Prompt:
Human: Dan Amos, Chairman and CEO of Aflac Incorporated will begin with an overview of our operations in Japan and the US.
Fred Crawford, President and CEO of Aflac Incorporated will then touch briefly on conditions in the fourth quarter and discuss key initiatives including how we are navigating the pandemic.
Members of our US executive management team joining us for the Q&A segment of the call are Teresa White, President of Aflac US; Virgil Miller, President of Individual Benefits; Rich Williams, President of Group Benefits; Eric Kirsch, Global Chief Investment Officer and President of Aflac global investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US.
We are also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan.
Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koji Ariyoshi, Director and Head of Sales and Marketing.
Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature.
Actual results could differ materially from those we discuss today.
We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results.
aflac.com and includes reconciliations of certain non-US GAAP measures.
I'll now hand the call over to Dan.
At this time last year, it would have been very difficult to foresee the gravity of what was soon to unfold for society and for the company do to COVID-19.
I'm proud of our employees, our sales distribution and Board of Directors for their decisive people-first initiatives we spearheaded early on in both the United States and Japan to protect our workforce and to be here for our policyholders throughout this trying time.
We were able to reinforce our financial strength and operations, as well as our distribution franchise with digital and virtual investments to the position of our company for the future growth.
Adjusted earnings per diluted share excluding the impact of foreign exchange increased 10.8% in 2020.
While benefiting from a lower effective tax rate, we were pleased with the results when you consider the pandemic pressure on revenues, accelerated investment in our core technological platforms and the initiatives to drive future earned premium growth and efficiency.
Investing in growth and innovation will continue to be critical strategic focus this year.
There is one central message it had been emphasizing with our management team.
It is imperative that we control the factors we have the ability to control and what we don't have control over, we must monitor continually to be ready to adapt.
Despite the fact that sales in both US and Japan had been suppressed considerably due the constraints of face-to-face opportunities, we did not sit still.
We maintained forward motion as we absorbed accelerated investment in our platform while continuing strong earning performance.
In 2020, Aflac Japan generated solid overall financial results with a stable profit margin of 21.2%, an extremely strong premium persistency of 95.1%.
The relaunch of our new cancer rider drove a sequential improvement in both cancer insurance and total sales in the fourth quarter.
As a result, total sales were down 22.2% for the quarter and 36.2% for the year.
In Japan, we introduced our new medical product in January and even up against difficult comparisons of last January that were pre-COVID sales, it is a positive launch exceeding our expectations.
We are encouraged by the reception of both the consumers and our sales force.
While these sales results represent sequential improvements relative to last quarter, the effective reduced face-to-face activity are evident and we continue to promote virtual sales.
Our goal in Japan is to be the leading company for living in your own way.
This is a declaration of how we tailor our products to fit the needs of customers during the different stages of their lives and reach them where are they want to buy through agencies, strategic alliance and banks.
Now turning to Aflac US, we saw a stable profit margin of 19.3% amid a year of intense investments in the future of our business and the global pandemic conditions.
However, this backdrop continues to notably impact our sales results in this segment as well, largely due to reduced face-to-face activity.
As expected, we saw modest sequential sales improvement in the quarter with a decrease of 27.2% for the quarter and 30.3 for the year.
In the US, we continue to feel the impact of limited access at the work site especially among our career agents who have historically relied upon face-to-face meetings to engage small business owners and their employees.
However, we remain cautiously optimistic for continued modest sequential sales improvement contingent upon the pace of the economic recovery and as a results, expect to see a wider second half of 2021.
Fred is responsible for acquisitions and he will cover that shortly.
But while these acquisitions may not have an immediate effect on the top line, they better position Aflac for future long-term sales in the United States.
As part of the Vision 2025 in the US, we seek to further develop a world where people are better prepared for unexpected health expenses, the need for the products we offer is a strong or stronger than ever has been and at the same time we know consumer habits and buying preferences have been evolving and we are looking to reach them in ways other than the traditional media and outside the work site.
This is part of the strategy to increase access, penetration and retention.
Even while working remotely for the greater part of the year, we remain true to our culture and identity as a socially responsible company.
We stepped up our engagement with our employees through virtual town meetings and weekly touch base letters.
Additionally, diversity continues to play an important role at Aflac as it has for decades.
I have always believed that in order to accomplish our goals and serve the community where we have a presence, we must surround our sales with a group of people who bring different perspectives to the table.
We have done that for years, at the end of 2020, nearly 50% of Aflac's US employees were minorities, 66% were women, 23% of our US senior officers were minorities and 30% were women.
And then when you think of Aflac's Board of Directors, 36% were minorities and 36% were women.
Diversity has always played an important role within ESG and [Indecipherable] with executive oversight of our ESG efforts.
He will provide greater detail on our 2021 key objectives.
I've always said that the true test of strength is how one handles adversity.
While pandemic conditions are ongoing, I'm pleased that 2020 confirmed what we knew all along and that is that Aflac is strong, adaptable and resilient.
We strive to be where people want to purchase insurance that applies to both Japan and the United States.
In the past, this is met meeting face to face with individuals to understand their situation propose a solution and close the sale.
However, the pandemic clearly demonstrates the need for virtual means.
In other words, non-face-to-face sales to reach potential customers and provide them with the prediction that they need.
Therefore we have accelerated investments to enhance the tools available for our distribution in both countries.
Related to capital deployment, we placed significant importance on continuing to achieve strong capital ratios in the United States in Japan on behalf of our policyholders and shareholders.
When it comes to capital deployment, we pursue value creation through a balance of actions including growth investments, stable dividend growth and disciplined tactical stock repurchase.
It goes without saying that we treasure our record of dividend growth.
The fourth quarter's declaration mark the 38th consecutive year of dividend increases.
Additionally, the Board approved a first quarter dividend increase of 17.9%.
Our dividend track record is supported by the strength of our capital and cash flows.
At the same time, we remain tactical in our approach to share repurchase, buying back $1.5 billion of our shares in 2020.
We have also focused on integrating the growth investments we have made in our platform.
As always, we are working to achieve our earnings per share objectives while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in a continued position of strength and leadership.
I don't think it's coincidental that we've achieved our success while focusing on doing the right things, pull our policyholders, shareholders, employees, distribution channel, business partners and communities.
In fact, I believe that go hand in hand.
I'm proud of what we have accomplished in terms of both our social purpose and financial results, which have ultimately translated into strong long-term shareholder return.
Now let me turn the program over to Fred.
I'm going to touch briefly on conditions in the fourth quarter with respect to the pandemic.
I'll then provide an update on key initiatives in Japan and the US, Japan has experienced approximately 400,000 COVID-19 cases and 6,000 confirmed since inception of the virus.
While quite low as compared to other developed countries and the US, these statistics have more than doubled since the end of the third quarter.
Earlier this week, the government of Japan extended their state of emergency for Tokyo and 9 other prefectures through March 7.
This action includes the suspension of domestic tourism campaign and entry of foreigners into Japan.
We have responded with again moving more of our workforce to working from home, unlike the state of emergency declared last year in the initial stages of the virus.
Government restrictions are more balanced with economic recovery considerations and we have not prohibited face-to-face consultations and/or closed our sales shops.
Meanwhile, Prime Minister, Suga has announced a goal of beginning vaccinations mid-February.
Through the fourth quarter, Aflac Japan's COVID-19 impact totaled approximately 3400 unique claimants with incurred claims totaling JPY1 billion.
We continue to experience a significant reduction in paid claims for medical conditions other than COVID-19 as Japan manages hospital capacity and discourages more routine visits.
Despite the recent rise in infection rates in Japan, we continued to track well below our stress assumptions.
As Dan outlined, sales have clearly been impacted, but when looking at policies in force, the impact of reduced sales on earned premium has largely been offset by improved persistency with the reduction in reported revenue driven primarily by paid up policies.
Finally, pandemic related expenses in the quarter totaled JPY1.8 billion which includes the rollout of virtual distribution tools, employee teller working equipment and distribution support.
Turning to the US, there are nearly 27 million COVID-19 cases and 450,000 deaths as reported by the CDC.
For Aflac US in 2020, COVID-19 claimants totaled 23,000 with incurred claims of approximately 71 million in the quarter and $128 million for all of 2020.
We are now in a better position to back test the correlation of US rates of infection to paid claims in order to build an estimate for incurred claim reserves.
It's fair to say this is still very difficult to estimate as IBNR often works from years of reliable data to establish trends.
While our reserves assume elevated claims, we continue to see the length of stay in hospital and transition to ICU traveling below our expectations.
We have seen limited impact to our reported persistency numbers, however, we believe this is in part attributed to the combination of reduced sales where lapse rates tend to be much higher in the first year, and the state executive orders requiring premium grace periods.
Executive orders are still in place in 11 states as of the end of the quarter with 5 states having open-ended expiration dates.
We have reduced pressure on lapse rates through proactive work with our policyholders including converting from payroll deduction to direct bill and encouraging a review of wellness benefits.
Turning to key operating initiatives, 2020 was an important year in setting the stage for growth once we move clear of pandemic conditions.
Beginning with Japan after launching and promoting a simplified cancer rider in the 4th quarter, we successfully launched our refreshed medical product called EVER Prime in January.
As Dan noted in his comments, it's early and our associates channel is having to navigate pandemic conditions, but January medical sales are promising.
