Consistent with the way our values based organization has operated since our founding during the Great Depression in 1935.
We swiftly moved 80% of our workforce to remote or at-home work thereby creating a safer socially distance work setup in our buildings for those who need to be on-site to execute the central operations.
We've paid all of our employees at 100% of pay, including those who are home because of illness, quarantine, higher health risk or to take care of loved ones or kids home because of school closures.
As of April 16, we have modified over 2,000 units, representing $476 million of residential mortgages and home equities, that's approximately 6.5% of total home equity and mortgage balances, roughly 750 borrowers or $300 million of small business loans, representing approximately 17% of our small business portfolio outstandings, and over 300 borrowers and close to $1.6 billion of commercial loans or roughly 13% of the funded commercial loan portfolio.
When the SBA stopped accepting applications last Thursday, we had more than 2,000 SBA approved loans, representing approximately $650 million, most of which should be funded over the next week.
We've made more than $375,000 in donations thus far to Feeding America, the American Red Cross and United Way's across our footprint to provide urgent basic needs.
Pre-provision net revenue of $125 million was up modestly from Q4, driven by a slight increase in total revenue and a slight decline in expenses.
Earnings per share were $0.39 in the quarter compared to $0.96 in Q4 of 2019 and $1.06 in the prior year's first quarter.
Tangible book value per common share increased 8% from prior year.
Our first quarter return on common equity was 4.75%, and return on tangible common equity was 5.95%, with each reflecting the $68 million reserve build in the quarter.
The combination of a slight increase in total revenue and a slight decrease in expenses led to improvement in the efficiency ratio, which was 58% in Q1.
Loan growth was strong as total loans grew 11%, and commercial loans grew almost 16% from a year ago or by more than $1.8 billion.
Strong organic growth in CRE was augmented by approximately $450 million in revolver drawdowns in the commercial portfolio in March and we saw a reduction in prepayment activity.
Deposits grew 7.7% year-over-year, driven by the inflow of HSA deposits and public funds, and transactional and HSA deposits now represent 60% of total deposits, up from 57% a year ago.
Also of note, footings at HSA Bank increased 9% from a year ago for growth of $679 million during the year.
In Commercial Banking, loans were up nearly 7% linked quarter and 15.5% from a year ago, which includes the aforementioned $450 million in net revolver draws.
Deposits were up smartly some 15% linked quarter and 20% from a year ago, largely driven by the depositing of revolver draws into DDA.
Normalizing for revolver usage, deposits were up approximately 5% in Commercial Banking in the quarter.
Loan and deposit volumes in the quarter drove a 3% year-over-year increase in net interest income and Commercial Banking despite rate pressure.
Expenses were up 4.3% year-over-year, driven by investment in people and technology.
In fact, in early April, we closed our largest agency deal on a best efforts basis, a $350 million technology infrastructure deal where we held just over 10% of the risk after close.
We concluded another successful first quarter as we opened 338,000 new accounts for a total of 734,000 new accounts opened over the last 12 months.
In addition, we added over 1,000 new employers in the quarter.
Ending accounts were up 6.4% to $3.1 million, while deposits increased 8.5% to $6.7 billion.
One important point to note is that HSA Bank's funded account growth rate was 9.2% in 2019 compared to the industry rate of 5.6%.
In the first quarter, our funded account growth rate was 6.8% year-over-year, both reflective of our consistently low percentage of unfunded accounts when compared to industry data.
In addition, as you may have seen, yesterday, we announced that we signed an agreement to acquire State Farm Bank's portfolio of seasoned HSA accounts, representing approximately $140 million in deposits.
In response to the pandemic and consistent with all of Webster, we were able to quickly transition 96% of our HSA staff to work from home in less than three weeks, maintaining 24/7 customer support and continuing to meet service and quality metrics.
I'm on Page 7.
Total community bank loans grew by 5% year-over-year with business banking loans leading the way at 9%.
Deposits grew by 3%, again led by business banking.
Non-interest income was up 9% as a result of higher mortgage and investment services revenue.
Many more customers have transitioned to self-service channels as digitally active households crossed 50% in the quarter for the first time and we see that trend continuing given the pandemic.
Also after a modest repurchase of approximately 2 million shares in early Q1 before the onset of the pandemic, we do not anticipate repurchasing additional shares until this pandemic is behind us.
Average loans grew $516 million or 2.6% linked quarter.
A linked quarter increase of $329 million in commercial real estate was the result of strong originations and a reduction in pay-offs.
On a year-over-year basis, our commercial real estate loans grew more than $1 billion.
Commercial loans now represent 66% of total loans compared to 63% in prior year.
Consumer loan performance was driven by a $96 million increase in residential mortgages with some offset in home equity.
On the deposit side, our low-cost transactional and HSA deposits have increased more than $1.2 billion from last year and now represent 60% of total deposits with a combined cost of 13 basis points.
The Q1 seasonal inflow of HSA and government deposits funded loan growth, as well as a $200 million reduction in short-term borrowings.
With regard to capital, the modest average linked quarter reduction in common equity is reflective of a day one CECL adjustment of $58 million and approximately $77 million as a result of share repurchases in the quarter.
Likewise, modest reductions in the common equity Tier 1 and tangible common equity ratios are also reflective of CECL, share repurchases and asset growth.
We have elected to phase in the CECL impact on regulatory capital, which favorably impacts our ratios by 20 basis points to 25 basis points.
Net interest income was flat to prior quarter as the $6 million benefit from loan growth was offset by the effect of a lower rate environment.
This is reflective in our net interest margin, which was lower by four basis points versus Q4, 16 basis points due to lower loan yield, which was partially offset by nine basis points from lower deposit costs and three basis points from lower borrowing costs.
Versus prior year, net interest income declined $11 million, $31 million of the decline was due to lower market rates with a partial offset of $20 million from earning asset growth.
Non-interest income increased $2.5 million linked quarter and $4.8 million from prior year.
HSA fee income increased $3.4 million as a result of account growth and the seasonal increase in interchange.
In addition, our mark-to-market on hedging activity increased $2.6 million, which was offset by a decline in syndication and client swap revenue.
Reported non-interest expense of $179 million declined modestly linked quarter and grew less than 2% from prior year.
Pre-provision net revenue of $125 million increased $3 million from Q4 and decreased $9 million from prior year.
Provision for credit losses for the quarter was $76 million, which I will explain in more detail shortly.
The efficiency ratio improved to 58% from 58.5% in Q4, reflecting a modest increase in revenue and a slight decrease in non-interest expense.
And our effective tax rate was 22.6% compared to 22.3% in Q4.
As we look at the walk, the day one CECL adoption was $58 million, a 28% increase in the allowance, resulting in a starting coverage ratio of 1.33%.
During the quarter, we had $7.8 million in net charge-offs.
We recorded a $12 million provision as a result of loan growth of $855 million during the quarter.
Loan growth primarily came from the commercial categories and included $450 million in line draws in March, slower prepayment activity and loans funded from our strong fourth quarter pipeline.
The remaining Q1 provision was $64 million, bringing our allowance to $335 million or a coverage of 1.6%.
At the time we closed the books in early April, our outlook included a second quarter GDP decline of nearly 20% with unemployment peaking just under 10% and a recovery beginning in the second half of 2020.
Initial April economic forecast are projected to be more severe as the second quarter GDP decline could exceed 30% with unemployment peaking near 15%.
Non-performing loans in the upper left increased $12 million from Q4.
C&I represented $9 million of the increase.
Net charge-offs in the upper right increased slightly from Q4 and totaled $7.8 million in the quarter.
Commercial classified loans in the lower left represented 287 basis points of total commercial loans.
This compares to a 20-quarter average of 317 basis points.
The allowance for credit losses increased to $335 million, resulting in a coverage ratio of 1.6%.
More than $1.1 billion of core deposit growth in Q1 has maintained our favorable loan to deposit ratio of 85%.
We are predominantly core deposit funded with brokerage CDs representing less than 0.5% of total deposits at March 31.
In addition, our sources of secured borrowing capacity remain intact, totaling over $9 billion at March 31.
The common equity Tier 1 ratio of 11% exceeds well-capitalized by $1 billion, while the excess for the Tier 1 risk-based capital ratio is $809 million.
What I can tell you is, we expect average earning assets to grow in the range of 4% over Q1, driven primarily by loan growth.
Our share count will be about 1.3 million shares lower on average due to buybacks completed in Q1.
The nearly $21 billion loan portfolio we have today has been thoughtfully and purposefully built.
I'll then provide what I hope to be a clear and concise comparison of our current loan and securities portfolios with our 2007 pre-Great Recession portfolios.
And then I'll briefly walk through each of our loan portfolios allowing Jason to provide some context with key metrics, so hopefully, you'll get a sense, have a clear granular view of the $21 billion we have in loans.
This attempts to capture our loan outstandings in each of the most impacted sectors, including rating of categories, modification and line draw activity through 3/31, which Jason will update in a moment.
In fact, 94% of these loans are pass-rated and you'll see here that there has been limited modification and revolver draw activities, so I want to provide a little context there.
94% as I said are in pass-rated categories, most representing 1% or maybe 2% of our total loan portfolio.
The other point I want to make before letting Jason provide some context is that you'll see retail in -- as broadly defined represents 5% of our loan portfolio.
In this category, more than 50% of those loans are in high-quality investor CRE, and those are mostly in non-discretionary pharmacy or grocery anchored.
And for those of you who've heard me talk about Bill Wrang over 25 years, with his retail exposure, he's always looking for non-discretionary.
I'll also tell you that an additional 20% of that retail exposure is fully followed in our ABL Group, where credits are borrowing base secured and often have cash dominion.
And I've been working with Warren Mino in that group for the entire 15 years I've been here and they have an unbelievable track record in managing even struggling large retail exposure.
Modifications are up to $692 million versus the $517 million.
Revolver draws in these sectors are up modestly to $130 million versus $122 million.
That said, as John mentioned early, commercial modifications in total have been roughly $1.85 billion as of late last week.
By exposure, we've reviewed over 80% of the accounts in the portfolio and have reached out to the majority of those where we have direct relationships.
I will also say that 90% of the borrowers that have requested modifications are pass-rated and many have low loan to values, junior capital, owner and sponsor support and liquidity.
Turning to Page 16, these next three slides demonstrate the purposeful strategic shifts in our portfolio since the Great Recession.
But I can tell you that our portfolio today is vastly different than what we had in 2007.
Not only are the portfolio dynamics different, but the way we underwrite, manage and report on risk is light-years ahead of where we were in 2007 when we had only a few years earlier transitioned to be an OCC regulated commercial bank.
We centrally underwrite everything internally even correspondent in market loans, and we have been very disciplined on underwriting guidelines over the last 10 years.
On Page 17, it shows the same analysis for our Commercial Banking portfolios.
While our sponsor and leveraged loan portfolios are larger today on an absolute basis, I'll remind you that they represent roughly the same percentage of C&I loans as they represented in 2007, and they represent roughly the same percentage of Tier 1 capital plus reserves that they represented in 2007.
On Page 18, this is a critical slide.
Today, only 18% of our $8.5 billion securities portfolio is credit-sensitive compared to 44% in 2007.
And I can tell you that we've pivoted over time in the last 12 years on things like contractors or traditional advertising-based media, so that we're able to make decisions quickly to reduce emphasis in certain portfolios over time and we've done that.
You can see a high-level breakdown here of the $21 billion, and in the carats on the right, you'll see where those exposures reside.
So for consumer finance, the $7.2 billion portfolio, $7 billion of that are prime in-market residential mortgages and home equity loans, and then a small pocket of consumer finance, which includes Lending Club.
Our commercial real estate is comprised of a majority of it in our Commercial Banking Investor CRE book run by Bill Wrang for over 21 years here, who's had great asset performance even during the Great Recession.
And on page 36 in the supplemental information, please don't turn to it now, you'll see a detailed breakdown of the investment securities portfolio, which I will not cover here.
On Page 20, residential mortgage.
The key takeaway on this slide is that our $5 billion mortgage portfolio is a high-quality prime in-market centrally underwritten portfolio with high FICO scores and modest LTVs, both at origination and when updated for today.
On Page 21, home equities, pretty much the same story as mortgages.
I also want to highlight one carat there that close to 50%, 50 of this portfolio is in a first-lien position.
On Slide 22, personal lending, a very small $220 million.
80% of it represents Lending Club.
And as you know, it's about $176.2 million and has been coming down since the peak of about $230 million, $240 million.
On Page 23, in commercial real estate, our total CRE portfolio.
I'll provide more detail on that $3.8 billion representing the 62% you see in the top chart there on the next page.
We've had less office exposure as well than we did 10 years ago.
So we're not talking about 80% loan-to-value real estate loans.
We're talking about a portfolio of 60% loan-to-value real estate loans with an average debt service coverage ratio of nearly two times.
On Page 25, you'll see the C&I portfolio balanced and diversified.
On Page 26, we'll talk about sponsor and specialty and leveraged on these last two pages, and I'll ask Jason to provide a little more color and context.
One of the important things that we always talk about and I'm not sure is fully understood is that our sponsor and specialty business is $3.3 billion or something.
Most of our leveraged loans are in this book over 80%.
We've been lending the sponsor-backed and leveraged companies since 2004 when Chris Motl and I arrived at the bank.
You'll see that software, tech and infrastructure has grown from about one-third of the portfolio to almost 50%, again that's because of the nature of the transactions in the underlying companies, and these companies seem to be less susceptible to this particular crisis as well.
We've maintained discipline on covenants with only 7% of our book being covenant-lite, where the general market is almost 84% covenant-lite.
When we look at the borrower's ability to service debt, we have a very strong profile with 85% to 90% having fixed charge coverage ratios of greater than one and a half times.
And on average for both leveraged and non-leveraged deals in sponsor, our loan-to-value, that's the loan to the enterprise value is between 35% and 40% on average.
We saw that during the 2008 crisis.
When we talk about financing recurring revenue business models, 90% of the exposure in that book has over 70% recurring revenue.
There is only one deal that has less than 50% of recurring revenue in that book, which again represents almost half of the sponsor book.


