is taking place around the world, consumers' desire to wear athletic footwear and apparel in all moments of their lives and an expanding definition of sport, and last, the fundamental shift in consumer behavior toward digital plays to our increasing digital advantage.
As I've said before, challenges create opportunities for strong brands to get stronger and that's what's happening here.
And we are now in a much stronger competitive position today than we were 18 months ago, and that trend continues.
We are seeing this strength come to life this holiday season.
Our brands' deep connection with the consumer is driving strong holiday sales, most notably with North American Digital leading the industry over Black Friday week, with close to 40% growth.
And our Singles Day performance showcased our brand strength in greater China as we added 13 million new members, and Nike was again the number one sport brand on TMall.
More broadly, this holiday season has shown the power of our digital transformation across the globe.
Digital is the engine driving our Consumer Direct Acceleration strategy.
And Q2 was another incredible quarter for sport led by our deep roster of athletes and teams.
Let me just touch on a few of the highlights from the quarter.
Following the exciting end of the WNBA and MLB seasons, the energy around sport continues with the NBA, NFL, European soccer and upcoming college football bowl season, where 16 of the top 20 teams and three out of the four Playoff participants are Nike teams.
When these leagues are as exciting as they are today, our business benefits.
Nike athletes continue to lead the way across the sports landscape, highlighted by Barcelona captain Alexia Putellas, who won the Ballon d'Or as the best female footballer in 2021.
We were also thrilled to see Marcus Rashford receive his MBE from Prince William last month, an honor very well deserved for his work to support vulnerable children during the pandemic.
And congratulations to Cristiano Ronaldo for reaching yet another remarkable milestone by becoming the first player in recorded history to score 800 career goals in official matches.
And I also have to give a special shout-out to Shalane Flanagan who was wearing the Nike Air Zoom Alphafly Next%, when she completed the six World Marathon Majors in six weeks running each of them in under two hours and forty-seven minutes.
This achievement offers all of us a reminder of the joy and unrelenting spirit of sport.
As we deliver against our Consumer Direct Acceleration Strategy, we continue to drive separation as the most innovative sports brand by delivering a constant pipeline of new products that sets the standard and what's more, we're aligning against our key growth drivers of Women's, Jordan and Apparel, as well as to our commitments to sustainability.
In Women's, we launched a brand new shoe designed specifically for dancers.
The Nike Air Sesh, was designed by Tinker Hatfield, in collaboration with professional dancers and it choreographers prioritizes both style and performance with a mid-cut leather upper and a cushion foam under the foot.
We launched the Air Sesh for Nike members first, with a wider release to take place soon.
As we continue to accelerate our strategy and fuel the expanded definition of sport, we are able to more deeply connect with women and create an even sharper focus.
And this quarter also saw the debut collection from the Serena Williams Design Crew, our apprenticeship program that advances diversity in design.
The Crew connects innovation, design and purpose in a uniquely powerful way, fueled by our commitment to the full spectrum of sport for women, across performance and lifestyle.
Serena joined us on campus a few months back to help open the Serena Williams Building at our World Headquarters.
Along with our LeBron James Innovation Center, these two buildings represent the most remarkable investment in sport innovation in the world.
We were also thrilled to see the Jordan Brand launch the AJ36.
The AJ36 is NIKE Inc.'s first shoe using leno-weave, a process that creates material that is uniquely strong, lightweight and adaptable to all foot shapes making the AJ36 one of the lightest Air Jordans ever.
Consumers can expect to see us iterate on this innovation in future seasons.
In Apparel, we're driving energy in the market through design that resonates with consumers.
The latest NBA City Edition and MLB City Connect uniforms are great examples as we grow the culture of the sport by listening to local team communities and using thoughtful design to celebrate the game.
We also launched FIT ADV, the next generation of performance apparel that combines weather-ready tech and innovative design to help athletes take on extreme conditions.
This represents the pinnacle of Nike apparel innovation and is currently in Nike's performance apparel collections.
And next year, it will be available in Nike lifestyle products across all platforms.
And finally in sustainability, we launched Alphafly Next Nature, our most sustainable performance shoe and our first sustainable performance running shoe.
This continues the progress made by our Cosmic Unity sustainable basketball shoe by reaching more than 50% total recycled content by weight.
Learnings from the Alphafly Next Nature will be scaled across our running line, creating higher performing products with more sustainable materials.
We know the future of sport depends on a healthy planet and we remain committed to doing our part to protect that future.
As we connect consumers with the strongest innovation, athlete roster and brand storytelling in the world, we are also elevating their experience through One Nike Marketplace.
We are creating the marketplace of the future, where we serve consumers with seamless, consistent, and premium experiences.
Through Nike membership, we increasingly know and serve our consumer across a connected marketplace.
I'd like to highlight three examples from this quarter of how Nike is driving a more elevated and premium member experience across the marketplace.
First, we recently launched new wellness content and workouts featuring Megan The Stallion in our Nike Training Club app.
Megan's content drove record high engagement, drawing 2 times increase in daily active users in NTC, and her curated looks saw more than double the demand, compared to any other product content viewed during that same time period.
Second, ahead of Singles Day in Greater China, we activated a new member experience on TMall and improved the onboarding journey.
As a result, the Nike Flagship store on TMall was the number one brand for new member recruitment across sport, driving a 20 point increase in member demand penetration this year.