Introduced in October of 2020, we have technology in place to allow agents to pivot from face-to-face to virtual sales and an entirely digital customer experience.
True virtual sales in Japan is relatively limited.
In addition, the majority of applications are still filed in paper form, although digital applications have been adopted in face-to-face consultations.
Excluding traditional non-face-to-face means of distributing products like worksite, direct mail and call center sales, we estimate only 2% to 3% of our sales are currently digital end-to-end.
However, we understand some of our agencies have significantly adopted virtual tools to supplement face-to-face consultations.
We have discussed our paperless initiative across all operations in Japan.
This is a JPY10 billion investment with approximately JPY2.8 billion spent in the fourth quarter and JPY4.8 billion spent in 2020.
We are projecting another JPY4.3 billion spend planned for 2021.
This investment has a 3-year payback and will reduce the production and circulation of over 80 million pieces of paper per year.
In summary, we expect the combination of product development, improved pandemic conditions and the return of Japan posed to distributing Aflac cancer insurance will drive growth as we look toward the second half of 2021.
Turning to the US, we focused our efforts in 2020 on setting the table for 2021, including a national launch of network, dental and vision completing our group benefit acquisition and standing up our new direct to consumer digital platform.
On the operation side, we rolled out a new and upgraded enrollment platform called Everwell 2.0 in September, which requires time for full adoption and stabilizing the platform.
2020 was an important year to introduce digital tools, increase adoption rates and take on any corrective action before 2021.
In addition, under Teresa White's leadership, we have reorganized the US forming a group benefits in individual division.
Rich Williams, will now lead our group benefits division, which includes Aflac voluntary group, Aflac network, dental, vision, Argus, our dental TPA and our new Aflac premier life, absence management and disability business.
Virgil Miller will lead our individual benefits division, which includes Aflac's individually issued and small business focused worksite products and our new consumer market's business targeting workers not at the traditional worksite both divisions pull from shared service US operating platforms.
This new alignment provides focus for each division within the US business segment and allows Aflac to offer tailored products and services for our career agency teams and broker partners based on the unique markets they serve.
Like Japan, we have all the tools in place for agents to conduct business without a face-to-face meeting.
However, most sales are being driven on a continuum of face-to-face and digital interaction.
We estimate about 15% of our traditional individual sales are completed without some form of face-to-face interaction.
This excludes digital direct to consumer, which is naturally non-face-to-face.
Turning to more specifics on our key growth initiatives, on January 12, we announced the national rollout of Aflac dental and vision.
Our dental and vision products are now available in 40 states with more coming online throughout the year.
This is a broad launch that is available to large and small companies and distributed through agents and brokers.
In November, we closed on our Zurich Group Benefits acquisition, the new platform managed to contribute to sales in the quarter with 5 million in production.
This is more of a turnkey launch meaning products are filed and we are open for business in 2021 under the Aflac brand.
Finally, we officially launched our new digital direct-to-consumer platform in the first week of January.
We offered critical illness, accident and cancer and are approved to sell all 3 products in approximately 30 states with more states and products coming online throughout the year.
As highlighted during our investor conference, we are addressing expenses over 2 horizons.
In 2020, we took actions to realize approximately $100 million of annualized run rate expense savings on a go-forward basis.
Actions included restricting hiring, rationalizing distribution expenses and a voluntary separation plan that resulted in a 9% reduction to our US workforce.
Longer term expense initiatives center on our group division and the migration onto a new administrative platform as well as integration of the Zurich Group Benefits business.
As you are all aware, we have adopted a conservative buy-to-build acquisition strategy.
The build efforts taken together impacted our expense ratio in the fourth quarter by 160 basis points and is expected to impact the 2021 ratio by approximately 180 basis points.
Our global investments team remains focused on asset quality, monitoring economic conditions and sourcing new investment opportunities.
Portfolio actions prior to and in the early days of the pandemic lowered our exposure to prolonged economic weakness and we ended 2020 with a modest amount of asset losses.
We continue to watch closely our middle market loan and traditional real estate -- transitional real estate portfolios.
While we have seen ratings downgrades, our portfolios are resilient consisting of diversified first-lien loans conservatively underwritten to high quality borrowers.
We have further refined our approach to managing the unhedged dollars in Japan, both lowering our hedge ratio and maintaining our out-of-the-money protection for extreme moves in foreign exchange.
These unhedged dollars provide diversification and income benefits as well as lowering our enterprise exposure to the Yen.
As has been our practice for 2021, we have locked in lower hedge costs with floating-rate loan yields benefiting from LIBOR floors.
Finally, we are pleased with the performance of our strategic investment in alliance with Varagon Capital Partners during 2020 contributing to corporate investment income.
We are working to establish similar strategic alliances that leverage the capabilities of our asset management subsidiary and further the performance of our insurance segments.
As commented on by Dan, we have refocused our efforts in key areas to drive tangible ESG initiatives in 2021.
We are focused on the following, building off our published ESG investment policy.
Aflac Global Investments is advancing a responsible investing framework that includes the establishment of a core ESG team and formal governance process.
We initiated work with third-party experts to measure draft and eventually disclose a formal plan to be carbon-neutral on or before 2014 and carbon net-zero emissions on or before 2015.
We pledged to continue hitting key milestones on our important women and leadership initiative as part of a diversity and inclusion in Japan and targeting 30% of leadership positions in Japan filled by women by 2025.
In the US, we seek to advance our already strong diversity statistics by broadening our influence through identifying and providing capital to organizations that advanced diversity and inclusion as well as social justice and economic mobility.
Finally, we pledged to advanced reporting and disclosure framework in compliance with SASB and TCFD reporting standards.
We will provide further disclosures on ESG initiatives in our proxy material and on our ESG hub, esg.
Wrapping up my comments, we believe the investments made in the past 2 years and accelerated during the pandemic, positioned us for future growth and efficiency in the face of what we believe to be temporary weakness in sales and earned premium.
I'll now pass on to Max to discuss financial performance in more detail.
We finished the year with stable fourth quarter earnings in a year marked by significant mortality and morbidity events as well as continued low interest rates.
For the quarter, adjusted earnings per share increased 3.9% to $1.7 and a full year earnings per share was a record $4.96, up 11.7% year-over-year.
Adjusted book value per share including foreign currency translation gains and losses to 19.1% both for the quarter and full year.
The adjusted ROE excluding the foreign currency impact was 12.1% in the fourth quarter and a respectable 15.1% for the full year, a material spread to our cost of capital.
This quarter benefited from favorable marks on our alternate investment portfolio to the amount of $47 million pre-tax above our long-term return expectations, a very good outcome on our building alternatives portfolio.
We also booked a severance charge associated with our previously announced voluntary separation program or VSP.
In our US and corporate segments, totaling pre-tax $43 million included in adjusted earnings.
Turning to our Japan segment, total earned premium for the quarter declined 3.5%, reflecting mainly first sector policies paid-up impacts.
While earned premium for our third sector products was down 1.9%.
For the full year, total earned premium was down 2.8% while totally policies in force declined by a lesser rate at 1.2%.
As policies in force are not impacted by the paid-up status, it tends to serve as a better indicator of the growth of the underlying business.
Persistency has been on our positive trajectory ___[08:08]___ slightly sequentially to 95.1%, up 70 basis points year-over-year.
Japan's total benefit ratio came in at 68.9% for the quarter, down 110 basis points year-over-year.
And the third sector benefit ratio was 58.6% down 150 basis points year-over-year.
The main driver for the lower benefit ratio was a higher than normal IBNR release due to the sustained lower-paid claims environment in 2020.
We estimate that this lower the benefit ratio by roughly 130 basis points compared to what we would deem a normal IBNR release to be.
For the full year, the reported total benefit ratio was 69.9%, up 40 basis points year-over-year.
And our third sector benefit ratio was 59.7%, also up 40 basis points year-over-year, largely due to improved persistency.
The expense ratio in Japan was 23%, up 130 basis points year-over-year.
The main driver was our people less initiative, which kicked in at a higher gear as we digitize our operations and drive efficiencies throughout the value chain to future state with significantly reduced paper usage.
This investment increased our quarterly expense ratio by 85 basis points.
For the quarter, adjusted net investment income increased 11.9% in Yen terms, led by strong returns in our alternatives portfolio, but also strong results from the loan book, like real estate and middle market loans.
For the full year, adjusted net investment income was 4.4%.
The pre-tax margin in the quarter was 20.9%, up 110 basis points year-over-year.
As the combined effect from the lower benefit ratio and higher expense ratio was still positive.
For the full year, the pre-tax margin was a respectable 21.2%.
Turning to US results, the earned premium was down 2.3% for the quarter due to weaker sales results.
Persistency improved 160 basis points to 79.3%.
This was driven by emergency orders in various states and by lower sales in 2020 as new policies lapse at a higher rate than in-force policies older than one year.
We're moving these factors would result in a stable year-over-year persistency rate and we view that as a good outcome to-date.
Given a pandemic environment's impact on our policyholders and reflecting our efforts to retain accounts and keep premium in-force.
For the full year, earned premium was down 0.9%.
Our total benefit ratio came in at 51.6%, which was 250 basis points higher than Q4 2019.
Pandemic conditions continue to be very relevant when analyzing our benefit ratio.