Sales for the quarter increased approximately 4.2%, primarily reflecting higher year-over-year production in the ethanol segment and increased distillers grain pricing.
Sales were based upon 67.7 million gallons this year versus 65.9 million in the prior year fourth quarter.
Gross profit for the ethanol and by-products segment increased for the fourth quarter from $8.1 million to $8.3 million, primarily due to improved distillers and corn oil pricing.
The refined coal segment had a similar fourth quarter loss of $1.4 million for this year versus a $1.5 million for the prior year.
SG&A decreased for the fourth quarter from $5.6 million to $4.4 million, largely due to lower ethanol freight charges recorded in selling, general and administration due to certain contract terms.
The company recorded income from its unconsolidated equity investment of $332,000 for the fourth quarter of this year versus $1 million in the prior year.
We recognized a tax benefit of $1.8 million in this year's fourth quarter versus a benefit of $3.4 million in the prior year's fourth quarter.
The refined coal segment contributed a benefit of $1.7 million this year versus $1.5 million in the prior year fourth quarter for the tax benefit.
The above factors led to net income for the fourth quarter of fiscal 2020 of $3.5 million compared to $4.4 million in the prior year, while diluted earnings per share decreased from $0.70 to $0.59.
In terms of going forward with our cash, we have about $180 million in consolidated cash and equivalents, no debt, our plants are continuing to explore investing in carbon and carbon capture, we've made progress there and have spent a fair amount of time on working on that project.
March 9th report of the USDA showed that carry-out stayed at 1.5 billion bushels with export at 2.6 billion bushels.
The estimated corn yield is 172 bushels per acre and ethanol plants are expected to consume approximately 5 billion bushels in 2021 crop year.
Export of the distillers grains in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019.
Ethanol export during 2020 totaled of 1.3 billion gallons compared to 1.46 billion gallons of 2019.
January 2021 export totaled 164.7 million gallons compared to 151.3 million gallons in January.


This momentum continued into June, with net orders eclipsing last year's June totals by 53%.
For the quarter, net orders were up 5%, given the uncertainties and sales obstacles we faced at the end of the first quarter.
Our homebuilding gross margin in the quarter increased to 20%, reflecting this pricing discipline.
In addition to maintaining price discipline, with respect to our homes, we also exercised cost discipline across our organization during the quarter, leading to a 90 basis points year-over-year improvement in our SG&A ratio.
Given these favorable market conditions, we are now targeting 8,000 home deliveries for the 2020 full year.
Net income increased 55% to $84.4 million or $1.31 per diluted share for the second quarter of 2020.
Both our homebuilding and financial services businesses contributed to these year-over-year improvements as pre-tax income from our homebuilding operations increased $23.3 million or 38%, and our financial services pre-tax income increased $14 million or 110%.
The increase in homebuilding pre-tax income was the result of a 21% increase in home sale revenues and a 160 basis point improvement to our homebuilding operating margins.
Our tax rate decreased from 26.6% to 24.4% for the 2020 second quarter.
For the third and fourth quarters, we currently estimate a 25% tax rate, excluding any discrete items.
Homes delivered increased 25% year-over-year to 1,900, driven by an increase in the number of homes we had in backlog to start the quarter.
The increase in units delivered was slightly offset by a 4% decrease in our average selling price to about $467,000.
This decrease was in line with our strategic focus on affordability as a percentage of our deliveries for more affordable product collections rose to 54% for the second quarter of 2020 versus 44% for the same period a year ago.
We are anticipating home deliveries for the third quarter of 2020 to be between 1,902 and 2,100.
For the full year, we are estimating to deliver between 7,700 and 8,000 homes.
As previously mentioned, our gross margin from home sales improved by 70 basis points year-over-year to 20.2%.
Gross margins increased on both build-to-order and speculative home deliveries, driven by price increases implemented across the majority of our communities over the past 12 months.
It should be noted that during the second quarter of both 2020 and 2019, we recorded decreases to our warranty accrual, which positively impacted gross margins by 20 basis points in each period.
Gross margin from home sales for the 2020 third quarter is expected to again approximate 20%, excluding impairments and warranty adjustments, consistent with the 2020 second quarter.
We demonstrated solid operating leverage for the quarter as our SG&A expense as a percentage of home sale revenues decreased 90 basis points year-over-year to 10.4%.
Our total dollar SG&A expense for the 2020 second quarter was up $9.6 million year-over-year, mostly due to variable selling and marketing expenses that increased in line with the 21% increase in home sale revenues during the period.
For the third and fourth quarter of 2020, we may see a significant increase to our general and administrative expense relative to the $40.4 million expense we just recognized in the second quarter.
The dollar value of our net orders increased 8% year-over-year to $1 billion.
Unit net orders increased by 5%, driven by a 2% increase in our monthly absorption rate to 4.2%, and a 2% year-over-year increase in average active subdivisions.
The average selling price of our net orders increased by 3% year-over-year, driven by price increases implemented over the past 12 months as well as a shift in mix to California, which has our highest average price.
As Larry noted earlier, we experienced a sharp rebound in order activity during the latter part of the second quarter, culminating with June net new home orders increasing 53% year-over-year.
Based on the activity we've seen to date, we expect our July 2020 net orders to exceed our July 2019 orders by at least 50%.
We ended the quarter with an estimated sales value for our homes in backlog of $2.4 billion, which was up 23% year-over-year.
The average selling price of homes in backlog increased 3% due to price increases implemented over the past 12 months, decreased incentives and a shift in mix to California.
With the uncertainty created by COVID-19, especially during the first half of the quarter, we approved only 1,244 lots for purchase during the second quarter of 2020.
However, even with the drop in lot approvals, our lot supply to end the quarter was 6% higher than at the same point in 2019.