And third, just last month, we announced a partnership with one of our strategic retail partners, Dick's Sporting Goods, who shares our vision for the future of retail specifically, shopping and experiences that are amplified by digital and personal to each consumer's journey.
This new partnership allows shoppers to link their Nike member account and their DSG account together to unlock exclusive offers, products and experiences.
Recently, I had an opportunity to visit one of DSG's newest concepts, the House of Sport door in Rochester, NY.
I must say I was blown away at the store's unique service model, interactive sport experience and enhanced showcasing of product, which creates a true destination for consumers and will alter future expectations at retail.
Our partnership with DSG is a new model for how brands and retailers work together delivering product, experience, and connection service to delight consumers at scale.
We are fulfilling our vision, that through connected member experiences and inventory, powered by connected data and technology, we can provide consumers with greater access to the very best of Nike with more speed, convenience and connection to our brand and sport than ever before.
As we look forward there is even more opportunity to connect consumers with Nike across digital platforms that integrate sport, innovation, culture, and commerce.
For example, we recently opened a new space in our New York digital studio to produce the weekly Sneakers livestreams that are driving industry leading engagement metrics.
Weekly content includes launch previews in our Sneakers Live Heating Up show, and a new Jordan franchise presented through the lens of female Jordan fans, called J-Walking.
Our stories go deep and engage a two-way interaction with the community.
As a result, our consumer engagement is 3 times the industry average for livestreams.
And speaking of Sneakers and Jordan, the first set of invitations for the AJ11 Cool Grey was sent to the largest female-focused group yet and sold out in the first hour.
The group was selected utilizing our new Dedication Score designed to reward member groups with high product affinity.
We continue to see exclusive access serve as a defining marketing mechanism to connect with consumers.
In Q2, we also launched the 3D immersive world of NIKELAND on Roblox.
Nike is meeting young athletes wherever they are, encouraging them to let their imaginations run wild and rewarding real-world movement through new virtual experiences.
The Nike, Jordan and Converse brands have always thrived at the intersection of sport, creativity, innovation and culture.
The RTFKT acquisition allows us to extend this reach to serve and delight consumers and creators in both the physical and virtual worlds.
We will invest in the very talented RTFKT team, creator community and cutting-edge innovation to deliver next generation experiences that involve the RTFKT and NIKE Inc. brands.
Today, we are stronger than we were before the pandemic, and I couldn't be more excited by the opportunity ahead of us.
Our results this quarter are evidence that our strategy is working.
Through all we've navigated, this team has worked together with creativity and resilience to serve our consumers and serve our communities.
As you've heard us say before, Nike is a growth company with boundless potential.
And our Consumer Direct Acceleration strategy is transforming our operating model by driving deeper and more direct connections with consumers through digital.
Our teams continue to navigate through unprecedented levels of volatility with flexibility, agility and grace, leveraging the operational playbook we created at the onset of the pandemic to stay focused on what matters most.
We have embraced new ways of working, elevated experienced players into new leadership roles, reorganized the company to create even deeper focus on the consumer, and developed new capabilities to serve consumers directly with speed and at scale.
Nike's second quarter financial results were in line with the expectations we established 90 days ago, fueled by continued Brand momentum, the strength of our product franchises with extraordinary levels of full price realization, and strong season-to-date Holiday sales, offset by lower levels of available inventory supply relative to marketplace demand.
As John mentioned, we had an incredible Black Friday week with Nike Direct in North America and EMEA increasing over 20% versus the prior year, on top of last year's meaningful gains.
To accomplish this, I'm particularly proud of the work by our supply chain teams.
In late October, I was able to visit our North America distribution centers in Pennsylvania, Tennessee and Mississippi, to review our expanding digital fulfillment capabilities and holiday readiness plans.
Our teams are executing those plans with precision, optimizing available inventory to meet demand with improved service levels and lowering carbon impact, all enabled through technology and automation.
Staying on the topic of supply chain a little longer.
Factory reopening in Vietnam is on plan.
Nearly all impacted factories began reopening in October.
As of today, all factories are operational and employee attendance rates have improved, with weekly footwear and apparel production now at roughly 80% of pre-closure volumes.
In total, Vietnam factory closures caused us to cancel production of roughly 130 million units due to three months of lost production volume and several months to ramp back to full production.
Compared to ninety days ago, we are increasingly confident supply will normalize heading into fiscal '23.
Turning to our digital business.
Nike's digital growth is outperforming comparisons and being fueled by our member-centric focus.
Nike Digital grew 11% in the quarter, on a currency neutral basis, setting the pace for the industry.
Nike Digital is now 25% of total NIKE Brand revenue, up 3 points versus the prior year and more than double the digital mix in fiscal '19.
Enhanced onboarding experiences are attracting millions of new members into the top of the funnel, and we are focused heavily on member engagement and buying.
Member engagement grew 27% and repeat buyers grew 50% versus last year, driving overall higher AUR, AOV and member buying frequency.
40% of total digital demand this year is coming from our mobile apps, highlighting the strength of our digital platform.
We now have over 79 million engaged members across our Nike ecosystem.
And as Nike's digital ecosystem continues to grow, we are beginning to see the compounding benefits of scale from brand awareness and consumer connection, to data informed personalization and inventory utilization, to loyalty.