Due to the recent increase in infection rates, we estimate incurred claims impact of $72 million of which 58 million was an increase to IBNR, resulting in an impact to the benefit ratio of 5.1 percentage points from COVID-related claims.
This is somewhat offset by favorable non-COVID related claims activity generating an underlying benefit ratio of 46.5%.
COVID and non-COVID-related claims tend to have a negative correlation, which clearly can be seen in our quarterly results throughout 2020.
We would expect this pattern to continue in early 2021.
Going forward, we still expect the guided range of fab of 48% to 51% to be a reasonable future benefits ratio.
Our expense ratio in the US was 43.5%, up 60 basis points year-over-year.
The severance charge for our VSP explains 220 basis points of the rise.
While the residual is primarily driven by digital investments and the reduction in revenues, the full year expense ratio landed at 38.6%.
Adjusted net investment income in the US was up 1.1% due to strong alternative investment income, while the portfolio book yield contracted 22 basis points year-over-year.
Full year adjusted net investment income declined 2.1%.
As both the benefit and expense ratio rose, profitability did come under pressure with a pre-tax margin of 11.6% in the quarter.
For the full year, we still reported a solid pre-tax margin of 19.3% in line with recent historical average.
In our corporate segment, the pre-tax loss widened to $47 million in the quarter compared to 9 million from a year ago.
Lower net investment income on our short duration hold Holdco cash position, increased retirement expenses and $8 million of DSP severance expense were the main components of the delta.
For the full year, the Corporate segment pre-tax loss was $115 million.
Our capital position remains strong and stable.
We ended the quarter with an SMR of north of 9% in Japan.
And an RBC of approximately 525% in Aflac Columbus.
Holding company liquidity stood at $4 billion, $2 billion above our minimum balance.
With a leverage of 23%, we continued to travel in the middle of our stated leverage range of 20% to 25% offering ample debt capacity.
The continued spread of COVID-19 leads us to remain cautious in how we manage our capital base, make investments and deploy capital to the benefit of the shareholder.
In the quarter, we repurchased $500 million of our own stock and paid dividends of $196 million offering good relative IRR on these capital deployments.
For the full year, we paid $798 million of dividends and return an additional $1.5 billion to shareholders in the form of share repurchases.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk adjusted ROE with meaningful spread to our cost of capital.
A recent example is the Board's decision to increase the quarterly dividend by 17.9% to $0.33 per share.
Before going into Q&A.
I would characterize our 2020 financial performance as solid despite significant external challenges.
As we look forward into 2021, we do not see any fundamental drivers causing us to change the outlook provided at our Financial Analyst Briefing in November.
In order to achieve these objectives, we remain laser focused on executing on our growth initiatives, expense efficiency and continue to drive ROE at a significant spread to our cost of capital.
Carol, we will now take the first question please.
 Assistant:

Chosen response:
compname reports fourth quarter net earnings of $951 million, reiterates increase in first quarter cash dividend of 17.9%.
aflac - in yen terms, aflac japan's net premium income was ¥333.8 billion for quarter, or 3.5% lower than year ago.
aflac - pandemic conditions continue to impact sales results both in united states & japan, as well as earned premium & revenues.
expect pandemic conditions to remain with us through first half of 2021.


Prompt:
Human: I appreciate you joining us today to discuss our first quarter fiscal year 2022 results.
Our positive momentum continued with another quarter of solid results, despite the continuing impact of the COVID-19 pandemic.
Compared to the prior year period, sales were up 14% from $401 million to 405 -- $455 million and adjusted diluted earnings per share from continuing operations were up 206% from $0.17 per share to $0.52 per share.
Our sales to commercial customers increased 52% and our sales to government and defense customers decreased 17%.
We are particularly pleased that our sequential growth from Q4, Q1 was 4%, notwithstanding the fact that our first quarter typically declines from our fourth quarter as a result of seasonality in our business.
Sequential growth in our commercial activities was 17%.
This improvement was driven by our parts businesses, which is an encouraging indicator of returning demand.
The strong performance in the quarter was also due to the robust demand for our airframe MRO services.
Notably, the significant majority of our MRO volume has been on standard maintenance work as opposed to catch-up work.
Our operating margin was 5.5% for the quarter on an adjusted basis up from 2.5% last year and 5.2% in the fourth quarter.
For context, our margin this quarter was actually higher than 2 years ago prior to the pandemic even though our revenue was down $86 million or 16%.
This performance demonstrates the operating leverage that we have created over the last 18 months by optimizing our MRO operations, exiting underperforming activities and reducing indirect and overhead costs.
It was another strong quarter, as we generated $18 million from operating activities from continuing operations.
We also continue to reduce the usage of our accounts receivable financing program.
Excluding the impact of that AR program, our cash flow from operating activities from continuing operation was $26 million.
Subsequent to the end of the quarter, we announced several new business wins.
First, we announced an exclusive agreement with Arkwin, a TransDigm company to distribute engine actuation and other commercial aviation product.
This award reflects the power of our independent distribution offering to component OEMs as well as the strength of our balance sheet.
Second, we announced a contract with the Department of Energy for the conversion and delivery of a 737-700 aircraft modified to allow the DoE to quickly transition between passenger and cargo modes.
Like our prior C40 aircraft delivery contract with the U.S. Marine Corps, this contract demonstrates the significant cost savings available to government customers by procuring in the aftermarket.
Finally, we announced an extension of our component support program with Volotea, a growing low cost Spanish carrier which reflects the market's continued demand for this offering and our ability to drive, lower operating costs with superior operating performance.
Before turning it over to Sean, I would like to comment on the critical role that AAR in the U.S. withdrawal from Afghanistan.
We had over a 150 people station in country primarily in support of our WASS program.
Over a 36 hour period, our WASS team transported approximately 2,000 U.S. embassy personnel to Kabul International Airport to support their evacuation from the country.
All of our employees subsequently departed the country safely as well and I'm exceptionally proud of our team support of state department personnel under very difficult circumstances.
Our sales in the quarter of $455.1 million were up 14% or $54.3 million year-over-year.
Sales inour Aviation Services segment were up 19.8% driven by recovery in our commercial markets.
Sales in our Expeditionary Services segment were down $17.7 million, reflecting the divestiture of our Composites business and strong performance of the U.S. Air Force pallet contract in the prior year quarter.
Gross profit margin in the quarter was 14.2% versus 12.1% in the prior year quarter and adjusted gross profit margin was 16.1% versus 13% in the prior year quarter.
The significant improvement reflects the cost take out and efficiency initiatives we have implemented.
As the commercial market recovers, we would expect to continue to generate higher gross margins, given the fixed nature of some of our cost of sales and the higher margin nature of our parts business, which is not yet participated in the market recovery to the same degree as our maintenance business.
As we indicated during last quarter's call, one of our commercial programs contracts was terminated during the quarter.
We recognized $10 million of charges primarily related to this termination and an asset impairment.
SG&A expenses in the quarter were $49.3 million or 10.8% of sales excluding severance of about $1 million, this would have been closer to 10.6% of sales.
This is down from 11.3% in the year ago quarter and 11.2% in Q4.
As a reminder, last year's results had contemporary cost savings due to salary and benefit reductions that were in place through Q2 of last year.
Net interest expense for the quarter was $0.7 million compared to $1.6 million last year, driven by lower borrowings.
Average diluted share count for the quarter was $35.7 million versus $35 million for the prior year quarter.
With respect to Afghanistan, as we discussed on last quarter's call, we had in-country activity on 2 programs, our WASS program supporting the State Department and our C130 program supporting four Afghan Airforce aircraft.
In conjunction with the state department's exit from Afghanistan, we are winding down related activities and expect that to be completed later this quarter.
The C130 program is currently continuing with support of 2 of the 4 aircraft based in the UAE.
In total, our FY'21 sales in Afghanistan were $67 million, the margins on these activities were consistent with the overall WASS program, which we have described in the past as being high single-digit operating margin.
As John indicated, we generated cash flow from our operating activities from continuing operations of $17.5 million as we continue to reduce our rotables and inventory balances.
In addition, we reduced our accounts receivable financing program by $8.4 million in the quarter.
Our balance sheet remains exceptionally strong with net debt of $80.2 million and net leverage of only 0.6 times.
Looking forward, we expect that demand for our MRO activities will remain strong as airlines continue to focus both on readiness to support the recovery in air travel and on preserving a healthy maintenance supply chain.
With respect to part supply, while we saw increasing levels of activity during the quarter, we expect stable performance in the near term as a result of the uncertainty created by the Delta variant.
On the government side, the exit from Afghanistan as well as the programs nearing natural completion points will have a near-term impact on our business.
However, our Department of Energy contract is an offsetting award that demonstrates the fundamental value proposition of our commercial best practices business model.
In addition, we continue to build a solid past performance history.
As such, we believe that over time, we remain in an excellent position to grow our government business through additional program wins and expansions of our current positions.
Based on these near term dynamics, we currently expect overall Q2 performance to be similar to Q1.
While there remains uncertainty over the timing of the recovery.
We are confident that a recovery will occur and we believe, we are exceptionally well positioned.
We have emerged from the crisis with an even stronger balance sheet, our government and commercial pipelines are full and the operating leverage we have created positions us to continue to drive further margin expansion.
 Assistant:

Chosen response:
compname reports q1 sales of $455 mln.
q1 adjusted earnings per share $0.52 from continuing operations.
q1 sales $455 million versus refinitiv ibes estimate of $438.4 million.