Net income increased 55% to $84.4 million or $1.31 per diluted share for the second quarter of 2020.
The increase in units delivered was slightly offset by a 4% decrease in our average selling price to about $467,000.
We are anticipating home deliveries for the third quarter of 2020 to be between 1,902 and 2,100.
For the full year, we are estimating to deliver between 7,700 and 8,000 homes.
Our total dollar SG&A expense for the 2020 second quarter was up $9.6 million year-over-year, mostly due to variable selling and marketing expenses that increased in line with the 21% increase in home sale revenues during the period.
The dollar value of our net orders increased 8% year-over-year to $1 billion.
We ended the quarter with an estimated sales value for our homes in backlog of $2.4 billion, which was up 23% year-over-year.


Third quarter 2021 consolidated sales increased 0.5% to $5.15 billion.
Raw material availability negatively impacted sales by an estimated high single-digit percentage, with about 75% of the impact in The Americas Group.
Consolidated gross margin decreased 630 basis points to 41.6%, driven by lower sales volume, raw material cost inflation outpacing our price increases near term and supply chain inefficiencies.
SG&A expense decreased 2.7% in dollars and decreased 90 basis points to 26.6% as a percent of sales.
Consolidated profit before tax decreased $264.1 million or 30.2% to $611.5 million.
The third quarters of 2021 and 2020 included $70.3 million and $76.4 million of acquisition-related depreciation and amortization expense, respectively.
Excluding these items, consolidated profit before tax decreased 28.4% to $681.8 million.
Diluted net income per share in the quarter decreased to $1.88 per share from $2.55 per share a year ago.
The third quarters of 2021 and 2020 both included acquisition-related depreciation and amortization expense of $0.21 per share.
Excluding these items, third quarter adjusted diluted earnings per share decreased 24.3% to $2.09 per share from $2.76 per share.
EBITDA was $834.2 million in the quarter or 16.2% of sales.
Net operating cash grew to $2.1 billion, or 13.5% of sales in the first nine months of 2021.
Despite strong demand, sales in The Americas Group decreased 0.4% as volume and mid-single-digit selling price increases could not fully offset the decrease related to raw material availability.
Segment margin decreased 3.8 percentage points to 21.3%, resulting primarily from lower sales volume and higher raw material costs, partially offset by selling price increases.
Sales in the Consumer Brands Group decreased 22.8% against a very strong comparison a year ago.
Adjusted segment margin decreased 11.7 percentage points to 14.7% of sales, resulting primarily from lower sales volume, higher raw material and supply chain inefficiencies, partially offset by selling price increases and good sales and marketing cost control.
Sales in the Performance Coatings Group increased 17.4%, driven by volume, price increases and favorable currency exchange.
Adjusted segment margin decreased 5.5 percentage points to 10.5% of sales as operating leverage from the higher volume, selling price increases and good cost control were more than offset by higher raw material costs, where inflation was the highest among the company's three operating segments.
We have significant production capacity available today and we are bringing 50 million gallons of incremental architectural production capacity online over the next two quarters.
2021 year-to-date consolidated sales were up 9.4% or $1.31 billion.
Despite high teens raw material inflation, adjusted PBT increased 1.5% or $33.1 million and adjusted diluted net income per share increased 4.8% to $6.80 per share.
Adjusted EBITDA is $2.73 billion or 18% of consolidated sales.
We've opened 50 net new stores year-to-date.
Group sales increased by more than 17% in the quarter, including a currency translation tailwind of 2%.
We've returned a little over $2.5 billion to our shareholders in the form of dividends and share buybacks.
We've invested $2.1 billion to purchase 8.075 million shares at an average price of $265.88.
We distributed $442.9 million in dividends, an increase of 20.4%.
We also invested $248 million in our business through capital expenditures, including approximately $36 million for our Building our Future project.
We ended the quarter with a net debt-to-adjusted EBITDA ratio of 2.5 times.
On the cost side of the equation, our raw material inflation expectations for the year moved up to the low 20% range from the high teens given additional pressure we've seen since our last guidance.
We do not see any meaningful improvement until well into 2022.
And as we've said many times, we expect margin expansion over the long term and maintain our gross margin target in the 45% to 48% range.
We expect diluted net income per share for 2021 to be in the range of $7.16 to $7.36 per share compared to $7.36 per share earned in 2020.
Full year 2021 earnings per share guidance includes acquisition-related amortization expense of $0.85 per share and a loss on the Wattyl divestiture of $0.34 per share.
On an adjusted basis, we expect full year 2021 earnings per share of $8.35 to $8.55.
We expect to have around 80 new store openings in the U.S. and Canada in 2021.
We expect foreign currency exchange to be a tailwind of approximately 2% in the fourth quarter.
We expect our 2021 effective tax rate to be slightly below 20%.
We expect full year depreciation to be approximately $270 million and amortization to be approximately $310 million.
We expect full year capex to be approximately $370 million, including about $70 million for our Building our Future project.
The interest expense guidance we provided last quarter remains unchanged at approximately $340 million.
We expect to increase the annual dividend per share by 23.5% per share for the full year.

Third quarter 2021 consolidated sales increased 0.5% to $5.15 billion.
Diluted net income per share in the quarter decreased to $1.88 per share from $2.55 per share a year ago.
Excluding these items, third quarter adjusted diluted earnings per share decreased 24.3% to $2.09 per share from $2.76 per share.
2021 year-to-date consolidated sales were up 9.4% or $1.31 billion.
We do not see any meaningful improvement until well into 2022.
We expect diluted net income per share for 2021 to be in the range of $7.16 to $7.36 per share compared to $7.36 per share earned in 2020.
On an adjusted basis, we expect full year 2021 earnings per share of $8.35 to $8.55.


Their collective efforts delivered the company's strongest quarterly adjusted EBITDA on record at $1.6 billion, surpassing last quarter's record by 43%.
Our year-to-date adjusted EBITDA is almost $2 billion higher than the first half of 2020.
Wood Products delivered another record quarter at $1.4 billion of adjusted EBITDA, surpassing last quarter's record by 56%.
Timberlands earnings and adjusted EBITDA improved by approximately 5% compared with the first quarter.
To date, we've harvested nearly 2/3 of our planned salvage volume in Oregon.
Southern Timberlands' adjusted EBITDA increased by approximately 10% compared with the first quarter.
Turning to real estate, energy and natural resources on Pages nine and 10.
Earnings and adjusted EBITDA decreased by approximately 5% compared with the first quarter due to timing of real estate sales and mix of properties sold, but were significantly higher than the year ago quarter.
Earnings increased by more than 230% compared with the second quarter of 2020.
Wood Products, Pages 11 through 13.
Wood Products earnings and adjusted EBITDA improved by almost $0.5 billion compared with the prior quarter.
In the lumber market, average framing lumber composite pricing increased 29% compared with the first quarter.
Adjusted EBITDA for lumber increased $291 million or 57% compared with the first quarter.
Our sales realizations increased by 25% and sales volumes increased moderately.
Average OSB composite pricing increased 52% compared with the first quarter.
OSB adjusted EBITDA increased by $172 million or 57% compared to the first quarter.
Our sales realizations improved by 48%.
Engineered Wood Products adjusted EBITDA increased $11 million compared to the first quarter, a 26% improvement.
In Distribution, adjusted EBITDA increased $36 million compared to the first quarter, a 92% improvement as strong demand drove higher sales volumes for most products and the business captured improved margins.
I'll begin with our key financial items, which are summarized on Page 15.
We generated over $1.3 billion of cash from operations in the second quarter and over $2 billion year-to-date.
Adjusted funds available for distribution or adjusted FAD for year-to-date second quarter 2021 totaled nearly $1.9 billion, with approximately $1.2 billion related to second quarter operations, as highlighted on Page 16.
Year-to-date, we have returned $255 million to our shareholders through payment of our quarterly base dividend.
As a reminder, we target a total return to shareholders of 75% to 80% of our annual adjusted FAD; in the case of 2021, the majority will be returned to the variable supplemental component of our new dividend framework.
We ended the quarter with approximately $1.8 billion of cash and just under $5.3 billion of debt.
During the second quarter, we repaid our $225 million variable rate term loan due in 2026 and incurred no early extinguishment charges.
We plan to repay our $150 million 9% note when it matures in the fourth quarter.
Looking forward, key outlook items for the third quarter and full year 2021 are presented on Pages 17 and 18.
In our Timberlands business, we expect third quarter earnings and adjusted EBITDA will be approximately $25 million lower than second quarter.
We anticipate slightly lower domestic log sales realizations in the third quarter, absent significant fire-related disruption.
In the third quarter, we will record a cash inflow of $261 million and a gain of approximately $30 million related to this transaction.
We expect third quarter adjusted EBITDA will be comparable to the third quarter 2020, but earnings will be approximately $20 million higher than one year ago due to a lower average land basis on the mix of properties sold.
As a result, we are increasing our guidance for full year 2021 adjusted EBITDA to $290 million.
We now expect land basis as a percentage of real estate sales to be approximately 30% to 35% for the year.
For lumber, our quarter-to-date realizations are approximately $425 lower, and current realizations are approximately $535 lower than the second quarter average.
Our quarter-to-date OSB realizations are approximately $155 higher and current realizations are approximately $125 higher than the second quarter average.
As a reminder, for lumber, every $10 change in realizations is approximately $11 million of EBITDA on a quarterly basis.
And for OSB, every $10 change in realizations is approximately $8 million of EBITDA on a quarterly basis.
We are also anticipating improved unit manufacturing costs during the quarter.
In May 2021, we announced another increase, which ranges from 15% to 25% and will be captured over the next several quarters.
We anticipate significantly higher raw material costs, primarily for oriented strand board web stock, as the cost of web stock lags benchmark OSB pricing by approximately 1/4.
As a result, we recorded a $138 million improvement in our net funded status as well as a reduction in our noncash, nonoperating pension and post-employment expense.
It also shows the $40 million capital expenditure increase we announced back in June for some additional high-return projects across our businesses.
We are now -- we now expect our effective tax rate to be between 20% to 24% based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary.
The $90 million tax refund associated with our 2018 pension contribution has now been approved, and we expect to receive the refund in the third quarter of 2021.
U.S. housing activity continues at an impressive pace, with total housing starts in the second quarter averaging 1.6 million units on a seasonally adjusted basis and total permits averaging 1.7 million units.
Single-family starts in June reached their highest monthly level since May of 2007.
Looking forward, we remain focused on industry-leading performance across our operations and are on track to deliver our 2021 OpEx target of $50 million to $75 million.
Our balance sheet is extremely strong and with year-to-date adjusted FAD of nearly $1.9 billion, we expect to return significant amounts of cash to shareholders through the variable supplemental component of our new dividend framework.

