Prompt:
Human: This information is available on our Investor Relations website, investors.
We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.
During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations, or FFO; core FFO, same-center net operating income, and adjusted EBITDA.
As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, May 6, 2021.
[Operator Instructions] On the call today will be Steven Tanger, our Executive Chair; Stephen Yalof, Chief Executive Officer; and Jim Williams, Executive Vice President and Chief Financial Officer.
We are encouraged by a greater macro outlook over the past 90 days as vaccination rollout continues and an improving retail environment, as evidenced by the Consumer Confidence Index in late April, reaching its highest level since the onset of the pandemic.
The improvement we are starting to see in some of our operating metrics reflects the excellent value proposition that our open-air centers provide for both retailers and shoppers.
We are confident that, by continuing to make progress executing on our strategy, we'll position the company to return to sustained growth over time.
We're pleased to share that traffic to our domestic open-air centers in the first quarter nearly returned to 2019 levels and exceeded 2019 levels in April.
We continued to make progress on our core priorities for the business: leasing, operating and marketing our outlet centers.
We are focused on rebuilding our occupancy, driving leasing, and curating our merchandise mix to maximize shopper frequency and dwell time, and to bring new customers to Tanger Centers.
Consolidated portfolio occupancy was 91.7% at the end of the quarter, up only 20 basis points from the end of 2020.
This reflects the anticipated 61,000 square feet of space recaptured during the quarter related to bankruptcies and brandwide restructurings.
Blended average rental rates decreased 2.8% on a straight-line basis and 8.5% on a cash basis for all renewals and retenanted leases that commenced during the trailing 12 months ended March 31, 2021.
However, this reflects a 300 basis-point improvement on a cash basis, a 390 basis-point improvement on a straight-line basis compared to our reported Q4 2020 spreads.
We believe we will continue to see improvement longer-term as positive traffic and sales trends will support driving better rents.
However, in the near term, we anticipate that we will continue to see pressure on retenanting spreads this year as we fill recaptured space that was at rental rates above the portfolio average.
Collections of contractual fixed rents billed in the first quarter of 2021 were approximately 95%.
Through April 30, 2021, we collected 96% of the deferred 2020 rents due to be repaid in the first quarter and had collected 83% of all deferred 2020 rents, leaving a balance of only $3.7 million.
Given this run rate, we're comfortable with our outlook for future collections.
Meaningful rebound in traffic that we discussed last quarter has been sustained.
For the first quarter, domestic traffic returned to 97% of the 2019 level even as February traffic was impacted by severe winter weather, and we were still operating at 20% fewer hours.
We believe a comparison to 2019 is more relevant as we started to feel the impacts of the pandemic during March of last year.
Our strong and sustained traffic levels clearly reflects the attraction of our open-air shopping centers, their dominant market locations, and the value proposition that we offer to both our retailer partners and shoppers.
Note that in Canada, where we have two unconsolidated JV properties, stores had been closed under government mandate through mid-February and are again closed under mandate.
The trailing 12 months, 280 leases commenced, totaling over 1.4 million square feet.
Renewals executed or in process as of March 31 represented 52% of the space scheduled to expire during the year compared to 63% at the same time last year.
The slower-than-usual pace reflects our decision to strategically delay some of our renewal leasing activity as the overall economic and retail environments improve.
We continue to expand relationships with our traditional tenants, and we are seeing a measured pace of new leasing activity, with particular interest coming from the higher-end brands.
Developing new business with local and regional brands is one of our leasing priorities.
This initiative provides compelling opportunities to add new and interesting concepts to our centers and, with it, more variety for our shoppers.
Additionally, we continue to expand our tenant mix beyond apparel and footwear, growing such categories of food and beverage, interactive and experiential, home d?
cor and design, housewares, sporting goods, and gourmet grocers.
As a result, we are reimagining design elements for our centers.
In Grand Rapids, Michigan, for example, we have created outdoor seating in a gathering space in connection with the new microbrew restaurant located in a formerly underutilized part of our center.
In our Hilton Head Center, iconic gourmet grocer, Nantucket Meat & Fish, is currently under construction for Memorial Day Grand opening.
Our partnership with Fillogic, the logistics-as-a-service platform in Deer Park, has provided for 5,000 square feet of a micro distribution hub aimed at providing lower cost and efficient distribution solutions for our retailers and shoppers.
We continue to deliver strong pop-up leasing activity, which serves several important functions: introducing new brands to the outlet channel that may convert to long-term permanent tenants, creating retail vibrancy in an otherwise dark store; providing variety to the center and more choice for our shoppers, delivering immediate NOI contributions; and, in certain cases, allowing us to maintain occupancy on a temporary basis as we defer long-term leases for market improvement.
This tenancy represented approximately 8.6% of our consolidated portfolio total GLA as of March 31, 2021.
Though elevated from previous levels, this is a proven approach that has historically benefited our centers.
Since joining Tanger one year ago, our top priority has been evolving our operational discipline by empowering our field leadership team to drive local leasing, business development and operational efficiencies at the center level.
These efforts have proven effective and are reflected in our better-than-planned short-term leasing, paid media and operating expense contributions.
Revenues derived from non-rental transactions, such as paid media and sponsorships.
also provided a significant contribution to the Other Revenues line in the first quarter of 2021, driving a 14% increase year-over-year.
We have decentralized shopping center operations, with each center's management team now participating in revenue generation and empowered with decision-making authority regarding operating expenses.
At the same time, we are centralizing certain procurement activities to benefit from the scale of our organization.
One thing the COVID environment reinforced is the importance of meeting the customer where they are and creating a more personalized experience.