Prompt:
Human: Both of these documents are available in the Investor Relations section of our website at applied.com.
A replay of today's broadcast will be available for the next two weeks.
These are available at the Investor Relations section of applied.com.
We appreciate you joining us.
I'll begin with some brief thoughts, and then Dave will follow to review our financial results in more detail.
Our second quarter was characterized by cost discipline, margin control and solid cash generation within a persistent soft end market backdrop.
Execution in these areas is providing a path to deliver our earnings and cash commitments for the year and should support accretive growth once demand rebounds as well as capital deployment opportunities going forward.
We also remain highly focused on accelerating our company-specific out growth potential regardless of the industrial cycle.
As highlighted in recent quarters, our leading technical position and service capabilities across motion control, fluid power, flow control and now automation puts us in a unique position to capture greater share organically as our customers outsource their technical MRO and production infrastructure needs.
As well as through M&A, a smaller players look to partner with a leading technical platform, given increasing service, operational and capital requirements.
This trend should supplement a strong cross-selling opportunity here at Applied that remains in the early innings, and is focused on expanding the reach of our fluid power, flow control, consumables and automation solutions across our embedded service center network customer base.
We also entered our second half of fiscal 2020 with a strong balance sheet, having reduced outstanding debt by $115 million over two years, post our acquisition of FCX, with net leverage down to our stated target of 2.5 times.
Combined with our cash generation trajectory, we have notable flexibility for additional deleveraging, acquisitions and pursuing other opportunities to enhance shareholder returns in the back half of our fiscal year.
As it relates to the broader end market backdrop, as discussed in recent quarters and consistent with macroeconomic industrial reports, demand remains weak across our top industry verticals.
After seeing some stabilization during October and November, customer activity was unusually weak during December and remained subdued with organic sales trending down in the mid-single digits year-over-year, so far in January.
While softness remains broad-based declines were most notable within metals, mining, oil and gas, machinery and process-related industries.
We also saw greater weakness across our international operations during the quarter within Canada and Mexico.
Some of the recent softness likely reflects demand abnormalities that occurred this time a year, given seasonality, plant shutdowns and customer budget resets, in turn making it difficult to fully gauge the underlying direction of current demand.
We are also cognizant of potential positive momentum that could arise if a trade resolution can stay on track, which has the potential to positively influence trends for the balance of our fiscal 2020 and into fiscal 2021.
That said, uncertainty remains, and we believe that sensible approach to our outlook remains prudent at this time.
Regardless of the direction of the cycle near term, we know how to operate to it, as our industry and recent results highlight.
At the same time, there is a great understanding and commitment on the opportunity Applied has long-term as the leading technical MRO distribution and solutions provider.
Our strategy is deeply focused on this opportunity and moving the company toward its long-term financial goals, providing the framework for significant earnings growth and value creation in the coming years.
Before I begin, another reminder that a supplemental investor deck recapping key financial and performance talking points is available on our investors site.
To summarize, we are managing effectively in a slow and uncertain end market environment with timely execution of our recent cost initiatives, continued solid gross margin performance and another positive quarter of cash generation.
We expect cash generation momentum to continue into the second half of fiscal 2020 providing ample flexibility to pursue capital deployment opportunities.
Overall, we believe we are well-positioned in the current environment.
Highlighting results for the quarter.
Consolidated sales decreased 0.8% over the prior year quarter, excluding 3.2% growth contribution from acquisitions, sales declined 4% on an organic basis.
Both selling days and foreign currency had a neutral impact this quarter.
As previously highlighted, sustained weak demand across a number of key end markets remains the primary drag on sales.
Looking at our results by segment.
As highlighted on Slide 6 and 7, sales in our Service Center segment declined 2.3% year-over-year or 3.5%, excluding a 1.2% incremental impact from acquisitions.
Results reflect continued weak manufacturing activity and related MRO needs across our service center network as well as softer demand within our international operations in Canada, and Mexico.
Segment sales were unusually weak during the month of December.
As mentioned earlier, we believe part of this reflects seasonal variations that occur around the holidays as customers to take time off and adjust project and production schedules.
Within our Fluid Power and Flow Control segment, sales increased 2.7% over the prior year quarter with acquisitions adding 7.6% growth.
This includes a full quarter of contribution from our August 2019 acquisition of Olympus Controls, and one remaining month of contribution from our November 2018 acquisition of Fluid Power sales.
On an organic basis, segment sales declined 4.9% reflecting weaker flow control sales and slower activity across our industrial OEM customer base, as well as the remaining year-over-year drag from the large project referenced in prior quarters.
Excluding the project related drag, segment sales declined approximately 3% on an organic basis over the prior year.
We note declines in this segment moderated and the daily sales rate was up modestly on a sequential basis, partially reflecting improving technology end market demand during the quarter.
Moving on to margin performance.
As highlighted on Page 8 of the deck, reported gross margin of 28.9% was up 4 basis points year-over-year.
Results include a non-cash LIFO charge during the quarter of approximately $1.9 million, which compared favorably to prior year LIFO expense of $2.7 million, resulting in a roughly 9 point -- basis point positive impact year-over-year.
Excluding LIFO, our gross margin was down a modest 5 basis points year-over-year.
Margins were slightly pressured by an unfavorable mix impact resulting from slower growth within local accounts as compared to large national accounts in our US service center operations.
This modest headwind was partially balanced by ongoing execution on pricing and other margin expansion initiatives.
Over time, we continue to expect mixed benefit margins, reflecting the positive contribution of expansionary products, growth among our technical service oriented solutions and ongoing actions to expand business across our local customer base.
Turning to operating cost.
On a reported basis, selling, distribution and administrative expenses were up 0.3% year-over-year, but down 3.4% on an organic basis, when adjusting out the impact of acquisitions and foreign currency translation.
SD&A was 21.9% of sales during the quarter, down 15 basis points sequentially on an adjusted basis.
Our teams are doing a commendable job of managing expenses in a slower environment including their timely execution of previously announced cost actions.
While, we remain highly focused on managing costs in the second half of our fiscal 2020 given the current environment.
As a reminder, our SD&A expense will increase on an absolute basis sequentially into our third quarter, reflecting seasonality as well as the impact of annual merit increases and two extra selling days versus the second quarter.
That said, we still expect SD&A to decline as a percent of sales into our second half relative to first half levels.
EBITDA in the quarter was $74.5 million compared to $76 million in the prior year quarter, while EBITDA margin was 8.9% or 9.2% excluding non-cash LIFO expense in the quarter.
Reported earnings per share for the quarter was $0.97 per share compared to $0.99 per share in the prior year.
Cash generated from operating activities was $34.9 million, while free cash flow was $47.9 million or approximately 126% of net income.
Year-to-date free cash flow of $93 million represents 119% of adjusted net income and is up nearly 60% from the prior year.
We are continuing to make good progress on our working capital initiatives in a slower demand environment.
This includes ongoing traction from our shared services and other collection initiatives.
We expect additional tailwinds into the second half of fiscal 2020, as inventory levels declined from the second quarter ending position.
We remain confident in our free cash flow potential for the full year, which will support our capital allocation strategy, focused on reducing outstanding debt, funding M&A opportunities, and opportunistically buying back shares.
We paid down $5 million of outstanding debt during the quarter.
Our debt is down nearly $115 million since financing the acquisition of FCX with net leverage at 2.5 times EBITDA at quarter end below the prior year period of 2.8 times.
This represents the 11th dividend increase since 2010 and underscores our strong cash generation and commitment to delivering shareholder value.
Transitioning now to our outlook.
We are narrowing our previous guidance ranges and now expect sales of down 2% to flat year-over-year or down 5% to down 3% on an organic day per day basis as well as earnings per share in the range of $4.20 to $4.40 per share.
Previously, our guidance assumes sales down 5% to down 1% organically and earnings per share of $4.20 to $4.50 per share.
Our updated guidance assumes end market weakness seen during December and January continues in coming months with seasonal Q3 sales step up at the lower end of historical trends.
At the midpoint, this implies mid-single digit organic sales declines will persist in the third quarter, with the declines easing to the low-single digits in the fourth quarter on easier comparisons.
By segment, our guidance assumes mid-to low-single digit organic declines year-over-year in our service center segment during the second half and low-single digit organic declines in our Fluid Power and Flow Control segment.
Our guidance also assumes gross margins are flat to up 10 basis points for the full year, slightly below our prior guidance of up 10 basis points to 20 basis points.
We continue to view 10 basis points to 20 basis points of gross margin expansion as the appropriate annual target over time, given our internal initiatives.
Lastly, we reaffirm our free cash flow outlook of $200 million to $220 million, which represents a 30% increase of our fiscal 2019 at the midpoint.
Overall, while we are executing largely to plan year-to-date, we remain prudent with our outlook, given the backdrop of uncertainty in near term industrial demand.
We remained highly focused on our internal growth and margin initiatives, which in addition to potential benefits from trade resolution and ongoing cost opportunities, we see several levers that should support our earnings momentum in coming quarters if the current environment does not weaken further.
Combined with our cash generation potential, we believe our position is strong and we are eagerly moving forward to realize our full potential.