Our year-to-date adjusted EBITDA is almost $2 billion higher than the first half of 2020.
We anticipate slightly lower domestic log sales realizations in the third quarter, absent significant fire-related disruption.
As a result, we are increasing our guidance for full year 2021 adjusted EBITDA to $290 million.
We are also anticipating improved unit manufacturing costs during the quarter.


Throughout 2020, we saw a 30% increase in leading activities and a corresponding 20% decrease in recordable cases, which is quite significant.
Our consolidated sales for the year at $1.67 billion represents a new high in the fourth consecutive year of growth when we exclude KJCC from prior results.
Now, while not yet final, we do expect to finish the year with a new high for operating profit of approximately $161 million, which would represent a 28% increase from 2019.
2020 will also represent a new-high watermark for adjusted EBITDA excluding KJCC as we expect to finish between $211 million and $212 million.
Now this compares to $201 million earned in 2019 and exceeds both our recent guidance range of $204 million to $210 million and even more incredibly exceeds our original pre-pandemic guidance for the year of $200 million to $210 million of EBITDA.
That level of EBITDA equates to a margin of 12.6% to 12.7%, which will be our highest margin since 2017.
It will also be the fifth straight year with adjusted EBITDA margins between 12% and 14% after seven straight years with margins hovering between 8% and 11%, just another indication of how we have truly transformed our business model.
For the year, we expect adjusted earnings per share to be between $4.10 and $4.20 per share, which again would represent a new high for Koppers beating our previous high of $3.68 per share back in 2017.
2020's expected result would represent an approximate 30% increase over 2019 adjusted earnings per share of $3.18.
Finally, we will have saved approximately $9.5 million in SG&A cost compared to 2019.
That's about $2.5 million shy of our original goal of $12 million, which was primarily due to our better-than-expected performance resulting in higher bonus accruals, and special bonuses paid out to our team members at year-end for their extraordinary efforts in extraordinary times.
In addition to receiving $65 million of net proceeds from selling our KJCC coal tar distillation facility in China at the end of September, we also had one of our strongest cash flow years generating over $120 million of cash, which will go down as our second-best cash flow year ever.
Now, doing so enabled us to reduce net debt by $131.5 million, which represents our largest net-debt reduction in any given year in our public company history.
Finally, the combination of the higher EBITDA generation and strong-debt reduction allowed us to reduce our net leverage ratio to 3.5 as of year-end compared to 4.3 at the end of 2019.
This is the first year-end since 2017 that we finished the year with net leverage below 4 times as we continue to remain focused on reducing leverage to average between 2 and 3 times.
We spent just under $70 million of capital for the year, which was near the high-end of our most recent guidance and was primarily due to the treatment expansion project North Little Rock.
Moving to Slide 9, currently, we have 20 employees or about 1% of our total employee population self-quarantining for the coronavirus.
To date, we have had 232 employees worldwide, or 11%, who'd have tested positive.
And on a cumulative basis, we've seen close to 2,000 occurrences of employees testing positive or having -- of employee testing positive or quarantining, many of them more than once.
We also recently began using a pool-testing method to screen all U.S.-based plant employees on a periodic basis as that is the employee base where 99% of our infections have come from.
For the fifth year, Koppers Railroad Structures participated in the Leukemia & Lymphoma Society's virtual Light The Night event in Madison, Wisconsin, bringing its cumulative impact to more than $91,000 in donations.
Our utility and industrial products group continued with deploying its storm response teams in August, restoring power to 25 million utility customers affected by devastating winds sweeping across Iowa.
In November, our UIP team again implemented its 24/7 storm recovery program to help those in Georgia, affected by Hurricane Zeta.
At roughly the same time, our UIP crews also responded to a major ice storm in Oklahoma, supplying more than 3,500 poles and crossties to aid in post-storm recovery.
Those at our Ashcroft, British Columbia facility donated 600 pounds of food to the Ashcroft community food bank, 150 pounds of household items to The Equality Project, and funds to the Jackson House Assisted Living facility.
Our Rock Hill employees donated more than 300 pounds of canned goods to their local food pantry and supported the local Toys for Tots campaign.
Also, I'm proud to say that Koppers was recently named the Newsweek Magazine's listing of America's Most Responsible Companies for 2021, placing among the top half, number 179 of 400 companies selected and ranking 30th overall in the social category, which scored us on items, including Board diversity, employee engagement, and community giving.
On Slide 22, consolidated sales were $393 million, an increase of $11 million from sales of $382 million in the prior-year quarter.
Sales for RUPS were $168 million, flat as compared to the prior-year quarter.
PC sales rose to $130 million from $105 million, and CM&C sales came in at $95 million, down from $108 million.
On Slide 23, adjusted EBITDA for RUPS was $10 million, which was the same as the prior year.
EBITDA for PC increased to $23 million from $14 million.
CMC EBITDA was $14 million compared with the prior year of $16 million.
Moving on to Slide 24, sales for RUPS were $168 million, relatively flat again year-over-year.
On Slide 25, adjusted EBITDA for RUPS was $10 million, also flat for the -- from the prior-year quarter, but which is in line, however, with the expected year-end slowdown in crosstie treating demand.
Sales for the PC segment, as shown on Slide 26, were $130 million compared to sales of $105 million in the prior year.
Adjusted EBITDA for PC on Slide 27 was $23 million compared with $14 million in the prior-year quarter.
Moving on to Slide 28, as this shows CM&C sales at $95 million compared to sales of $108 million in the prior-year quarter.
On Slide 29, adjusted EBITDA for CM&C was $14 million compared to $16 million in the prior-year quarter, reflecting an expected decline due to the ongoing weak-end market demand.
However, Q4 performance reflects continued margin recovery, year-to-date adjusted EBITDA margins were only 7.5% at June 30th but as we predicted CM&C margins rebounded strongly in the second half of the year and year-to-date margins for the full year increased to 11.7%, reflecting a very, very strong second half of 2020.
As seen on Slide 31, at the end of December, we had $737 million of net debt, with $346 million in available liquidity.
We reduced net debt by $131.5 million in 2020, which included the proceeds received from the KJCC divestiture.
As of December 31, 2020, total debt was at $784 million.
Due to all the hard work and dedication of our global workforce, we are on track to achieve a new high of profitability post KJCC to surpass the high-end of our initial 2020 earnings target, to exceed our original net-debt reduction objective of $120 million, and to reduce our net leverage to 3.5, below our pre-pandemic 2020 goal of 3.6 to 3.8.

Throughout 2020, we saw a 30% increase in leading activities and a corresponding 20% decrease in recordable cases, which is quite significant.
2020's expected result would represent an approximate 30% increase over 2019 adjusted earnings per share of $3.18.
PC sales rose to $130 million from $105 million, and CM&C sales came in at $95 million, down from $108 million.


We reported funds from operations or FFO of $18 million or $0.17 per share for the first quarter of 2021.
Turning to our balance sheet at March 31, 21, we had a total of $947.5 million of unsecured debt outstanding, including $27.5 million drawn on our line of credit.
At quarter end, between cash on hand and availability on our line, we had a total liquidity of about $577 million.
As a reminder, all of our debt is unsecured and we have no debt maturities until November 30, '21 when $155 million of term loans will become due.
Our debt is at fixed rates, other than the $27.5 million that sits on our line of credit, which is a floating rate.
We are reaffirming our previously announced 2021 disposition guidance to be in the range of $350 million to $450 million in aggregate gross proceeds.
If successful in our property disposition efforts during 2021 and along with our previously achieved sale of our f Emperor Boulevard property in the fourth quarter of last year, FSP is projecting it will reduce its total indebtedness by approximately 35% to 50% by the end of the year.
At the end of the first quarter, the FSP portfolio including redevelopment was approximately 81% leased.
The average leased occupancy of the portfolio for calendar 2020 was approximately 83.6%.
Rent collections were greater than 99.5% for the first quarter of 2021.
The typical occupancy in FSPs suburban office buildings now exceeds 20%, with some buildings approaching 40%.
Urban buildings in FSPs markets has not exceeded 20% occupancy on average yet.
FSP is currently tracking approximately 800,000 square feet of new prospective tenants that have shortlisted FSP assets compared to approximately 300,000 square feet last quarter.
FSP has been engaged with existing tenants and sub tenants for approximately 250,000 square feet of renewals and expansions.
Barring any surprises, the potential for aggregate net absorption over the next six months to 12 months is approximately 600,000 square feet.
During the past six months, FSP has finalized renewals and expansions with tenants exceeding 870,000 square feet.
As a result, we have reduced the near-term rollover exposure of expiring leases through 2023 to approximately 18% of the total portfolio.
This equates to roughly 6% of annual lease expirations from 2021 through 2023.
First, though, FSP is reaffirming our guidance of between $350 million and $450 million of select dispositions for calendar year 2021.
However, we do anticipate that if we are successful with our efforts under way, that FSP would satisfy our disposition guidance for 2021.

We reported funds from operations or FFO of $18 million or $0.17 per share for the first quarter of 2021.
However, we do anticipate that if we are successful with our efforts under way, that FSP would satisfy our disposition guidance for 2021.