This quarter, we held our first globally coordinated Member Days event, setting records in member engagement.
From member exclusive product offerings to our first livestreamed member events from our Nike Town London and Passeig de Gracia Store in Barcelona, we created a distinct member experience and set a record for weekly active users on the Nike App in North America.
Now moving to one final topic.
Connecting with today's consumer means serving them with the product they want when and where they want it.
Consumers want a premium, seamless and personalized experience, with minimal friction across their journey to explore, engage, connect and purchase products from the brands they love.
As we've discussed before, Nike is focused on creating One Nike Marketplace that elevates the brand by creating direct consumer connections through fewer, more impactful wholesale partners, with a connected mobile digital experience at the center built for the Nike member.
Over the past four years, North America has reduced the number of wholesale accounts by roughly 50%, while delivering strong growth and recapturing consumer demand through Nike Direct and our strategic wholesale partners leading the way for Nike.
In the second quarter, North America Digital grew 40% versus the prior year, pushing Nike Digital to 30% of total North America marketplace, bringing Nike Direct to 48% of total.
In order to enable this growth and drive the shift in marketplace composition, we have accelerated investment to evolve our distribution network and scale a digital first supply chain, leveraging advanced analytics, automation and technology.
We have opened two new regional service centers on both coasts, which are able to deliver more units to consumers with shorter delivery times.
We also enabled ship from store capabilities across our store fleet, all leveraging advanced analytics from our Celect acquisition.
On automation, we have added more than 1,000 robots in our distribution centers to handle the digital growth.
In our digital distribution center in Memphis, robots handled more than 10 million units that would have otherwise required manual labor.
We continue to scale O2O consumer services across our store fleet, including buy online, pick up in store, and digital order returns in store.
Volumes are relatively small today, but we have significant opportunity to scale.
We have also established new fulfillment models with key strategic partners to create inventory visibility across the marketplace and optimize full price digital demand.
When we do this right, the consumer wins.
The progress being made to create One Nike Marketplace has accelerated North America's revenue growth and gross margin expansion for yet another quarter, illustrating how Consumer Direct Acceleration will fuel Nike's growth and profitability toward the fiscal '25 outlook we shared in June.
Now let me turn to the details of our second quarter financial results and operating segment performance.
NIKE, Inc. revenue grew 1% and was flat on a currency neutral basis, led by 8% growth in Nike Direct offset by a 6% decline in wholesale, due to optimization of available inventory supply.
Nike Digital grew 11% and Nike-owned stores grew 4% with significant improvements in traffic and higher conversion rates.
Gross Margin increased 280 basis points versus the prior year, driven primarily by higher Nike Direct margins due to lower markdowns, higher full price mix and foreign currency exchange rates, partially offset by increased freight and logistics costs.
SG&A grew 15% versus the prior year primarily due to normalization of spend against brand campaigns, digital marketing investments to support heightened digital demand, strategic technology investments and wage related expenses.
Our effective tax rate for the quarter was 10.9% compared to 14.1% for the same period last year.
This was due to a shift in our earnings mix and the effects of stock-based compensation.
Second quarter diluted earnings per share was $0.83, up 6% versus the prior year.
Before we move into operating segment results, I want to recall a few points I made last quarter regarding the impact of Vietnam factory closures on the short-term performance of each of our geographies, beginning in the second quarter.
North America and EMEA finished the first quarter with high levels of in transit inventory, resulting in prior season supply that was arriving late due to longer transit times, which could be sold in the second quarter.
We saw that in our Q2 results.
However, Greater China and APLA, located closer to our sourcing base with shorter standard transit times, experienced a decline in units sold in the second quarter due to lost production and lower available inventory supply.
We also saw that reflected in our Q2 results.
With that in mind, let's review the operating segments.
In North America, Q2 revenue grew 12% and EBIT grew 21%.
Demand for Nike remained incredibly strong, with season-to-date holiday retail sales across the total market growing double-digits, energized by the continued momentum from the return to sport and the beginning of an outstanding holiday season.
Performance sport dimensions delivered strong double-digit retail sales growth, led by Running, Fitness, and Basketball, on lower levels of sell-in due to available inventory supply.
Womens retail sales grew high double-digits, more than twice the rate of men's, with strong growth across both footwear and apparel.
Nike Direct had an outstanding quarter, growing 30% versus the prior year.
As I mentioned earlier, Digital maintained its momentum growing 40% and setting holiday records on Black Friday week.
Nike-owned stores also delivered strong double digit growth, with traffic trending toward pre-pandemic levels, and strong increases in AUR, due to lower closeout inventory levels and significant year-over-year improvements in markdown rates and promotions.
Despite strong retail sales momentum in the wholesale channel, revenue declined 1% as marketplace inventory levels remain lean, and Vietnam factory closures and longer transit times disrupt the flow of inventory supply to meet marketplace demand.
In EMEA, Q2 revenue grew 6% on a currency neutral basis and EBIT grew 22% on a reported basis.
Season-to-date holiday retail sales across the total market grew double-digits, with strong growth across all consumer segments.
The region was energized by the start of the global football season and the Champions League tournament across the continent.
Nike players continue to dominate on the pitch with the Mercurial boot being the lead scorer in a number of European professional leagues.