 Assistant:

Chosen response:
compname reports q2 earnings per share $0.97.
q2 earnings per share $0.97.
fiscal 2020 guidance updated, range narrowed.
applied industrial technologies -2020 guidance now assumes non-gaap adjusted earnings per share of $4.20 to $4.40.
reaffirm our free cash guidance of $200 million to $220 million, up 30% at midpoint for 2020.
sees 2020 non-gaap adjusted earnings per share of $4.20 to $4.40.
sees sales down 2% to 0% in 2020.2020 adjusted earnings per share ranges exclude fiscal q1 restructuring expenses.
applied industrial technologies - recent quarter impacted by an unusually slow december.


Prompt:
Human: We had a fantastic third quarter.
For our combined Brokerage and Risk Management segments, we posted 17% growth in revenue, 10% organic growth and nearly 11% organic if you control for last year's large life sale that we've discussed frequently.
Net earnings growth of 22%, adjusted EBITDAC growth of 13%.
And we completed five new mergers in the quarter, bringing our year-to-date closed merger count to 19, representing nearly $200 million of annualized revenue.
And if you add in the pending Willis Reinsurance merger, that number would be pushing $1 billion.
So the team continues to execute at a very high level, growing organically, growing through acquisitions, improving our productivity, raising our quality and, most importantly, constantly building upon our unique Gallagher culture.
A terrific quarter on all measures.
Let me provide a brief update on our agreement to purchase Willis Re.
On the regulatory approval front, we received competition clearance in five of six jurisdictions required to close, including clearance by the U.S. Department of Justice.
The final jurisdiction in the U.K. where the CMA is reviewing the transaction, that's the final jurisdiction.
That review is ongoing, but we believe we're in good shape.
Although there is still work to be done, at this point, we believe we're on track for a fourth quarter closing.
On the integration front, hundreds of Gallagher and Willis Re professionals are hard at work, ensuring we will be well positioned to service our clients when we close.
Our 40-year acquisition history allows us to leverage our proven M&A integration path.
Integration is in our DNA.
We're looking forward to welcoming 2,200 new colleagues to Gallagher as a family of professionals this holiday season.
It's really exciting to think about all the talent and expertise that will be joining us.
It's going to be incredible for our combined organization and our clients.
Back to our quarterly results, starting with the Brokerage segment.
Reported revenue growth was excellent at 16%.
Of that, 9% was organic revenue growth, at the upper end of our September IR Day expectation and nearly 10% controlling for last year's large life product sale.
Net earnings growth was 23%, and we grew our adjusted EBITDAC 13%.
Doug will provide some comments on third quarter margin and our fourth quarter outlook, but needless to say, another excellent quarter from the Brokerage team.
Let me walk you around the world and break down our organic by geography, starting with our P/C operations.
First, our domestic retail operations were very strong with more than 10% organic.
Results were driven by good new business combined with higher exposures and continued rate increases.
Risk Placement Services, our domestic wholesale operations, grew 16%.
This includes more than 30% organic in open brokerage and 5% organic in our MGA programs and binding businesses.
New business and retention were both up a point or so relative to 2020 levels.
Outside the U.S., our U.K. operations posted more than 9% organic.
Specialty was 12%, and retail was a solid 6%, both supported by excellent new business production.
Australia and New Zealand combined grew more than 6%, also benefiting from good new business.
And finally, Canada was up nearly 10% on the back of double-digit new business and stable retention.
Moving to our employee benefit brokerage and consulting business.
Third quarter organic was up about 5%, in line with our September IR Day commentary.
Controlling for last year's large life insurance product sale, organic would have been up high single digits and represents a really nice step-up from the 4% organic we reported for the second quarter and a 2% organic for the first.
So we're experiencing positive revenue momentum and really encouraging sign for the remainder of the year and 2022.
So total Brokerage segment organic solidly in that 9% to 10% range, simply an excellent quarter.
Next, I'd like to make a few comments on the P/C market.
Global P/C rates remain firm overall, and pricing is positive in nearly all product lines.
Overall third quarter renewal premium increases were about 8% and similar to increases during the first half of this year.
Moving around the world, U.S. retail premium was up about 8%, including nearly 10% increases in casualty and professional liability.
Even workers' comp was up around 5%.
In Canada, premium was up about 9%, driven by double-digit increases in professional liability and casualty.
Australia and New Zealand combined up 3% to 4%.
And U.K. retail was up about 7% with double-digit increases in professional liability, while commercial auto was closer to flat.
Finally, within RPS, wholesale open brokerage premiums were up more than 10% and binding operations were up 5%.
Additionally, improved economic activity, even despite the Delta variant and supply chain disruptions, are leading to positive policy endorsements and other favorable midterm policy adjustments as our customers add coverages and exposures to their existing policies.
So premiums are still increasing almost everywhere.
As we look ahead over the coming quarters, I see the P/C market remaining difficult with rate increases persisting for quite a while.
In the near term, we don't see any meaningful changes in carrier underwriting appetite capacity, attachment points or terms and conditions.
Long term, markets do not appear to be seeing a slowdown in rising loss costs.
Global third quarter natural catastrophe losses, likely in excess of $40 billion, increased cyber incidences, social inflation, replacement cost inflation and supply chain disruptions.
And all of this is before factoring in further increases in claim frequency as global economies recover and become even more robust.
All of these factors, combined with low investment returns, suggest that carriers will continue to push for rate.
I just don't see a dramatic change for the foreseeable future.
So it's still a very difficult and even hard in many spots global P/C environment.
But remember, our job as brokers is to help our clients find the best coverage while mitigating price increases through our creativity, expertise and market relationships.
As we think about the environment for our employee benefits, the improved business activity, lower unemployment and increased demand for our consulting services is driving more revenue opportunities.
And our customers and prospects continue to rapidly shift away from expense control strategies to plans and tactics that will help them grow their business.
And with rebounding covered lives in one of the most challenging labor markets in memory, our consulting businesses are extremely well positioned to deliver creative solutions to our clients.
So as I sit here today, I think fourth quarter Brokerage segment organic will be similar to the third quarter, and that could take full year 2021 organic toward 8%.
That would be a really nice improvement from the 3.2% organic we reported in 2020.
To put that in perspective, 8% would be our best full year Brokerage segment organic growth in nearly two decades, and we think 2022 organic will end up in a very similar range.
Moving on to mergers and acquisitions.
I mentioned earlier we completed five brokerage mergers during the quarter, representing about $16 million of estimated annualized revenues.
As I look at our tuck-in M&A pipeline, we have more than 50 term sheets signed or being prepared, representing around $400 million of annualized revenues.
So even without the reinsurance merger, it's looking like we will finish 2021 strong, wrapping up another successful year for our merger strategy.
Next, I would like to move to our Risk Management segment, Gallagher Bassett.
Third quarter organic growth was 16.6%, even better than our September IR Day expectation.
Margins were strong, too.
Adjusted EBITDAC margin once again came in above 19%.
Results continue to benefit from late 2020 and early 2021 new business wins, in addition to further improvement in new arising claims within general liability and core workers' compensation.
Just an exceptional quarter from the team.
Looking forward, while our fourth quarter comparison is somewhat more challenging, the recovering global economy, improving employment situation and excellent new business production should result in fourth quarter organic over 10%.
That puts us on track for double-digit full year organic and an EBITDAC margin nicely above 19%.
As I look back over the last nine months, I can't help but to be really impressed with our team and our accomplishments.
Our commitment to our clients and to each other is evident in our successes, and that is due to our unique Gallagher culture.
In these challenging times, our clients are continuing to count on us, and I'm proud of our team's unwavering client focus.
Gallagher's unique culture is founded on the values in The Gallagher Way.
Those values have kept us on a steady course throughout the pandemic.
And time and time again, during these past months, our clients have shared their trust and appreciation for the value Gallagher brings to the table.
It comes down to talented individuals tapping into the power of our expertise across the globe, working together during this ongoing pandemic to continue to deliver for our clients.
That's The Gallagher Way, and it's the backbone of who we are as an organization.
As Pat said, a fantastic third quarter.
Then I'll walk you through our CFO commentary document, and finish up with my typical comments on cash, liquidity and capital management.
Headline all-in organic of 9%, outstanding in itself, but as Pat said, really running closer to 10% due to last year's life sale.
Either way, a nice step-up from the 6% we posted in the first quarter and the 6.8% in the second.
As we sit now, I'm seeing a fourth quarter organic again pushing that double-digit level.
Turning now to Page six to the Brokerage segment adjusted EBITDAC margin table.
Underlying margin after controlling for the life sale was around 160 basis points.
Let me take you through the math to get you to that.
First, headline margins were down 48 basis points, right about where we forecasted at our September IR day.
So controlling for the large life sale would bring us back to flat.
Second, in September, we forecasted about $25 million of expenses returning into our structure as we emerge from the pandemic and a small amount of performance comp time.
Recall, expenses returning mostly relate to higher utilization of our self-insured medical plans, resumption of advertising costs, more use of consultants, merit increases and a small pickup in T&E expenses.
We came in right on that forecast.
So controlling for these expenses also brings you to that underlying margin expansion of about 160 basis points.
That feels about right on organic in that 9% to 10% range.
Looking forward, we think about $30 million of our pandemic period expense savings return in the fourth quarter.
And if you assume, say, 9% organic, math would say we should show 90 to 100 basis points of expansion here in the fourth quarter.
So in the end, the headline story is that we have a really decent chance at growing our full year '21 margins by nearly 150 basis points.