We expect to post a year-over-year total revenue growth of low to mid single digits in the second quarter, along with more than 30% adjusted EBITDA growth in the second quarter.
For those that have been following the Company for a while now, we refinanced 11.5% term loan B with a LIBOR plus 700 term loan B during the quarter, and we also got shareholder approval for our converts issuance which we did in the Q4 time periods.
And that was approved at the end of February in the first quarter and the converts have a rate of 6%.
So, we have lowered our overall cost of capital from 11.5% about 7.17%.
We're showing a loss of 142.3 million on our income statement and we need to put that in perspective given the financing moves that we made in the first quarter, which significantly lower our cash outflows.
We had to take a non-cash charge of 126.6 million on the income statement.
Also, in order to get the refinancing done, we incurred 19.4 million of non-cash charges related to extinguishment of debt.
And in order to get all those deals done, we incurred 10.2 million in costs associated with those transactions.
If you take those three charges into account, your net loss actually goes from 142.3 million to a net gain before taxes of 13.9 million, so a net gain of 13.9 million.
Now turning to operations, our digital subscribers surpassed 1.2 million in the quarter as a fantastic and again, it outperformed our internal expectations.
We grew over 37% versus the prior year, and we had our single largest quarter for new paid digital subscribers adding over 120,000.
Further our digital the ownership relation revenue grew by more than 45% year-over-year.
Overall in Q1, our digital revenues accounted for approximately 30% of total revenue in print advertising was less than 25% of total revenue, making real progress toward our goal of being a digital technology company combined with having a revenue streams primarily made up of subscription revenues.
We've implemented a cumulative 300 million of annualize synergies.
Now as of the end of the first quarter of this year, well ahead of our original goal of 300 million by the end of 2021.
And we are confident in our ability to implement additional synergies by the end of 2021, resulting in a total of approximately 325 million or more of annualized synergies.
As I mentioned, digital only subscriptions surpassed 1.2 million in the quarter of 37% year-over-year.
And importantly, we delivered our largest quarter-over-quarter growth as a combined company with 120,000 net new subscribers.
We anticipate that new subscription and product launches in the coming months will accelerate this growth on our path to reach a target of 10 million paid digital only subscriptions in the next five years.
Online game is a sector that is poised to grow substantially in the U.S. over the next 5 to 10 years, as it continues to legalize across the country at the state level.
First, for the fourth year in a row, we received a score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index.
For Q1 total operating revenues were $777.1 billion, a decrease of 18.1% as compared to the prior quarter.
On the same-store basis operating revenues decreased 16.5% as compared with the prior year quarter, due to the continued secular decline in print advertising and home delivery revenue, as well as the continued economic slowdown brought on by the pandemic.
The incentives generated through the Digital Marketing Solutions segment totaled $13 million for all of 2020 with $9.2 million of that in the first quarter last year.
That negatively impacts the Q1 same-store trend by approximately 90 basis points.
Adjusted EBITDA totaled $100.5 million in the quarter, which is up $1.4 million or 1.4% year-over-year.
The adjusted EBITDA margin was 12.9% and growing 250 basis points over the prior year.
In the first quarter, expenses were lower by 20.4%, reflecting permanent expense savings put in place in response to the pandemic, regular way cost reductions as well as the continued synergies from the merger integration.
Now moving on to our segments, the publishing segment revenue in the first quarter was $699.6 million.
Print advertising revenue decreased 24.9% compared to the prior year on a same-store basis reflecting the continued sector of pressures as well as the disruption from the pandemic.
However, print advertising revenue continues to show improvement each quarter, with 200 basis points of improvement in Q1 as compared with the Q4 trend.
Digital advertising and marketing services revenues decreased 10.4% on the same-store basis reflecting the ongoing impact of the pandemic, as well as cycling against strong comparisons in the first quarter last year.
Digital marketing services revenue in the segment continue to show improvement year-over-year on the same-store basis, improving 460 basis points from the Q4 trends as a results of ARPU growth year-over-year.
Circulation revenues decreased 12.9% compared to the prior year on the same-store basis, which compares favorably with Q4 same-store trend of down 13.6%.
Digital only subscribers grew 37.2% year-over-year on a pro forma basis for approximately 1,219,000 subscriptions.
And the digital only subscriber revenue grew 46.3% on the same-store basis as compared with the prior year.
Adjusted EBITDA for the publishing segment total $102.2 million, representing a margin of 14.6% in the first quarter, an expansion of 170 basis points on a year-over-year basis.
For the Digital marketing solutions segment, total revenue in the first quarter was $102.3 million, a decrease year-over-year of 12.7% on the same-store basis.
The decline of 230 basis points from the Q4 trend can be attributed to the termination of the industry wide marketing incentive programs as I mentioned earlier, that was worth $9.2 million in Q1 of 2020.
Adjusted EBITDA for the Digital Marketing Solutions segment totaled $9.2 million, representing a strong margin of 9% in the first quarter in line with our fourth quarter results, and well above margins in Q1 2020 of 6.5%.
In terms of our Q1 net loss attributable to Gannett was $142.3 million, which reflects a $19.4 million noncash loss on the early extinguishment of debt in connection with our term loan refinancing and a $126.6 million noncash loss and the derivative associated with the 6% convertible notes due 2027.
Our net loss also reflected $58.1 million of depreciation and amortization.
As we outlined in our last earnings call, the Company has fully refinance our original 11.5% term loan earlier this year, putting our blended rate of debt outstanding at just over 7%.
We ended the quarter with approximately $1.54 billion of total debt and made $41.2 million of debt repayments in the quarter including $8.6 million of repayments post by refinancing.
These repayments were funded through cash on hand and $10.9 million of assets sales in the first quarter.
We expect to generate an incremental $90 million to $115 billion of assets sales this year with the intention to reach firstly net leverage below one times adjusted EBITDA by the end of 2022.
Our cash balance at the end of the quarter was $163.5 million, resulting in net debt of approximately $1.374 billion.
Capital expenditures totaled 7.6 million for the quarter reflecting investments related to digital product development, technology and operating infrastructure.
Lastly, in connection with the CARES Act, subsequent to March 31, 2021, the Company has received approval for approximately $16.2 million in PPP funding in support of certain of our locations that were meaningfully affected by the COVID-19 pandemic.

For Q1 total operating revenues were $777.1 billion, a decrease of 18.1% as compared to the prior quarter.
On the same-store basis operating revenues decreased 16.5% as compared with the prior year quarter, due to the continued secular decline in print advertising and home delivery revenue, as well as the continued economic slowdown brought on by the pandemic.
The adjusted EBITDA margin was 12.9% and growing 250 basis points over the prior year.
Now moving on to our segments, the publishing segment revenue in the first quarter was $699.6 million.
Circulation revenues decreased 12.9% compared to the prior year on the same-store basis, which compares favorably with Q4 same-store trend of down 13.6%.