We saw a strong consumer response for the Mercurial boot and launch of the Champions League third kit.
Wholesale revenue grew 6% on a currency neutral basis as we comp prior year market closures.
Nike Direct also grew 6% led by double digit growth in Nike-owned stores as we comp prior year store closures, with traffic improvement due to tourism picking up and back to school holidays.
Nike Digital was down 1% as we compare to extraordinary levels of off price sales in the prior year, as the geography leveraged digital in the prior year to liquidate excess inventory.
This quarter, our full price Digital business grew over 20%, resulting in a 30 point improvement in full prices sales mix, double-digit growth in AUR and improvement in markdown rates and promotions.
This contributed to strong year-over-year expansion in gross margin and return on sales profitability.
In Greater China, Q2 revenue declined 24% on a currency neutral basis and EBIT declined 36% on a reported basis, however, season-to-date holiday retail sales across the total market have trended more favorably.
Results for this quarter were as expected, as we navigated lower full price product supply due to the Vietnam factory closures.
We saw disproportionate impacts to our wholesale revenue, which declined 27% on a currency neutral basis.
Nike Direct declined 21%, with declines in both digital and physical retail channels.
COVID-related lockdowns continue to drive volatility in retail traffic, however, we did see traffic recover to pre-pandemic levels at times throughout the quarter.
Digital declined 27%, partially impacted by delay in product launch timing on Sneakers.
Over the 11.11 consumer moment, we drove stronger digital performance with significant member acquisition and higher AOV through better engagement with consumers.
While challenging, we continue to leverage our operational playbook and remain optimistic about the longer term in Greater China.
This quarter, we extended our Joy of Sport brand campaign, utilizing local influencers, Olympians and other athletes that are part of Nike's leading sports marketing portfolio in Greater China.
The Jordan brand added to the energy by announcing their first female athlete signing in Asia, with basketball player Yang Shu Yu.
To support this activity and normalize our marketing investment levels, we increased our investment in demand creation in the second quarter by more than 40% versus the prior year.
Our local team remains focused on creating distinctive and authentic connections with Chinese consumers.
We celebrated the 40th anniversary of Nike's operations in China by using the Express Lane to reintroduce the original Nai-ke collection, with robust storytelling on the history and heritage of these iconic products.
During our first launch, all product sold through in the first hour.
We will continue to expand the Express Lane to bring unique, localized offerings to the consumer, leveraging our most popular global product franchises to drive uniquely Nike energy in the marketplace.
We see encouraging signs in Greater China and while inventory supply has been a major disruption in the marketplace, we continue to expect fiscal '22 to be a year of recovery.
Having said that, we expect to see sequential improvement from here, beginning in the third quarter.
Now moving to APLA.
Q2 revenue declined 6% on a currency neutral basis and EBIT declined 8% on a reported basis.
Double-digit revenue growth, on a currency neutral basis, in SOCO was offset by declines in Asia Pacific territories which faced a greater impact from Vietnam factory closures as well as the business model shift in Brazil.
Season-to-date holiday retail sales across the total market grew versus the prior year, despite supply disruptions and door closures in SEA&I and Pacific.
Nike Direct grew 6%, led by Nike Digital growth of 25%.
Our teams maximized market moments with all territories delivering successful Member Days and locally relevant activations including Singles Day in South East Asia, Buen Fin in Mexico and Cyber Week in Japan.
Mexico's digital business more than doubled as we enabled a localized assortment and fulfillment capabilities through the Nike App.
Finally, APLA continues to leverage the Express Lane, their digital ecosystem and global partnerships to create locally relevant product and meaningful engagement with consumers around the world.
Consumers in APLA are highly connected, and our team continues to innovate on digital experiences that are locally relevant.
The Dia De Los Muertos footwear pack saw 100% sell through and this story was extended to the world through our new partnership with Roblox.
Now let's turn to our financial outlook.
As we approach the end of the second year of the pandemic, it is becoming even more challenging to compare quarters and fiscal years due to multiple waves of COVID-related disruption at different times, across the consumer marketplace and now supply chain.
We expect the operating environment to remain volatile as COVID-variants continue to cause disruption to business operations.
Our fiscal '22 financial outlook reflects inventory supply significantly lagging consumer demand across Nike's portfolio of brands.
However, Nike's long-term market opportunity is larger than ever, and so we remain focused on what we can control in the short-term and on where we are heading through our Consumer Direct Acceleration strategy and on what is required to deliver on our fiscal '25 financial outlook.
Specifically for fiscal '22, we continue to expect Revenue to grow mid single-digits versus the prior year, in line with guidance from 90 days ago.
For Q3, we expect revenue to grow low single-digits versus the prior year, due to the ongoing impact from lost production from COVID-related disruptions in Vietnam.
We are raising our gross margin guidance to expand 150 basis points versus the prior year.
We expect to continue benefiting from exceptional demand against the backdrop of lean marketplace inventory.
Full price realization will remain above our long-term target, with lower channel markdowns.
However, we expect product costs to rise in the second half due to higher macro input costs.
We are also planning for supply chain cost for the full year to increase relative to our estimates 90 days ago, with a greater impact in the second half.
Last, we now expect foreign exchange to be a 55 basis points tailwind versus prior year.