And that's even growing over the life sale and the return of costs as we come out of the pandemic.
Add that to expanding margins over 400 basis points last year means we'd be growing margins more than 550 basis points over two years.
That really demonstrates the embedded improvements in how we do business.
No matter how you look at it, it's simply outstanding work by the team.
Moving to the Risk Management segment EBITDAC table on Page 7.
Adjusted EBITDAC margin of 19.5% in the quarter is an excellent result.
Year-to-date, our margins are at 19.2%, which underscores our ability to maintain a large portion of our pandemic period savings.
Looking forward, we think we can hold margins above 19% in the fourth quarter and for the full year.
That would result in about 100 basis points of margin expansion relative to 2020, another fantastic margin story.
Now let's shift to our CFO commentary document we posted on our IR website, starting on Page 4.
You'll see most of the third quarter items are close to our September IR Day estimates.
One small exception is Brokerage segment amortization expense, about $3 million below our September IR Day estimate.
It's simply because we finalized our valuation work on a recent '21 acquisition, which causes a small catch-up estimate change.
Flipping to Page five in the Corporate segment table.
Sharing actual third quarter results in the blue section to our September IR estimates in gray.
Interest and banking line on a reported and adjusted basis were both in line.
The non-GAAP adjustment here is that $12 million charge related to the early extinguishment of debt that we issued in May related to the terminated Aon and Willis remedy package.
Acquisition cost line, mostly related to the Willis Re transaction, came in a bit higher than our IR Day estimate on a reported basis, but in line on an adjusted non-GAAP basis.
We will see some additional transaction-related costs here in the fourth quarter.
Should have a sense of what those costs might be at our December IR Day.
Again, we plan on presenting these costs as a non-GAAP adjustment as well.
On the corporate cost line, in line on an adjusted basis after controlling for $5 million of a onetime permanent tax item, that's a noncash and it's simply a small valuation allowance related to a couple of international M&A transactions.
And finally, clean energy.
We are increasing our full year net earnings range to $87 million to $95 million on the back of the third quarter upside.
As for cash and capital management and M&A.
As you heard Pat say, we have a strong pipeline of tuck-in merger opportunities, and that's on top of the Willis Re acquisition that we hope to close here in the fourth quarter.
At September 30, cash on hand was about $2.7 billion, and we have no outstanding borrowings on our credit facility.
We plan to use that cash, cash flow generated during the fourth quarter and our line of credit to fund our -- the acquisition of Willis Re.
Our Brokerage and Risk Management segments combined have produced 15% growth in revenue, nearly 8% organic growth.
We completed 19 new mergers this year with nearly $200 million investment made at annualized revenue.
Net earnings margin expanded 81 basis points.
Adjusted EBITDAC margin expanded 153 basis points.
And our clean energy investments are on track to being up 30% this year, setting us up nicely for substantial additional cash flows for the coming five to seven years.
A terrific quarter, in my mind, on all measures, positions us for another great year.
Those are my comments.
Back to you, Pat.
And Hillary, we can go to questions.
 Assistant:

Chosen response: qtrly total revenues $2,138.2 million versus $1,849.1 million.


Prompt:
Human: Joining me on the call today are Kent Masters, our chief executive officer; and Scott Tozier, our chief financial officer; Raphael Crawford, president of Catalyst; Netha Johnson, president of Bromine Specialties; and Eric Norris, president of Lithium, are also available for Q&A.
Please also note that some of our comments today refer to non-GAAP financial measures.
Scott will provide more detail on our results, outlook, and guidance.
We reported another solid quarter with net sales of $831 million and adjusted EBITDA of $218 million.
Sales improved by 11% on a year-over-year basis, while adjusted EBITDA was relatively flat compared to the third quarter last year.
Excluding FCS from our third quarter 2020 results, our net sales were 19% higher and EBITDA was up 14%.
Scott will get into more detail on our financials in a few minutes including favorable revisions to our guidance.
During our recent Investor Day, we did a deep dive into our accelerated growth strategy and provided color on how we think about the near-term expansion of our Lithium business as well as our disciplined investment approach.
Since that event in early September, we are pleased to have announced several updates on those efforts.
This includes signing an agreement to acquire Guangxi Tianyuan New Energy Materials, or Tianyuan, which owns a recently built conversion plant near Qinzhou.
We are totaling to ensure the plant operates as advertised and expect to close this transaction in the first quarter of next year.
This puts us on track for first sales from this plant in the first half of next year.
In addition to this plant, we have signed two recent agreements for investments in China to support two greenfield projects, each initially targeting 50,000 metric tons per year.
These projects position us for initial added conversion capacity of up to 150,000 metric tons of lithium hydroxide on an annual basis to meet our customers' growing demands.
In addition, our MARBL joint venture announced the restart of the Wodgina Lithium Mine in Western Australia.
On Slide 5, you will see the objectives we set for 2021.
When we set these goals, we did so with the intent of challenging ourselves with plans that were aggressive, but achievable.
As we approach the end of the year, I'm excited by the significant progress and proud of the effort our team has put into achieving these goals.
As you see on this slide, we have accomplished the vast majority of what we set out to do.
For example, we are successfully progressing high-return, fast payback Bromine projects at both Magnolia and JBC.
These projects will increase our capacity and improve the efficiencies of our operations.
We've also made significant progress on our lithium growth projects.
First, at La Negra III and IV, our team continues to execute to plan.
I'm excited to announce that we recently completed a major milestone by achieving first lithium carbonate production in late October.
Initial production volumes will be used to qualify the plant and the material with our customers to ensure we are meeting their requirements.
This qualification process is proceeding on track with first sales expected in the first half of next year.
In Western Australia, the ongoing labor shortages and pandemic-related travel restrictions have continued to significantly impact virtually all companies in that region and show no signs of easing in the near term.
Despite these efforts and with Herculean efforts, our team has managed to hold Kemerton I construction completion to year-end 2021.
We now expect Kemerton II construction completion in the second half of 2022.
While we are facing challenges at these projects, our strategy to consolidate resources and prioritize the first train continues to mitigate additional risks.
On Slide 7, I'll highlight the progress we've made on our Wave III program since we last spoke to you at our Investor Day.
At the end of September, we announced an agreement to acquire Tianyuan for $200 million, including a recently built conversion plant near the port of Qinzhou designed to produce up to 25,000 metric tons of lithium per year with the potential to expand to 50,000 metric tons per year.
We expect this acquisition to follow a similar path as our acquisitions of Xinyu and Chengdu facilities back in 2016.
Following the close of the transaction, which is expected in the first quarter of next year, we plan to make additional investments to bring Qinzhou plant to Albemarle standards and ramp to initial production of 25,000 metric tons.
This acquisition enables us to accelerate conversion capacity growth and leverage our world-class resource base.
Together with our partner, we agreed to restart operations at the Wodgina Lithium Mine in Western Australia.
Initially, Wodgina will begin one of three processing lines, each of which can produce up to 250,000 metric tons of lithium spodumene concentrate.
This resource will be critical as we ramp our conversion capacity in Western Australia with our Kemerton sites.
We also signed agreements to invest in two greenfield conversion sites in China at Zhangjiagang and Meishan.
We plan to build identical conversion plants with initial target production of 50,000 metric tons of battery-grade lithium hydroxide at each site.
These investments offer additional optionality for future growth and have expansion potential.
Investing in China offers capital-efficient, high-return growth with proximity to our low-cost Australian spodumene resources and many of our major cathode and battery customers.
We continue to explore global expansion of our conversion capacity as the battery supply chain shifts west.
Turning to Slide 8 for a review of our global project pipeline.
As you can see, Albemarle is executing a robust pipeline of projects all around the world.
For example, our bromine business is pursuing incremental expansions in Jordan and the United States.
These high-return projects leverage our low-cost resources and technical know-how to support customers in growing and diverse markets, like electronics, telecom and automotive.
In Chile, the Salar Yield Improvement Project allows us to increase lithium production without increasing our brine pumping rates utilizing a proprietary technology to improve efficiency and sustainability.
In Australia, we continue to progress study work on additional Kemerton expansions to leverage greater scale and efficiency with repeatable designs.
Finally, in the United States, we are expanding our Silver Peak facility in Nevada to double lithium carbonate production.
This is the first of several options to expand local U.S. production.
In Kings Mountain, North Carolina, we continue to evaluate restarting our mine.
And at our bromine facility in Magnolia, Arkansas, we're evaluating the process technologies to leverage our brines to extract lithium.
We'll continue to update you periodically on our pipeline.
I hope this gives you a sense of the diversity and optionality Albemarle has as a global lithium producer.
Let's begin on Slide 9.
During the third quarter, we generated net sales of $831 million, an 11% increase from the same period last year.
This improvement was driven by strong sales for our lithium and bromine segments.
Adjusted EBITDA was essentially flat on a year-over-year basis, resulting from the sale of FCS and increased freight and raw material costs.
The GAAP net loss of $393 million includes a $505 million after-tax charge related to the recently announced Huntsman arbitration decision.
While we continue to assess our legal options, we have also initiated discussions with Huntsman regarding a potential resolution.
Excluding this charge, adjusted earnings per share was $1.05 for the quarter, down 4% from the prior year.
Third quarter adjusted EBITDA of $218 million increased by 14% or $27 million compared to the prior year, excluding the sale of FCS.