Additionally, we further solidified our balance sheet as we completed a new $1 billion credit -- revolving credit facility and $400 million debt issuance.
At the end of the third quarter, our total investments were approximately $6.5 billion with 358 properties in service and 96% occupied.
During the quarter, our investment spending was $39.3 million, bringing the year-to-date total through September 30 to $107.9 million in each case entirely in our experiential portfolio, the spending included in acquisition, build-to-suit development and redevelopment projects.
Our experiential portfolio comprises 284 properties with 43 operators and accounts for 91% of our total investments or approximately $5.9 billion of the $6.5 billion, and at the end of the quarter was 95% occupied.
Our education portfolio comprises 74 properties with eight operators, and at the end of the quarter was 100% occupied.
Q3 total box office was $1.37 billion.
The first $100 million a three-day weekend in the pandemic era wasn't until July.
Since then, North American box office has exceeded $100 million for a three-day weekend five times.
Shang-Chi and the Legend of the Ten Rings put an exclamation point on the quarter, establishing an all-time four-day Labor Day box office record at $94.7 million.
Venom Let There Be Carnage, delivered the highest grossing opening three-day weekend during the pandemic era at $90 million.
North American box office through this past weekend is $3 billion compared to $2.1 billion for all of 2020.
We believe Q4 performance will deliver around $2 billion.
Q2 box office growth was around 25% of 2019.
July was at 45%, August at 50%, September at 53%.
And when final October numbers are in, we expect grosses will exceed $622 million or around 80% of 2019, the highest monthly gross since February 2020.
During 2018 and 2019, there were around 560 new titles released to theatrical exhibition annually.
In 2020, there were 327, a 42% decrease.
Through September 30, there have been 285.
We anticipate that number will grow to around 400 by the end of the year.
The 2022 film slate is compelling with the potential for 20 titles to gross $100 million or more up approximately 50% from 2021, anchored by two Tom Cruise pictures, Top Gun Maverick and Mission Impossible 7, three Marvel Universe films and several highly anticipated sequels, including Aquaman 2, Avatar 2, John Wick 4, The Batman, and Jurassic World.
The exclusive theatrical window is generally settling around 45 days with some variability for individual titles and exhibitors.
Historically, the majority of box office gross occurred in the first 45 days.
In May, Netflix released Army of the Dead theatrically in select theaters, including 600 Cinemark theaters for one week prior to its availability on Netflix.
In Q4, it will release 10 titles to theatrical exhibition before release to streaming.
We saw strong demand through the summer and into the fall foliage season, which draws visitors to -- Great Smoky Mountains National Park, the most visited national park in the country with over 12 million visitors in 2020.
Vail's recently announced $320 million capital plan will improve four of our properties.
After a challenging 16 months, we are returning to growth and actively pursuing deals in all our experiential verticals other than theaters.
In Q3, we acquired the Jellystone Park Camp Resort in Warren's, Wisconsin, for $25.2 million in an unconsolidated joint venture, of which we own 95%.
Since Q3 2020, we've sold five vacant theaters for various uses, including one that closed yesterday for approximately $6.8 million at a slight gain.
At the end of October, we sold our WISP and Wintergreen ski resorts to our tenant for $48 million or about a 9% cash cap rate with a gain on sale of $15.4 million.
Tenants and borrowers paid 90% of contractual cash revenue for the third quarter.
In addition, we collected a total of $11.3 million of deferred rent and interest during the quarter, as well as $5.3 million on a previously reserved note receivable.
Through September 30, we have collected a total of $59.5 million of deferred rent and interest from accrual and cash basis customers.
We are excited by the prospect of each metric approaching 100% in the fourth quarter.
as adjusted for the quarter was $0.86 per share versus a loss of $0.16 in the prior year, and AFFO for the quarter was $0.92 per share compared to $0.04 in the prior year.
Total revenue for the quarter was $139.6 million versus $3.9 million in the prior year.
Additionally, we had higher other income and other expense of $7.9 million and $5.2 million, respectively, due primarily to the reopening of the Kartrite Resort and indoor water park after being closed due to COVID restrictions, COVID-19 restrictions, as well as the operations from two theater properties.
Percentage rents for the quarter totaled $3.1 million versus $1.3 million in the prior year.
Costs associated with loan refinancing or payoff for the quarter of $4.7 million related to the write-off of fees and termination of interest rate swaps related to the repayment of our $400 million unsecured term loan facility during the quarter.
Interest expense net for the quarter decreased by $5.2 million compared to prior year due to reduced borrowings offset by lower interest income on short-term investments.
You may recall that in prior year, we had drawn $750 million on our revolving credit facility as a precautionary measure which provide us with additional liquidity during the early days of the pandemic.
During the quarter, we continued to see improvement in the credit profile of our mortgage notes and notes receivable, resulting in a credit loss benefit of $14.1 million versus a loss of $5.7 million in the prior year.
The primary reason for the benefit this quarter was stronger-than-expected performance by a borrower, resulting in a partial repayment of $5.3 million on a fully reserved note and the release from an additional $8.5 million in funding commitments that also had been previously reserved.
Lastly, income tax expense was $395,000 for the quarter versus $18.4 million in the prior year.
As mentioned earlier, we repaid our $400 million unsecured term loan on September 13.
On October 6, we amended and restated our $1 billion revolving credit facility to extend the maturity to October 2025, with extensions at our option for a total of 12 additional months subject to conditions.
On October 27, we closed on $400 million of new 10-year senior unsecured notes at a coupon of 3.6%, the lowest in the company's history.
The offering was over 4.5 times subscribed, which allowed us to significantly tighten pricing and achieve a negative 5 basis points new issue concession.
As previously announced, the proceeds from this offering will be used in part to redeem all $275 million of our 5.25% senior unsecured notes at the make-whole amount on November 12.
Our net debt to gross assets was 38% on a book basis at September 30.
Pro forma for the bond transactions, we will have total offsetting debt of approximately $2.8 billion, all of which will be either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.3%.
Additionally, our weighted average debt maturity will be approximately 6.5 years with no scheduled debt maturities until 2024.
We had $144.4 million of cash on hand at quarter end, which is expected to increase by approximately $95 million with the issuance of the new 10-year bonds net of the redemption of the 2023 bonds, and we have nothing drawn on our $1 billion revolver.
Cash collections from customers continue to exceed expectations and were approximately 90% of contractual cash revenue were $124.5 million for the third quarter.
During the quarter, we also collected $7.7 million of deferred rent and interest from accrual basis tenants and borrowers and the deferred rent and interest receivable on our books at September 30 was $40.9 million, which we expect to collect primarily over the next 27 months.
Additionally, during the quarter, we collected $3.6 million in deferral repayments from cash basis customers that were recognized as revenue when received.
At September 30, we had about $126 million of deferred rent and interest owed to us not on the books.
However, most of this amount is scheduled to begin to be collected over about 60 months beginning in May of 2022.
Finally, as discussed previously, we also received a note repayment from a cash basis customer of $5.3 million, which resulted in credit loss recovery that is excluded from FFO as adjusted.
Adding this all together, and as you can see on the slide, we collected more than 100% of contractual cash revenue for the quarter.
We are pleased to be increasing guidance for 2021 FFO as adjusted per share from a range of $2.76 to $2.86 to a range of $2.95 to $3.01.
The guidance for 2021 FFO as adjusted per share includes only previously committed additional investment spending of approximately $6 million for the last three months of 2021.
Guidance for disposition proceeds has also been increased from $40 million to $50 million to $93 million to $103 million, primarily to reflect the sale of the two ski properties that Greg discussed.
The range we expect to recognize in Q4 of such contractual cash revenue is $133 million to $138 million or 96% to 99%.
Additionally, the expected range we expect to collect of such contractual cash revenue in Q4 is $131 million to $135 million or 95% to 97%.
I would also like to note that beginning in 2022, we expect both current quarter collections and revenue recognition to be at 100% of contractual cash revenue, and we expect to continue to collect deferral amounts from prior periods.
Finally, I thought it would be helpful to provide a bridge from the midpoint of our previous FFO as adjusted per share guidance of $2.81 to the midpoint of our increased guidance of $2.98.
Details regarding all of our 2021 guidance can be found on page 22 of our supplemental.

as adjusted for the quarter was $0.86 per share versus a loss of $0.16 in the prior year, and AFFO for the quarter was $0.92 per share compared to $0.04 in the prior year.
We are pleased to be increasing guidance for 2021 FFO as adjusted per share from a range of $2.76 to $2.86 to a range of $2.95 to $3.01.


FedEx Ground had an outstanding Cyber Week, with 100 million packages picked up during the first official week of peak.
For example, at FedEx Ground, this means adding 14.4 million square feet to our network, the equivalent of 300 football fields since June of this year.
In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November just weeks before peak.
Last week, we exceeded 111,000 applications, the highest level in FedEx history.
To put this in perspective, we had 52,000 applications the week of May 8.
This has led to appropriate staffing levels of peak, including having more than 60,000 frontline team members since we last spoke in September.
We delivered strong results for the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations shared during the Q1 call.
Second quarter results include outstanding performance by our team at FedEx Express, where operating income on an as-adjusted basis exceeded $1 billion for the quarter.
FedEx Freight also delivered a strong quarter with an operating margin of 14.7%.
We estimate the effect of labor shortages on our Q2 results was approximately $470 million, in line with our original expectations.
And consistent with the first quarter, Ground once again, bore the majority of these costs to the tune of $285 million.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times.
Q2 delivered our second consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result.
Our domestic yield growth was 9.1% with fuel in Q2.
In January, the Ground Economy peak surcharge will be replaced by the new Ground Economy delivery surcharge at a $1, solidifying the price point for our Economy product.
We are forecasting that the U.S. domestic parcel market will reach 134 million pieces a day by calendar year 2026, a remarkable 70% growth from 2020.
E-commerce is expected to drive 90% of the parcel market growth.
It will grow at a 5% CAGR through 2026.
Q2 Express international export yield grew 12% and volume grew 7.6%, which is outstanding year-over-year growth.
International export composite yield grew to almost $54 per package, while average daily volume was more than 1.1 million.
International Priority Freight had a very strong quarter with 34% year-over-year revenue growth year-to-date.
As we approach the final stages of physical integration this fiscal year, we are increasing the FedEx brand presence on the road in Europe by approximately 30%, including the rebranding of vehicles and facilities.
We have also launched our new FedEx Ship Manager application in more than 100 countries.
Given the historically challenging nature of peak season, along with the continued staffing challenges felt by numerous companies around the world, we are quite pleased with our second quarter consolidated financial results, with adjusted operating income up 11% year-over-year.
While adjusted earnings per share was unchanged year-over-year, this year's effective tax rate was significantly higher as last year's earnings included a $0.71 per share discrete tax benefit from favorable guidance issued by the IRS.
As we anticipated, most of the headwinds we experienced in the first quarter persisted through the second quarter, which dampened our Q2 profitability by an estimated $770 million.
The difficult labor market once again had the largest effect on our bottom line, representing an estimated $470 million in additional year-over-year costs.
Of the $470 million, we estimate $230 million was incurred in higher wage and purchase transportation rates.
We estimate network inefficiencies resulting from labor shortages, increased costs by approximately $240 million.
Beyond the labor effects, our results for the second quarter also included the following headwinds; $90 million related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity; an estimated $75 million in incremental air network costs at Express due to the continued effect of COVID restrictions on our operations; and lastly, a $70 million effect year-over-year from higher federal excise taxes as the waiver ended on December 31, 2020.
Ground reported $8.3 billion in revenue, a 13% increase year-over-year, with operating margin at 5.8%.
Ground operating income was down approximately $70 million and in addition to the $90 million I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amid the constrained labor market.
Express adjusted operating income increased to over $1 billion and reported an adjusted operating margin of 8.8%, which was driven by higher yields and international priority volume growth, which more than offset the negative effects of continued staffing challenges and COVID-19-related air network inefficiencies.
Freight had another outstanding quarter with an operating margin of 14.7% as revenue for Q2 increased 17% year-over-year and operating income increased 33% year-over-year.
Our Q2 results include a net pre-tax non-cash mark-to-market loss of $260 million related to the termination of the TNT Express Netherlands Pension Plan and a curtailment charge related to the U.S. FedEx Freight Pension Plan.
Year-to-date, we spent $3.1 billion in capital as we continue to invest in our strategies for profitable growth, service excellence and modernizing our digital platforms.
Our capital forecast for fiscal 2022 remains at $7.2 billion and less than 8% of anticipated revenue.
We ended our quarter with $6.8 billion in cash and are targeting approximately $3 billion in adjusted free cash flow for FY 2022, which puts us on pace to deliver over $7.5 billion in adjusted free cash flow for FY '21 and '22 combined, far exceeding our historical levels.
As a result of this flexibility, I am pleased to announce our Board has approved a new $5 billion share repurchase authorization.
And as part of this program, we expect to enter into a $1.5 billion share repurchase program that will be completed by the end of the fiscal year, which is on top of the $750 million of repurchases in the first half of the year.
During Q2, we also made a $250 million voluntary contribution to our pension plan, which mitigates PBGC fees and further strengthens the funded status of our plan for our employees and we expect to make an additional $250 million contribution in February.
As for our FY2022 guidance, we are raising our full-year adjusted earnings per share range to $20.50 to $21.50 to reflect second quarter results and outlook for the second half of the fiscal year as well as the expected benefit from our ASR transaction.
This improved outlook represents another outstanding financial year with a year-over-year increase in adjusted earnings per share ranging from 13% to 18%, following our strong 2021 results.
In addition, we do not expect a recurrence of approximately $1 billion in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one-time express frontline bonus and our commitment to the Yale Carbon Capture initiative.
And after 23 years with FedEx, he will retire at the end of this month.
I'm pleased to announce we will be hosting an Investor Meeting on Tuesday and Wednesday, 28, 29 June 2022 in Memphis.