We continue to expect SG&A to grow mid-to-high teens for the full year as demand creation spend normalizes and we continue to invest in the capabilities to support our consumer-led digital transformation.
We now expect our effective tax rate to be in the low teens for the full year.
Consumer Direct Acceleration is driving our business forward and it is transforming our financial model.
We continue to prove that we can manage through the uncertainty and volatility in the current operating environment But we are doing more than just managing through, we are building Nike for the future with deeper consumer connections, a pipeline of product innovation to serve the needs of the modern athlete, and new operational capabilities required to serve consumers directly and digitally, at scale.
We have a clear vision of our brands' long-term future, and so we remain focused on what is required to win over the long-term.
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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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Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO.
We plan to release fiscal 2021 second quarter earnings on December 18 before the market opens followed by a conference call.
And then Rick will provide more detail on our financial results and share our outlook for the second quarter.
As a reminder, all references to the industry benchmark during today's call refer to estimated Knapp-Track, excluding Darden, specifically, Olive Garden and LongHorn Steakhouse.
During our first fiscal quarter, industry same restaurant sales decreased 26%.
Given the ever-changing environment we continue to operate in, I am very pleased with what we accomplished during the quarter.
We are focused on four key priorities.
The health and safety of our team members and guests, in restaurant execution in a complex operating environment, investing in and deploying technology to improve the guest experience and transforming our business model.
The progress we made in these areas combined with our operating results, gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend.
Let me provide more detail on the four priorities.
First, the health and safety of our team members and guests remains our top priority.
Following CDC guidelines and local requirements, our teams continue to practice our enhanced safety protocols, including daily team member health monitoring.
We also continue to configure our dining rooms with social distancing that create a safe, welcoming environment, while maximizing allowable capacity.
A key part of this work is installing booth partitions to enable us to safely increase capacity where permissible.
At the end of August, we had completed installation in just over 500 restaurants in our total portfolio.
Operating in this environment adds another layer of complexity to an already complex operation, and I'm proud of the commitment our teams make every day to keep our guests and each others safe.
Second, we are laser focused on our back to basics operating philosophy to drive restaurant-level execution that creates guest experience, whether that's in our dining rooms, outdoors on our patios or in their homes, but it's not easy.
Executing at a high level is more complex today due to COVID-19 restrictions that vary by market.
Additionally, the constantly changing mix between on-premise and off-premise, plus expanded outdoor dining that is weather-dependent, leads to unpredictability in sales.
This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important.
Moving complexity from our operations has allowed our restaurant teams to execute more consistently in this unique environment.
Our operators continued to deliver great guest experiences by displaying a high level of flexibility, creativity and passion every day, and I'm thrilled to see that reflected in our guest satisfaction metrics.
Third, we are continuing to invest in and implement technology to remove friction from the guest experience.
This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts.
Additionally, we are deploying mobile solutions to make it easy for our guests to let us know when they have arrived to dine or pickup curbside order to go.
We are also expanding mobile payment options providing additional convenience for our guests.
For our three largest brands combined, more than 50% of our off-premise sales during the quarter were fully digital transactions where guest ordered and paid online.
Finally and most importantly, we transformed our business model.
Even with the sales declines we are experiencing, our restaurants continue to produce high absolute sales volumes.
Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows, while making the appropriate investments in our businesses.
This provides us a stronger foundation for us to build on sales as build on sales -- build upon as sales trends improve.
The first step in this process was to reimagine our offerings.
This resulted in simplified menus across the platform driving significant efficiencies in food waste and direct labor productivity.
Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending along with other incentives we have historically used to drive sales.
We will continue to evaluate our marketing promotional activity as the operating environment evolves.
Finally, we have further optimized our support structure which is driving G&A efficiencies.
The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of $185 million for the quarter.
Turning to our business segments.
Olive Garden delivered strong average weekly sales per restaurant of $70,000 while significantly strengthening our business model, resulting in higher segment profit margin than last year.
They were able to capitalize on simplification initiatives that strengthen the business model while making additional investments in abundance and value.
This work was critical to position Olive Garden to drive future profitable top-line sales as capacity restrictions ease.
Olive Garden same-restaurant sales for the quarter declined 28.2%, 220 basis points below the industry benchmark.
Overall, capacity restrictions continue to limit their top-line sales, particularly in key high volume markets like California and New Jersey where dining rooms were closed for the majority of the quarter.
In fact, restaurants that had some level of dining room capacity for the entire quarter averaged more than $75,000 in weekly sales, retaining nearly 80% of their last year's sales.
Given the limited capacity environment during the quarter, Olive Garden made a strategic decision to reduce their marketing spend as well as incentives and eliminate their promotional activity.
They will continue to evaluate their level of marketing activity as capacity restrictions ease.
Additionally, off-premise continue to see strong growth with off-premise sales increasing 123% in the quarter, representing 45% of total sales.
Finally, Olive Garden successfully opened three new restaurants in the quarter, which are exceeding expectations.
LongHorn had a very strong quarter.
Same-restaurant sales declined 18.1%, outperforming the industry benchmark by 790 basis points.
Their strong guest loyalty and operational execution helped drive their outperformance, while they also benefited from their geographic footprint.
In fact, same-restaurant sales were positive for the quarter in Georgia and Mississippi.
Additionally, the LongHorn team made significant investments in food quality and operational simplicity, which led to improve productivity and better execution.