Higher adjusted EBITDA for lithium and bromine was partially offset by a $13.5 million out-of-period adjustment regarding inventory valuation in our international locations, impacting all three GBUs.
Lithium's adjusted EBITDA increased by $25 million year over year, excluding foreign exchange.
Adjusted EBITDA for bromine increased by $5 million compared to the prior year due to higher pricing partially offset by increased freight and raw material costs.
Volumes were flat given the chlorine constraints in the quarter.
And Catalyst adjusted EBITDA declined $4 million from the previous year.
This was due to lower sales and cost pressures, partially offset by higher-than-expected joint venture income, which included a favorable tax settlement in Brazil.
Slide 11 highlights the company's financial strength that is key to our ability to execute our growth plans over the coming years.
Our net debt to EBITDA at the end of the quarter was 1.7 times and is below our targeted long-term range of two to 2.5 times.
This provides us with capacity to fund growth while supporting modest dividend increases.
We don't expect the recent arbitration decision to impact our current growth plans, but it could temporarily reduce our flexibility to take advantage of upside growth opportunities.
Turning to Slide 12, I'll walk you through the updates to our guidance that Kent mentioned earlier.
Higher full year 2021 net sales and adjusted EBITDA guidance reflects our strong third quarter performance.
Net cash from operations guidance is unchanged due to the timing of shipments to customers and increased raw materials and inventory costs.
Capital expenditures were revised higher related to the continuing tight labor markets and COVID-related travel restrictions in Western Australia, as well as accelerated investments in growth.
Turning to Slide 13 for a more detailed outlook on each of our GBUs.
Lithium's full year 2021 adjusted EBITDA is now expected to grow in the mid- to high teens year-over-year.
That's up from our previous guidance due to higher volumes and pricing.
The volume growth is driven primarily by tolling.
And our full year average realized pricing is now expected to be flat to slightly higher compared to 2020.
As a reminder, most of our battery-grade lithium sales are on long-term contracts with structured pricing mechanisms that are partially exposed to the market.
We also benefit from stronger market pricing on shorter-term technical grade sales and on spot and tolling sales of battery-grade lithium.
Full year 2021 average margins are expected to remain below 35% due to higher costs related to the project start-ups and tolling partially offset by productivity improvements.
Bromine's full year 2021 adjusted EBITDA growth is now expected to be in the low double digits.
That's also up from previous guidance due to the continued strength in demand and pricing for flame retardants.
Our bromine volumes remain constrained due to sold-out conditions and a lack of inventory.
The outlook for chlorine availability has improved since last quarter, but the market remains tight and the impact of higher chlorine pricing is expected to be felt more in 2022 than in 2021 due to the timing of inventory changes and shipments.
Year-to-date, higher bromine pricing has mostly offset higher raw material and freight costs.
Catalyst full year 2021 EBITDA is now expected to decline between 20% and 25%.
That's also an improvement from our previous guidance, owing to the higher-than-expected joint venture income.
The year-over-year decline in adjusted EBITDA is primarily due to the impact of the U.S. Gulf Coast winter storm earlier in the year, product mix and the previously disclosed change in our customers' order patterns.
Catalyst fourth quarter margins will also be impacted by product mix, including a greater proportion of lower-margin FCC and CFT resid orders.
FCC demand continues to improve with increasing global fuel demand, while HPC orders continue to be delayed.
Overall, market conditions are improving but volumes and Catalysts are not expected to return to prepandemic levels until late 2022 or 2023.
In total, we expect EBITDA margins to be lower in the fourth quarter due to higher raw materials, energy and freight costs across all 3 of our businesses.
We are closely watching several key risk factors, including global supply chain disruptions, global impacts of the energy rationing in China and chip shortages.
Supply chain and logistics challenges are the most immediate.
Our teams are working day and night to navigate these port issues, the lack of drivers and upstream supply disruptions to ensure our customers get their orders on time.
We also continue to monitor the global situation with regard to chip shortages.
We recognize that the auto industry has been struggling with those shortages.
But to date, we have not seen a direct impact on either our lithium or bromine orders.
And with that, I'll hand it back to Kent.
As Scott mentioned, we are disappointed by the outcome of the Huntsman arbitration decision.
But regardless of the ultimate outcome of that dispute, Albemarle will continue to focus on the execution of our growth strategy.
As we highlighted during our Investor Day in September, we have a well-thought out and focused operating model that we are implementing across our businesses.
This model, the Albemarle Way of Excellence, provides us with a framework to execute our objectives effectively and efficiently and will help us to remain on target as we pursue significant growth opportunities ahead.
And as we pursue these opportunities, we will be disciplined in our approach to capital allocation.
Our primary capital priority is accelerating high-return growth.
This means that we will invest not just to get bigger but to create tangible shareholder value and maintain financial flexibility to take advantage of future opportunities.
Utilizing this approach with our low-cost resources, we believe our annual adjusted EBITDA will triple by 2026.
Finally, at the core of all of this is sustainability.
As one of the world's largest lithium producers and innovators, we were able to work closely with our customers to create value and drive better sustainability outcomes for all stakeholders.
I'll hand over to the operator.
 Assistant:

Chosen response:
compname reports third-quarter sales growth of 11% and increases guidance.
q3 adjusted earnings per share $1.05 excluding items.


Prompt:
Human: Joining me on the call today are Kent Masters, chief executive officer; and Scott Tozier, chief financial officer.
Our GBU Presidents, Raphael Crawford, Netha Johnson, and Eric Norris are also available for Q&A.
Please also note that some of the comments made today refer to non-GAAP financial measures.
Scott will provide more details on our financial results, outlook, and capital allocation priorities.
And finally, I'll walk you through our 2022 objectives.
2021 was a transformative year for Albemarle.
Our strategic execution and ability to effectively manage the challenges of the global pandemic enabled us to capitalize on the strength of the lithium and bromine markets and generate results that exceeded expectations.
For the year, excluding our fine chemistry services business, which was sold in June of 2021, we increased net sales by 11% to $3.3 billion, which was in line with our previous guidance.
Adjusted EBITDA grew 13% in 2021 to $871 million, surpassing the upper end of our guidance.
Looking ahead, our outlook for 2022 has improved based primarily on favorable market conditions for lithium and bromine.
We expect adjusted EBITDA to grow between 35% and 55% versus 2021, excluding fine chemistry services.
To continue driving this growth, we are focused on quickly bringing capacity online with accelerated investments.
La Negra 3 and 4 is currently in commercial qualification, and we expect to start realizing first sales from this facility in the second quarter.
In November, we achieved mechanical completion of the first train at Kemerton.
The construction team is now dedicated to the second train, and we will be able to leverage our experience from train one to improve efficiencies and timeliness of this project.
And we recently signed a nonbinding letter agreement to explore the expansion of our MARBL joint venture with increased optionality and reduced risk.
Now looking at Slide 5.
We introduced this slide early last year to lay out our 2021 objectives designed to support the four pillars of our strategy: to grow profitably, to maximize productivity, to invest with discipline, and to advance sustainability.
Virtually all the goals we set last year were met or exceeded despite challenges related to severe weather, supply chain issues, and the ongoing effects of the pandemic.
The focus of our people around the world is what drove our strong year and underscores our ability to deliver on our commitments.
These accomplishments have also set the stage for us to take advantage of the growth opportunities ahead.
Just as important as driving growth is an ongoing dedication to strong ESG values.
I'm very proud of what you see on Slide 6.
Since I became CEO in 2020, one of my main priorities has been continued improvement in sustainability.
I'm pleased to see that these efforts are increasingly being recognized externally, but it certainly isn't a new initiative for Albemarle.
Sustainability is not just doing the right thing but also doing it the right way.
For example, the lithium market is expected to see significant demand growth in the coming years.
As a leader in lithium production, we expect to be an example and help define the standards of sustainability in this market as it goes through this fundamental shift.
Now turning to Slide 7 and more on the lithium market outlook.
Based on our current market data, EV trends, and regular interactions with our customers, we are revising our lithium demand outlook upwards once again.
We now expect 2025 lithium demand of approximately 1.5 million tons, up more than 30% from our previous estimates.
Beyond 2025, we anticipate continued growth with lithium demand of more than 3 million tons by 2030.
EV sales growth is accelerating as consumers become more energy-conscious, governments incentivize clean energy, technology improves, and EVs approach pricing parity with internal combustion vehicles.
In 2021, global EV production nearly doubled to over 6 million vehicles from 3 million in 2020.
By the end of the decade, EVs are expected to account for close to 40% of automotive sales.
When you look at last year's growth rate of nearly 50% and the auto industry's ambitions for a rapid transition to EVs, it's easy to see why demand expectations are so bullish.
However, meeting this demand will be a challenge.
Turning to our wave two projects on Slide 8.
La Negra 3 and 4, which will add conversion capacity for our Chilean brine resource in the Salar de Atacama, is currently in the customer qualification process.
We anticipate incremental volumes and revenue contribution from this project in the second quarter of this year.
While there are significant changes taking place to the political landscape in Chile, we do not anticipate any material impacts to our business.
We support the Chilean people's right of self-determination and applaud the peaceful leadership transition in that country.
Our team has already begun building relationships with the incoming administration.
As I mentioned earlier, Kemerton 1 reached mechanical completion late last year and is currently in the commissioning phase.