It will grow at a 5% CAGR through 2026.
Ground operating income was down approximately $70 million and in addition to the $90 million I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amid the constrained labor market.
Our capital forecast for fiscal 2022 remains at $7.2 billion and less than 8% of anticipated revenue.
This improved outlook represents another outstanding financial year with a year-over-year increase in adjusted earnings per share ranging from 13% to 18%, following our strong 2021 results.
In addition, we do not expect a recurrence of approximately $1 billion in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one-time express frontline bonus and our commitment to the Yale Carbon Capture initiative.


We protected our people, we found a way to run the plants and warehouses safely, we set production and shipping records, we figured out how to make hand sanitizer in our U.K. plant, we operated the company with 2,000 remote employees, we pivoted our marketing messages to support a 60% increase in e-commerce sales, we installed the new packaging lines with the assistance of off-site engineers using Google classes, we added overflow warehouses, and we validated new suppliers and co-manufacturers.
All in, we expect to deliver 3% organic sales growth and 6% to 8% earnings per share growth in 2021.
And this is on top of almost 10% organic growth and 15% earnings per share growth in 2020, which exceeded our 2020 outlook when we last spoke in October.
Steve has had a spectacular career with Church & Dwight, spanning over 20 years.
Whether you've been a short term one year shareholder of Church & Dwight, three, five, 10 or 15 years, you're very pleased with our performance.
Every year, we expect to grow our top line organically 3% and our bottom line 8%.
Well, if you take a look back over the last 10 years, you'll see that we've exceeded the 3% target every year except 2013 and 2017.
With respect to 8% EPS, you can see over many, many years, we're consistent.
We have an Evergreen model that is very familiar to all of our existing shareholders, 3% top line, 8% bottom line.
Now, where does the 3% organic growth come from?
Well, 2% from the U.S., 6% from international and 5% from the specialty products.
We focus on power brands, we have 13 power brands in our company that are displayed here on this chart.
And those 13 power brands, deliver 80% of our revenues and profits.
We have a nice split between premium and value, 58% premium and 42% value.
We're largely a U.S. company, only 17% of our consumer business is international, so lots and lots of runway.
One of our big advantages is that we're nimble, we're small, we only have 5,000 employees.
If you went back to the year 2000, the only brand we owned was ARM & HAMMER.
We were up only $800 million in sales in the year 2000.
In '21, we're going to cross $5 billion.
And of those 13 power brands, 12 of them were acquired since 2001.
If you go back just a few years in 2015, we were a laggard when it came to online sales, less than 1% of our sales were online.
At the end of 2019, it was 8%, at the end of '20, largely due to COVID, it's over 13%.
We have a low exposure to private label, only 12%, and if you look at the categories, there's only five of our 17 categories where we have significant private label share and those shares have been pretty stable over the last five years.
As you have heard from Matt, we plan to deliver another year of growth in 2021 on top of an outstanding performance in 2020, and in line with our Evergreen model.
We saw growth in 12 of our 17 categories, average 9.8% overall.
We saw an over 50% growth in vitamin, double-digit growth in baking soda and single-digit in many other categories.
We have high expectations for category growth in 2021 and I will speak to them in more detail.
As you can see in this chart, 11 of our 17 categories increased household penetration.
We added 8.6 million households to ARM & HAMMER, More Power to You, 2.4 million to OxiClean Stain Fighter and in the second half alone, Vitafusion added 3 million more households.
Vitamins grew an amazing 58% in consumption.
It takes 66 days to form a new habit, and consumers clearly formed new habits, regarding taking vitamins.
20% of consumer started taking vitamins, 57%, that means more than half, are now taking vitamins daily.
You can see that the share of gummies on total increased by nearly one-third, that is, it is now 23% and who would be better placed to profit from that growth than the number 1 vitamin gummy, Vitafusion.
In total, for 2020, we achieved slightly more unit sales than in 2019, despite dentists and certain retailers being closed for significant periods of time, which also means that we came out strong by the end of the year and this momentum will continue and only accelerate with more dentist office opened up and resuming higher traffic, there is only upside.
As you can see, laundry grew 5.5% in 2020 but was a lot of swings due to consumers' stockpiling and changing habits.
It is hard to get good statistics on cat ownership but we do know that 6% more households bought Cat Litter in 2020, leading me to believe that this is the minimum of additional cat owners.
18 to 24 year olds can't wait to get their social lives back and with college campuses reopening, 2021 looks promising.
In 2020, a year with difficult supply situations, the majority of our brands, which means seven out of our 13 power brands have grown share.
We have more than 500 influencers globally enjoying and recommending our brand.
We have reached more than 200 million consumers via those recommendations and this number will definitely grow in 2021.
79% of our consumers want germs removed from their laundry, introducing OxiClean Laundry and Home Sanitizer.
This product kills 99.9% of bacteria and viruses, it also removes germs, odors and stains.
Two-thirds of consumers find flossing difficult and only 16% floss daily.
Introducing Waterpik Sonic-Fusion 2.0, the most successful new product launch in power flosser history just got better.
This product is 30% smaller than traditional plug-in models, has 90 seconds of water capacity and with a lithium-ion battery that lasts up to four weeks with a single charge.
33% of consumers plan to purchase more immune-support supplements.
It is the only gummy to deliver over 100% daily value of the top three immune ingredients, Vitamin C, zinc and elderberry, it also includes a new ingredient, Manuka honey.
We finished 2020 posting organic growth of 8.6%, well above our 6% Evergreen goal.
This is remarkable given the fact that during Q2 at the height of the pandemic, we delivered less than 1% organic growth for the division.
Q4 finished up a remarkable 14.9% behind growth in both our domestic subsidiary markets as well as our GMG business, where a resurgent Asia was a key driver of performance.
We have now built an international business that's over $800 million and approaching scale in key markets and we feel that there is not a market that we cannot reach.
We've also tripled the historic CAGR of the division from 3% to 9%.
Barry came to Church & Dwight from Johnson & Johnson, where he worked for 14 years across consumer, pharmaceutical and medical device businesses, where he developed a depth of experience in both U.S. domestic and global markets during his time there.
In closing, it has been my sincere pleasure to work for this great company for the past 20 years.
This is as true today as when I joined in 1999.
And your work over 20 plus years has impacted the entire Church & Dwight organization.
As you saw under Steve's leadership, we've built International into an $820 million business that's growing faster than ever.
And as a reminder to this audience, we think about our International business in two buckets, our subsidiaries, where we have fully staffed Church & Dwight teams on the ground in Canada, Mexico, U.K., France, Germany and Australia, and our Global Markets Group, which covers 130 other markets via distributors who represent our brands.
As you've seen, GMG has been on a tear and now represents 34% of all international sales, followed by Canada and our European subsidiaries and then, our Australia and Mexican subsidiaries.
From a growth standpoint, our subsidiaries grew plus 4.8% in 2020 and GMG continued its stellar run with explosive growth of plus 19%.
As I mentioned earlier, GMG is now our largest entity with outstanding growth of plus 19%.
For context, our top CPG competitors derive over 25% of international sales from emerging markets in which we both compete, while C&D only realizes only 7% of our international revenue from them.
From an acquisition standpoint, our distributor coverage in 130 plus markets gives us a great footprint for expansion and we've been making excellent headway on new acquisitions like Waterpik and Flawless, but we're also still making excellent progress on some of our older acquisitions like Batiste and our VMS brands.
However, what you might find interesting is the visualization here showing if there are more consumers living in Asia than in the rest of the world combined, including 4.5 billion middle income consumers who represent our target audience for Church & Dwight brands.
However, you heard Britta talk about the powerhouse influencers that we're leveraging in the U.S. and I'm happy to share that we're using them abroad as well, with plants in 10 of our largest global markets that are sure to drive awareness and trial of this great new addition to our portfolio.
I mentioned earlier that we love all of our acquisitions here in international, even those that are a bit older and an example of how we're still greenhousing some of these older brands can be seen first with Batiste where we've grown at a 20% CAGR over the last five years and are still under-indexed in household penetration versus our lead market in the U.K.
We continue to launch in new markets and drive household penetration in existing markets and again have lots more room to run with household penetration less than 2% in most global markets.
One example of a market where we're investing significant time and resources on VMS is in China, where sales were up more than 30% in 2020.
Last but not least, we remain committed to doing all of the above, while continuing to use our increasing scale, pricing power in key markets and our personal care weighted mix to keep increasing operating margin by 50 basis points per year.
We did even better than that in 2020 where we grew 120 basis points and we remain committed to further continuous improvements here.
So in closing, we remain very excited about International and remain committed to our 6% organic growth target, which is also consistent with our outlook for 2021, and as a reminder, this is on top of almost 9% organic growth we experienced in 2020.
You heard me speak earlier about what our Evergreen model is, it's 3% annual organic growth, 2% from the U.S., 6% from International and 5% from the Specialty Products.
Our specialty products business is a $300 million business, two-thirds is animal productivity and one-third is specialty chemicals.
Less than 1% of our sales were from non-dairy.
In '21, we expect it to cross 30%.
As we say -- we opened the program today, pointing out that we have 13 brands that we call our power brands.
If you run your eyes across this page, you can see back in 1888, we -- the company introduced pro-environmental wall charts and trading cards that we put in our packages as a promotion for the environment.
If you went 20 years later to 1990, we were still the only corporate sponsor of Earth Day.
More recently, in 2016, 50% of our global electricity demand was supplied by renewable energy sources.
In 2018, we crossed 100%.
Reduce water and our wastewater by 25% by 2022.
For solid waste, to increase our solid waste recycling rate to 75% by the end of 2021.
We want to achieve 100% carbon-neutral status for all of our global operations by 2025 and of all those three, that's the one I'm most excited about.
We're almost $1 million of sales per employee, you'd normally expect that off a start-up.
Capex as a percentage of sales has been about 2% for as long as I've been with the company.
The other thing that may not be appreciated is that about 25% of our global sales are manufactured by third parties.
Number one, we only buy brands that are number 1 or number 2 in their categories.
Number two, we only buy brands that can grow 3% or better and have gross margins that are equal to or better than our corporate gross margins.
Our most recent acquisition is Zicam, that's a number 1 Zinc supplement in the United States in the adult cold shortening category.
Just to wrap up the M&A section, we have 13 brands today, we're shooting for 20 tomorrow.
So first off is the Evergreen model and our shareholders know that we've been talking about this for a very long time, 3% top line, 8% bottom line.
So 3% for net sales growth, 25 basis points for gross margin expansion, flat marketing as a percentage of sales, which is typically higher dollars as we grow the top line.
And then we leverage SG&A by 25 basis point.
That gets us to 50 basis points of operating margin expansion and about 8% earnings per share growth.
Q4 2020 was 10.8% organic sales growth, 11% domestic organic sales growth, 14.9% for international and minus 1.2% for SPD.
Gross margin was down 280 basis points, but in line with what our expectations were.
Remember our outlook was down 250 basis points for the quarter.
Now that 280 included a 40 basis point drag because we recognized some of our supply chain workers as the pandemic spiked the again.
And then, marketing change was up 140 basis points in the quarter as we invested behind our brands to enter 2021 with momentum.
SG&A was leveraged by 70 basis points.
And then, earnings per share was $0.53, our outlook was $0.50 to $0.52.
So we beat the midpoint of the range by $0.02.
Organic was 9.5%, domestic was 10.7%, international 8.6% and SPD was 0.4%.
So just really a strong year to have a 10% organic full-year number.
Gross margin was 45.2% or down 30 basis points, really driven because of COVID and incremental tariffs, but we'll get into the detail in a minute.
Marketing was 12.1% or higher by 30 basis points.
Adjusted SG&A is 14.1% or down 10 basis points, so we did leverage SG&A.
And so, earnings per share was up 15% or $2.83 and then cash was up to $990 million, a $400 million above our $890 million estimate a year ago.
And then, finally that translates into 125% free cash flow conversion, we do a great job converting net income into cash flow.
So for Q4, we had positive price volume mix, similar to the way we've had it all year long plus 130 basis points.
Then, inflation was a drag of 310 basis points, but that included a few items, commodities, distribution with a tight trucking market, labor increases and then investments.
COVID costs were 150 basis point drag, which included a 40 basis point drag for the supplemental bonus that we discussed earlier.
Incremental tariffs for Waterpik was a 90 basis point drag for the quarter, and then productivity programs were plus 160, so there's a lot of great work behind our good to great program.
Acquisition, that's really Zicam, for the month of December, a positive margin mix, and then Flawless accounting was down 30 basis points.
And that's how we get to down 280 basis points for the quarter.
And then, all that translates into the full year to be down 30 basis points.
Number three is acquisition synergies, you heard us a few months ago talking about Zicam, and we signed up for $5 million of synergies for Zicam, as an example.
So at a high level, our outlook consists of reported sales growth of 4.5%, that's really the organic number of 3% plus the impact of Zicam.
Organic is 3%, operating profit margin expansion of 100 basis points, which is almost double our 50 basis point expansion for our Evergreen model.
And then, adjusted earnings per share growth of 6% to 8%.
First, the 4.5% reported and then we get into the 3% organic sales growth.
And it's very consistent with what you just heard from Matt and Barry and Britta, 2% for domestic, 6% for international and 5% for SPD.
Now, the 3% organic growth, it does have a couple of strategic choices that we've made previously in there.
So we would have been at 4%, I just want to give you context there.
Gross margin is up 50 basis points.
We'll go through that detail in a minute and marketing is down 30 basis as we get back to kind of the average for pre-pandemic levels is around 11.8 and that's what we plan on doing in 2021.
SG&A, we leveraged by 20 basis points and then were up 100 basis points for operating margin.
Now you might ask if you're leveraging the operating margin by 100 basis points, why aren't you higher on the earnings per share growth outlook?
It's just 8%, your Evergreen model is 50 basis points and your 8% earnings per share growth.
Our tax rate in 2020 was 19% and we're going back to the consistent average of around 21%, 22%.
And so, as a result, we're up 100 basis points on operating margin, just really strong base business plan, up 6% to 8% on EPS, and then up to approximately $1 billion of cash flow generation, cash from operations.
Okay, here's a track record of our organic sales over the last 10 years.
We've typically averaged around 4%, this year we're calling 3% for 2021 and as I said before, if you add in some of those strategic decisions we made, we are closer to the 4% on an apples to apples basis.
So plus 50 basis points in 2021.
The detail of the 50 basis points of expansion in '21 really leads off with price and volume mix continuing to expand.
Inflation and the COVID costs are drag of around 130 basis points.
And then productivity programs are a tailwind of 100 basis points.
Those two pretty much offset and we're at plus 50 basis points for the year.
So first half gross margin is down 50 basis points.
Moving to marketing, we have a long track record of spending between 11% and 12% on marketing.
In years past, about -- the average is around 11.
8% and we're saying in 2021, we're going to get back to the pre-pandemic average of around 11.8%.
In 2021, we're going to be down 20 basis point, is our expectation, but if you look at this on a cash basis on the next slide, you can see how much we're actually leveraging cash SG&A.
We're going to be down 60 basis points in 2021.
6% to 8% earnings per share growth of $3 to $3.06 is the outlook.
And that's on top of 15% growth in 2020.
For many of the same reason, earnings per share growth is expected to be down 5% in the first half, as we get back to normal promotional levels.
In the second half, we expect to be up around 20% and that's because of a return to historical marketing level, improved promotional efficiency, lower COVID costs, tariff remediation in those actions that we're taking and 2020 investments that aren't going to repeat in the back half of the year.
We have a long track record of free cash flow conversion, 122% over the time period.
We had 125% in 2020.
Well, we have great working capital management, we've moved from 52 days down to 16 days is the outlook for 2021.
And if you strip out the Chinese supply chains that we have for Waterpik and Flawless, those numbers are actually closer to five days as we approach 0 working capital.
We expect to end the year at 1.3 times debt-to-EBITDA at the end of 2021.
We have the ability to do up to $4.2 billion deal and still maintain our credit rating.
And as you saw, we're going to end the year at 1.3 times debt-to-EBITDA in 2021, is our expectation.
If you looked back at our history, we usually bump around 2% of sales or below.
In years past, we've had capacity additions and that's what happened in 2009, we had our York laundry plant and that's when we bumped up to about about 5.5%.
In 2011, we bumped up to 2.8% when we had our Victorville laundry plant and so 2021, 2022 are no different.
We think we're going to spike up to around 3.5% as we add these capacity investments.
For over 120 years we've been paying dividends and in 2021, our outlook is a 5.2% dividend increase on top of increases of 5.5%, 4.5% and 14.5% these past few years.
In addition, we did a $300 million ASR that started in December and we expect to complete by the end of Q1.