They also took a number of steps to improve the overall guest -- the overall digital guest experience.
Off-premise sales grew by more than 240%, representing 28% of total sales.
Finally, LongHorn successfully opened two restaurants during the quarter.
The brands in our Fine Dining segment are performing better than anticipated.
While weekday sales continued to be impacted by a reduction in business travel, conventions and sporting events, we saw strong guest traffic on the weekends, and believe there will be additional demand as capacity restrictions begin to ease.
And lastly, our other business segment also delivered strong operational improvement with segment profit margin of 12.8%.
This was only 130 basis points below last year despite a 39% decline in same-restaurant sales.
Yard House's footprint in California is impacting same-restaurant sales in this segment.
Finally, I continue to be impressed by how our team members are responding to take care of our guests and each other.
The encouraging trends and performance we experienced toward the end of the fourth quarter continued into the first quarter of fiscal '21.
Furthermore, the actions we took in response to COVID-19 to solidify our cash position, transform the business model, simplify operations and strengthen the commitment of our team members helped build a solid foundation for the future.
These actions and our continued focus on pursuing profitable sales have resulted in strong first quarter performance that significantly exceeded our expectations.
For the quarter, total sales were $1.5 billion, a decrease of 28.4%.
Same-restaurant sales decreased 29%.
Adjusted EBITDA was $185 million.
And adjusted diluted net earnings per share were $0.56.
Turning to the P&L.
looking at the food and beverage line, favorability from menu simplifications more than offset increased To Go packaging costs.
However, beef inflation of over 7%, primarily impacting LongHorn, drove food and beverage expense 20 basis points higher than last year for the company.
Restaurant labor was 20 basis points lower than last year, with hourly labor as a percent of sales improving by over 350 basis points, driven by operational simplifications.
This was mostly offset by deleveraging management labor.
Restaurant expense, including $10 million of business interruption insurance proceeds related to COVID-19 claims submitted in the fourth quarter of fiscal 2020.
Excluding this benefit, we reduced restaurant expense per operating week by over 20% this quarter.
For marketing, we lowered absolute spending by over $40 million, bringing marketing as a percent of sales to 1.9%, 130 basis points less than last year.
As a result, restaurant-level EBITDA margin was 17.8%, 20 basis points below last year, but particularly strong given the sales decline of 28%.
General and administrative expenses were $10 million lower than last year as we effectively reduced expenses and rightsized our support structure.
Interest was $5 million higher than last year, mostly related to the term loan that was outstanding for the majority of the quarter.
And finally, our first quarter adjusted effective tax rate was 9%.
All of this culminated in adjusted earnings after-tax of $73 million, which excludes $48 million of performance-adjusted expenses.
These expenses were related to the voluntary early retirement incentive program and corporate restructuring completed in the first quarter of fiscal '21.
Approximately $10 million of this expense is non-cash and the remaining will be cash outflows through Q2 of fiscal 2022.
This restructuring resulted in a net 11% reduction in our workforce in the restaurant support center and field operations leadership positions.
It is expected to save between $25 million and $30 million annually.
We expect to see approximately three quarters of these savings throughout the remainder of fiscal '21.
Looking at our segment performance this quarter.
Despite a sales decline of 28%, Olive Garden increased segment profit margin by 110 basis points to 22.1%.
This strong profitability was driven by simplified operations, which reduced food and direct labor costs as well as reduced marketing spending.
LongHorn Steakhouse, Fine Dining and the other business segment delivered strong positive segment profit margins of 15.1%, 11.9% and 12.8% respectively despite a significant sales decline experienced in the quarter.
These brands also benefited from simplified operations, keeping segment profit margin at these levels.
In the first quarter, 68% of our restaurants operated with at least partial dining room capacity for the entire quarter.
These restaurants had average weekly sales per restaurant of $69,000 and the same-restaurant sales decline of 21.9%.
And while Olive Garden and the Fine Dining segment had fewer dining rooms opened than our average, these restaurants had the highest average weekly sales per restaurant of almost $76,000 and $90,000 respectively.
At the start of the second quarter, we had approximately 91% of our restaurants with dining rooms opened operating in at least limited capacity.
Now turning to our liquidity and other matters.
During the quarter, as we saw steadily improving weekly cash flows, we gained confidence in our estimated cash flow ranges.
We fully repaid the $270 million term loan we took out in April.
We ended the first quarter with $655 million in cash and another $750 million available in our untapped credit facility, giving us over $1.4 million of available liquidity.
We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter, well within our debt covenant of below 75%.
Given our strong liquidity position, improvements in our business model and better visibility into cash flow projections, our board reinstated a quarterly dividend.
The board declared a quarterly cash dividend of $0.30 per share.
This dividend represents 53% of our first quarter adjusted earnings after-tax within our long-term framework for value creation.
We will continue to have regular discussions with the board on our future dividend policy.
Our first quarter results were significantly better than we anticipated.
The actions we took to simplify menus and operating procedures and capture other cost savings, along with our choice to pursue profitable sales, have yielded strong results.
And now, with a full quarter operating under this environment, we have even better visibility into our business model.
We anticipate EBITDA between $200 million and $215 million and diluted net earnings per share between $0.65 and $0.75 on a diluted share base of 131 million shares.