This puts us on track to begin first sales in the second half of this year.
Kemerton 2 remains on track to reach mechanical completion by the end of this year.
The OEMs and battery manufacturers have been investing heavily in growth, including commitments in North America and Europe, and the lithium industry must do the same.
Turning to Slide 9.
We provide an overview of how Albemarle is investing to support downstream growth.
Since our Investor Day, we have accelerated and further defined our wave three projects, including the announcement of three strategic investments in China.
This wave of investments will provide Albemarle with approximately 200,000 tons of additional capacity.
That's up from 150,000 tons of capacity originally planned for wave three.
We've also continued to progress our growth options for wave four.
Based on discussions with our customers, we are analyzing options to restart our Kings Mountain lithium mine and the potential to build conversion assets in North America and Europe.
Our vertical integration, access to high-quality, low-cost resources, years of experience bringing conversion capacity online, and strong balance sheet provide us with considerable advantages.
I'm on Slide 10 now.
In China, we expect to close the acquisition of the Qinzhou conversion facility in the first half of this year.
This transaction is progressing well, and we continue to work through the appropriate regulatory reviews.
The Qinzhou plant is currently being commissioned, and we have begun tolling our spodumene to assist with that process.
We continue to progress the two greenfield lithium conversion projects in Meishan and Zhangjiagang.
We have started site clearing at Meishan and expect to break ground at Zhangjiagang later this year.
We expect mechanical completion of both projects by the end of 2024.
The restart of one of three processing lines at the Wodgina mine is going well, with first spodumene concentrate production now expected in the second quarter.
At Greenbushes, Talison continues to ramp production from the CGP 2 facility to meet design throughput and recovery rates.
In addition, the tailings project at Talison is on track.
Our bromine business is investing in innovation and capital projects to take advantage of growth opportunities.
We expect new products to make up more than 10% of annual bromine revenues by 2025, up from essentially a standing start.
The first of these products to launch is SAYTEX ALERO, our next-generation polymeric flame retardant.
We first discussed SAYTEX ALERO at our Investor Day last year, and I'm excited to say that we have achieved first commercial sales in January and expect to scale production throughout the year.
We've also invested in the resource expansion at the Smackover formation in Arkansas, and we continue to grow our conversion and derivative capacity in both Arkansas and Jordan.
Scott, you might be on mute.
Can you hear me now?
I was on mute.
I'll begin on Slide 12.
For the fourth quarter, we generated net sales of $894 million, which is an increase of $15 million compared to the prior-year quarter.
This was driven by higher sales from lithium and bromine, partially offset by the loss of revenue from our fine chemistry services business, which was sold in June 2021.
Excluding FCS, we grew by 11%.
The fourth-quarter net loss attributable to Albemarle was $4 million, reflecting an increased cost estimate to construct our Kemerton lithium hydroxide plant due to anticipated cost overruns from the impact of pandemic-related issues on the supply chain and labor.
Fourth-quarter adjusted diluted earnings per share of $1.01 was down 14% from the prior year.
The primary adjustment to earnings per share is the $1.13 add-back of that Kemerton revision.
Excluding FCS, fourth-quarter adjusted EBITDA was up 12% from the prior year.
Lithium results remained strong driven by higher volumes as well as higher pricing.
Bromine results were roughly flat year over year, reflecting strong performance in late 2020 and repeating it in 2021.
And Catalyst improved in the fourth quarter as refinery markets continue to rebound and the business saw benefits from onetime items.
Our second-half sales grew 13% from the first half of the year, following a relatively flat growth since mid-2020.
This acceleration of growth is expected to continue into 2022.
On Slide 14, you can see we are expecting both volume and pricing growth in all three of our business units in 2022.
We expect net sales of between $4.2 billion to $4.5 billion and adjusted EBITDA in the range of $1.15 billion to $1.3 billion.
This implies an adjusted EBITDA margin of between 27% and 29%.
Adjusted diluted earnings per share and net cash from operations are also expected to improve year over year.
We anticipate healthy growth in adjusted EBITDA in all four quarters this year, and we expect Q1 to be the strongest quarter for several reasons.
All three GBUs are expected to benefit from lower-cost inventory sold at prices that have been raised in anticipation of inflation.
In the first quarter, lithium also has the benefit of strong shipments from our Talison joint venture to our partner as well as a onetime spodumene sales material produced at Wodgina on initial start-up in 2019.
And finally, going forward, higher spodumene transfer pricing increases are going to increase our cost of sales and only partially be offset by higher Talison joint venture income, which is included in our EBITDA after tax.
And this creates a tax-impacted EBITDA margin drive.
As Kent mentioned, capex is expected to increase to the $1.3 billion to $1.5 billion range this year as we accelerate lithium investments to meet increased customer demand.
The key actions to meet or exceed this guidance include: first, successful execution of our lithium project start-ups; second, closing the acquisition in China; third, solid performance at our sold-out plants in lithium, bromine, and FCC catalysts; fourth, continued strength in our end-use markets and favorable pricing environment; and lastly, solid procurement to combat inflation.
Lithium's full year 2022 EBITDA is expected to be up 65% to 85%, a significant improvement from our previous outlook.
We now expect volume growth to be up 20% to 30% for the year with the new capacity coming online as well as ongoing efficiency improvements.
Average realized pricing is now expected to increase 40% to 45% compared to 2021 due to strong market pricing as well as the expiration of pricing concessions originally agreed to in late 2019.
In some cases, as these concessions rolled off, pricing reverted to legacy contracts with significantly higher variable pricing.
And as we've been saying, we've also taken the opportunity to work with our strategic customers to renegotiate contracts to more variable-rate structures.
Catalyst EBITDA is expected to be up 5% to 15%.
This is below our previous outlook, primarily due to cost pressures related to high natural gas pricing in Europe and raw material inflation.
Volumes are expected to grow across segments with overall refining markets improving.
We continue to see volumes returning to pre-pandemic levels in late 2022 or 2023.
FCC volumes are already there, but HPC volumes are lagging.
Bromine EBITDA is expected to be up 5% to 10%, slightly above our previous outlook based on strong flame retardant demand supported by macro trends, such as digitalization and electrification.
Volumes are expected to increase based on the expansions we began in 2021.
And as discussed, higher pricing and ongoing cost and efficiency improvements are expected to offset higher freight and raw material costs.
Now turning to Slide 16, I'll provide some additional color on lithium volume growth.
This slide shows the expected lithium production volume ramp from the new conversion facilities we expect to complete this year.
We begin the year with a baseload production of 88,000 metric tons in 2021, which includes Silver Peak, Kings Mountain, Xinyu, Chengdu, and La Negra 1 and 2.
And you can see that this is virtually a 50-50 split of carbonate and hydroxide.
As our wave two projects come online, output will begin to favor hydroxide.
Generally speaking, we expect it to take about two years to ramp to full conversion capacity at a new plant, including approximately six months for commissioning and qualification.
Therefore, we expect to reach our full 200,000 tons of conversion production by early 2025.
Our capital allocation priorities remain the same.
Our primary focus is to invest in profitable growth opportunities, particularly for lithium and bromine.
Strategic portfolio management and maintaining financial flexibility are important levers to support this growth.
For example, we have divested non-core businesses like FCS and reallocated funds to organic/inorganic growth opportunities, like the expected acquisition of the Qinzhou plant.
The strategic review of Catalyst is progressing well and is on track for us to make an announcement of the outcome in the first half of this year.
We'll also continue to evaluate bolt-on acquisitions to accelerate growth or bolster our portfolio of top-tier assets.
As always, future dividends and share repurchases are subject to board approval.
However, we expect to continue to support our dividend.
Given the outsized growth opportunities we see in lithium, we don't anticipate share repurchases in the foreseeable future.
First, we will continue to grow profitably.
This means completing our wave two expansions and progressing wave three expansions to grow lithium conversion capacity and volumes.
We'll also focus on safely and efficiency starting up those facilities.
Next, we will continue to maximize productivity, and this is even more important in today's environment with rising cost for raw materials.
We will leverage our operational discipline to offset inflation through manufacturing excellence, implementing lean principles, and embracing smart technology to improve HSE, cost, reliability, and quality.
Our procurement cost-saving initiatives and manufacturing excellence projects will be key to offsetting higher raw materials and freight cost as we work to achieve adjusted EBITDA margin of between 27% and 29%.
We will invest with discipline.
As Scott discussed, portfolio management and maintaining our investment-grade credit rating are both high priority for us and will continue to be a focus in 2022.
Importantly, we plan to complete the catalyst strategic review later this year, which will maximize value and set that business up for success while enabling us to focus on growth.
Finally, we will advance sustainability.
That means driving progress toward our goals for greenhouse gas emissions and freshwater use and setting additional sustainability targets.
We'll also continue to work with our customers to improve the sustainability of the lithium supply chain by completing our mine site certifications, Scope 3 greenhouse gas assessments, and analyzing product life cycles.
 Assistant:

Chosen response:
albemarle corporation finishes 2021 strong raises 2022 outlook.
oration finishes 2021 strong; raises 2022 outlook.
q4 adjusted earnings per share $1.01.
q4 sales rose 2 percent to $894 million.
expects that its full-year 2022 results across all business units will improve relative to full-year 2021.
sees fy 2022 net sales $4.2 billion - $4.5 billion.