As you have heard from Matt, we plan to deliver another year of growth in 2021 on top of an outstanding performance in 2020, and in line with our Evergreen model.
We saw an over 50% growth in vitamin, double-digit growth in baking soda and single-digit in many other categories.
We have high expectations for category growth in 2021 and I will speak to them in more detail.
In total, for 2020, we achieved slightly more unit sales than in 2019, despite dentists and certain retailers being closed for significant periods of time, which also means that we came out strong by the end of the year and this momentum will continue and only accelerate with more dentist office opened up and resuming higher traffic, there is only upside.
Introducing Waterpik Sonic-Fusion 2.0, the most successful new product launch in power flosser history just got better.
However, what you might find interesting is the visualization here showing if there are more consumers living in Asia than in the rest of the world combined, including 4.5 billion middle income consumers who represent our target audience for Church & Dwight brands.
Last but not least, we remain committed to doing all of the above, while continuing to use our increasing scale, pricing power in key markets and our personal care weighted mix to keep increasing operating margin by 50 basis points per year.
More recently, in 2016, 50% of our global electricity demand was supplied by renewable energy sources.
That gets us to 50 basis points of operating margin expansion and about 8% earnings per share growth.
And then, earnings per share was $0.53, our outlook was $0.50 to $0.52.
So at a high level, our outlook consists of reported sales growth of 4.5%, that's really the organic number of 3% plus the impact of Zicam.
Organic is 3%, operating profit margin expansion of 100 basis points, which is almost double our 50 basis point expansion for our Evergreen model.
First, the 4.5% reported and then we get into the 3% organic sales growth.
Gross margin is up 50 basis points.
It's just 8%, your Evergreen model is 50 basis points and your 8% earnings per share growth.
So plus 50 basis points in 2021.
The detail of the 50 basis points of expansion in '21 really leads off with price and volume mix continuing to expand.
Those two pretty much offset and we're at plus 50 basis points for the year.
So first half gross margin is down 50 basis points.
6% to 8% earnings per share growth of $3 to $3.06 is the outlook.
For over 120 years we've been paying dividends and in 2021, our outlook is a 5.2% dividend increase on top of increases of 5.5%, 4.5% and 14.5% these past few years.