In this environment, we continue to focus on building absolute sales volumes week-to-week and quarter-to-quarter.
This may result in variability in sales comparisons to last year as capacity constraints lead to less seasonality than we would have experienced historically.
Said another way, if capacity and social distancing restrictions remained similar to where they are today, it will be challenging to dramatically increase our on-premise average unit volumes.
Our second quarter is typically our lowest average unit volume quarter and our third quarter is typically our highest.
Additionally, as capacity restrictions ease and sales normalized, we will be able to reinvest to drive the top-line and a better overall guest experience.
Based on our strong business model enhancements, we now think we can get to our pre-COVID EBITDA dollars at approximately 90% of pre-COVID sales, while still making appropriate investments in our business.
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q2 adjusted ffo loss per share $0.20.
not providing updated guidance at this time.
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To access the call on the internet, please log on to Capital One's website at capitalone.com and follow the links from there.
With me this evening are Mr. Richard Fairbank, Capital One's chairman and chief executive officer; and Mr. Andrew Young, Capital One's chief financial officer.
In the fourth quarter, Capital One earned 2.4 billion or $5.41 per diluted common share.
For the full year, Capital One earned 12.4 billion or $26.94 per share.
On an adjusted basis, full year earnings per share were $27.11.
Full year ROTCE was 28.4%.
Included in the results for the fourth quarter was an upgrade to a legacy rewards program, which increased our rewards liability and decreased noninterest income by $92 million.
Both period end and average loans held for investment grew 6% on a linked-quarter basis.
Ending loans grew 10% in domestic card, 7% in commercial, and 1% in consumer banking.
Revenue in the linked quarter increased 4%, driven by the loan growth I just described, while total noninterest expense increased 12% in the quarter, driven by increases in both operating and marketing expenses.
Provision expense in the quarter was 381 million and net charge offs of 527 million were partially offset by a modest allowance release.
Turning to Slide 4, I will cover the changes in our allowance in greater detail.
For the total company, we released 145 million of allowance in the fourth quarter, bringing the total allowance balance to 11.4 billion.
The total company coverage ratio now stands at 4.12%.
Turning to Slide 5, I'll discuss the allowance of each of our segments in greater detail.
As you can see in the graphs, our allowance coverage ratio declined in each of our segments.
In domestic card, the allowance balance remained flat at $8 billion.
The decline in card coverage was driven by the impact of balanced growth that I highlighted earlier.
In our consumer banking segment, continued strength in auto auction values drove a decline in both the allowance balance and the coverage ratio.
And in commercial, the decline in allowance balance was driven by modest credit improvement in the existing portfolio.
In addition to the allowance decline, the coverage ratio was also aided by growth in lower loss segments.
Turning to Page 6, I'll now discuss liquidity.
You can see, our preliminary average liquidity coverage ratio during the fourth quarter was 139%.
The LCR remains stable and continues to be well above the 100% regulatory requirement.
We continue to gradually run off excess liquidity built during the pandemic.
Relative to the prior quarter, ending cash and equivalents were down about $5 billion.
And investment securities were down about $3 billion as we used our liquidity to fund loan growth and share buybacks.
Turning to Page 7, I'll cover our net interest margin.
You can see that our fourth quarter net interest margin was 6.6%, 25 basis points higher than Q3 and 55 basis points higher than the year-ago quarter.
The linked-quarter increase in NIM was largely driven by balance sheet mix as we had a reduction in cash and securities, as well as a higher amount of card loans.
Outside of quarterly day count effects, the NIM from here will largely be a function of the change in card balances, cash and securities levels, and interest rates.
Turning to Slide 8, I will end by discussing our capital position.
Our common equity Tier 1 capital ratio was 13.1% at the end of the fourth quarter, down 70 basis points from the prior quarter.
Net income in the quarter was more than offset by share repurchases and growth in risk-weighted assets.
We continue to estimate that our CET1 capital need is around 11%.
In the fourth quarter, we repurchased $2.6 billion of common stock, which completed our $7.5 billion board authorization.
Our board of directors has approved an additional repurchase authorization of up to $5 billion of the company's common stock.
I'll begin on Slide 10 with our credit card business.
Accelerating year-over-year growth in purchase volume and loans, coupled with strong revenue margin, drove an increase in revenue compared to the fourth quarter of 2020.
Credit card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11.
As you can see on Slide 11, our domestic card business posted strong growth in every top-line metric in the fourth quarter.
Purchase volume for the fourth quarter was up 29% year over year and up 30% compared to the fourth quarter of 2019.
The rebound in loan growth accelerated, with ending loan balances up $10.2 billion or about 10% year over year.
Ending loans also grew 10% from the sequential quarter, ahead of typical seasonal growth of around 4%.
Ending loan growth was the result of the strong growth in purchase volume, as well as the traction we're getting with new account origination and line increases, partially offset by continued high payment rates.
And revenue was up 15% year over year, driven by the growth in purchase volume and loans.
Domestic card revenue margin increased 123 basis points year over year to 18.1%.
Two factors drove most of the increase: revenue margin benefited from spend velocity, which is purchase volume and net interchange growth outpacing loan growth; and favorable year-over-year credit performance enabled us to recognize a higher proportion of finance charges and fees in fourth quarter revenue.
Credit results remain strikingly strong.
The domestic car charge-off rate for the quarter was 1.49%, a 120-basis-point improvement year over year.
The 30-plus delinquency rate at quarter-end was 2.22%, 20 basis points better than the prior year.
On a linked-quarter basis, the charge-off rate was up 13 basis points and the delinquency rate was up 29 basis points.
Noninterest expense was up 24% from the fourth quarter of 2020.
The biggest driver of noninterest expense was an increase in marketing.
Total company marketing expense was $999 million in the quarter.
Our choices in domestic card marketing are the biggest driver of total company marketing trends.
We continue to see attractive opportunities to grow our domestic card business, and our growth opportunities are enhanced by our technology transformation.
We continue to lean into marketing to drive growth and build our domestic card franchise.
At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying.
Pulling up, our domestic card business continues to deliver significant value as we invest to grow and build our franchise.
Moving to Slide 12, strong loan growth in our consumer banking business continued in the fourth quarter.
Driven by auto, fourth quarter ending loans increased 13% year over year in the consumer banking business.
Average loans also grew 13%.
Fourth quarter auto originations were up 32% year over year.
Our digital capabilities and deep dealer relationship strategy continued to drive year-over-year growth in our auto business.
In the fourth quarter, we saw a pickup in competitive intensity in the marketplace.
On a linked-quarter basis, auto originations were down 16%.
Fourth quarter ending deposits in the consumer bank were up $6.6 billion or 3% year over year.
Average deposits were up 2% year over year.
Consumer banking revenue grew 7% from the prior-year quarter, driven by growth in auto loans, partially offset by declining auto loan yields.
Noninterest expense increased 15% year over year.
Fourth quarter provision for credit losses improved by $58 million year over year, driven by an allowance release in our auto business.
The auto charge-off rate and delinquency rate remains strong and well below pre-pandemic levels.
On a linked-quarter basis, the charge-off rate for the fourth quarter was 0.58%, up 40 basis points; and the 30-plus delinquency rate was 4.32%, up 67 basis points.
Slide 13 shows fourth quarter results for our commercial banking business, which delivered strong growth in loans, deposits, and revenue in the quarter.
Fourth quarter ending loan balances were up 12% year over year, driven by growth in selected industry specialties.
Average loans were up 8%.
Ending deposits grew 13% from the fourth quarter of 2020 as middle market and government customers continued to hold elevated levels of liquidity.
Quarterly average deposits also increased 14% year over year.
Fourth quarter revenue was up 19% from the prior-year quarter, with 29% growth in noninterest income.
Noninterest expense was up 17%.
Commercial credit performance remained strong.
In the fourth quarter, the commercial banking annualized charge-off rate was a negative 2 basis points.
The criticized performing loan rate was 6.1%, and the criticized nonperforming loan rate was 0.8%.
Our commercial banking business is delivering solid performance as we continue to build our commercial capabilities.
I'll close tonight with some thoughts on our results and our strategic positioning.
Growth momentum is evident throughout our fourth quarter results.
In the quarter, we drove strong growth in domestic card revenue, purchase volume, and loans.
We also posted strong auto and commercial growth.
Credit remains strikingly strong across our businesses, and we continue to return capital to our shareholders.
As we enter 2022, we continue to see attractive opportunities to grow our businesses and build our franchise.
We will continue to lean into marketing to capitalize on these opportunities and drive growth.
For years, we've talked about how sweeping digital change and modern technology are changing the game in banking.
Last quarter, I noted that the stakes are rising faster than ever before.
The investment flowing into fintech is breathtaking, and it's growing.
Also, many legacy companies are embracing the realization that technology capabilities may be an existential issue for them and are increasing technology investments.
The war for tech talent continues to escalate, which is driving up tech labor costs even before any headcount increases.
All these developments underscore the significant opportunity for players who have modern technology and who are in a position to drive growth.
Capital One is very well positioned to do that.
We've spent years driving our technology transformation from the bottom of the tech stack up.
We were an original fintech, and we have built modern technology infrastructure and capabilities at scale.
And we're investing to leverage these capabilities to grow and to realize the many benefits of our digital transformation.
We have been on a long journey to drive our operating efficiency ratio down.
We expect that the striking rise in the cost of modern tech talent, on top of our growth investment, will pressure annual operating efficiency in the near term.
But these pressures do not change our belief in the longer-term opportunity to drive operating efficiency improvement powered by revenue growth and digital productivity gains.
Pulling way up, we're living through an extraordinary time of digital change.
Our modern technology stack is powering our performance and our growth opportunity.
It's setting us up to capitalize on the accelerating digital revolution in banking.
And it's the engine that drives enduring value creation over the long term.
We'll now start the Q&A session.
As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up question.
And if you have follow-up questions after the Q&A, the investor relations team will be available after the call.
Justin, please start the Q&A.
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compname reports second quarter 2021 net income of $3.5 billion, or $7.62 per share.
q2 adjusted earnings per share $7.71 excluding items.
qtrly provision (benefit) for credit losses decreased $337 million to $(1.2) billion versus q1 2021.
qtrly net interest margin of 5.89%, a decrease of 10 basis points versus q1 2021.
qtrly earnings per share $7.62.
common equity tier 1 capital ratio under basel iii standardized approach of 14.5% at june 30, 2021.
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