Our marketing and digital transformation teams have continued to expand our virtual shopper offering, curbside pickup with fluid interactive capabilities, and live stream shopping, and offer digital pre-shopping on the Tanger app and website.
Our digital initiatives are aimed at creating a highly personalized relationship for users and further building our loyalty base by providing more relevant offers and content to our individual shoppers.
Our operating strategy evolves, our commitment to environmental, social and governance efforts remains unchanged.
In 2021, we have launched a comprehensive materiality assessment conducted by a third party to ensure that we are addressing the ESG issues most important to our stakeholders and that these issues are integrated into our core values.
Our Board and executive leadership team are engaged on ESG issues impacting the organization, and we are investing time and resources to grow our diversity, equity and inclusion program.
We believe that education is essential to embedding DE&I throughout our culture and are launching unconscious bias training for our senior leadership team, which will be rolled out throughout the organization.
We are also investing in our communities in new ways, including through our newly implemented small business owner outreach initiative.
Through this program, we're offering opportunities for new and existing businesses in our communities to set up shop in Tanger Centers supported by our proprietary suite of services to help them incubate and grow.
In 2021, we will continue our efforts to streamline ESG reporting so that the data is more accessible to stakeholders and easier to navigate.
To improve our transparency and reporting on our ESG efforts, we will begin to implement the recommendations of the task force on climate-related financial disclosures during 2021 with a focus on reducing greenhouse gas emissions, energy performance, biodiversity, water and usage and waste management.
These projects have impact on the global environment, broader Tanger's environmental efforts beyond our immediate footprint, and provide additional opportunities to engage with our employees, retailers and shoppers.
Our team remains focused on a return to sustained growth.
We have strengthened our balance sheet and are exploring selective growth opportunities.
We are restarting our marketing efforts for our planned Nashville development and, as restrictions are lifted, prospective tenants are making site business.
Progress we are making across each of our strategic priorities gives us confidence that we will create long-term value for our shareholders.
First quarter results showed continued positive momentum but reflect the ongoing impact of the pandemic, recent bankruptcies and brandwide restructurings.
First quarter core FFO available to common shareholders was $0.40 per share compared to $0.50 per share in the first quarter of 2020.
Core FFO for the first quarter of 2021 excludes general and administrative expense of $2.4 million, or $0.02 per share for compensation costs related to a voluntary retirement plan and other executive severance costs.
Same-center NOI for the consolidated portfolio decreased 8% for the quarter.
This reflects the rent modifications and store closings from recent bankruptcies and brandwide restructurings, partially offset by the reversal of approximately $1.6 million in reserves related to rents previously deferred or under negotiation.
Collections of contractual fixed rents billed in the first quarter of 2021 were approximately 95%.
We also continue to collect rent bill for prior periods, including amounts related to 2020 that we allowed our tenants to defer to 2021.
As of March 31, 2021, remaining rental revenue reserves for 2020 rents deferred or under negotiation totaled $2.6 million.
Since implementing our ATM program, in March we opportunistically raised capital to reduce debt and strengthen our balance sheet.
During the first quarter, we issued 6.9 million common shares that generated $128.7 million in net proceeds at a weighted average price of $19.02 per share.
We used the proceeds to reduce $25 million of borrowings under our $350 million unsecured term loan on March 11, 2021; and, on April 30, completed the partial early redemption of $150 million aggregate principal amount of our 3.875% senior notes due December 2023 for $163 million in cash.
Subsequent to the redemption, $100 million remains outstanding.
We have no significant debt maturities until December 2023.
As previously disclosed, we expect to take a charge in the second quarter of 2021 currently estimated to be approximately $14.1 million, or $0.14 per share, including an approximately $13 million make-whole premium to be paid for the early redemption of the notes and $1.1 million in unamortized debt discount and loan costs.
The charge will impact our second quarter net income and FFO but will have no impact on core FFO.
We expect the 2021 net dilutive impact per share to be approximately $0.12 for net income, $0.18 for FFO, and $0.04 for core FFO.
This reduction in debt improves our leverage ratio and enhances our balance sheet flexibility.
We have always prioritized maintaining a strong financial position.
We will continue our disciplined and prudent approach to capital allocation.
In addition to dividend distributions sufficient to maintain REIT status, our priority uses of capital include investing in our portfolio to grow NOI, reducing leverage to pre-COVID levels over time, and evaluating selective growth opportunities over the longer term.
Our outlook for 2021 remains unchanged.
While we are encouraged by the pace of our progress, we continue to anticipate pressure from current vacancies, additional potential store closures and rent modifications.
As mentioned on our fourth quarter earnings call, we expect store closures during 2021 related to bankruptcies and brandwide restructurings to total approximately 200,000 square feet during 2021, including the 61,000 square feet we recaptured during the first quarter.
Most of the recapture should occur during the first half of the year.
Additionally, our guidance assumes there are no further domestic government-mandated shutdowns and assumed lease termination fees decrease by $9 million to $10 million, or $0.09 to $0.10 per share from the elevated level we recognized in 2020.
Based on our current outlook, we continue to expect core FFO per share for 2021 to be between $1.47 and $1.57.
We are maintaining this guidance despite the $0.04 dilutive impact previously discussed.
For additional details on our key assumptions, please see our release issued last night.
Operator, can we take our first question?
 Assistant:

Chosen response:
q1 core ffo per share $0.40.
sees 2021 core ffo per share$1.47$1.57.
sees 2021 core ffo per share $1.47 to $1.57 (adds dropped word).


Prompt:
Human: I will now read the Safe Harbor statement.
At this time, there are significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic.
I hope you, your colleagues and loved ones are all doing well.
As the pandemic remains a challenge in our business and personal lives, we are focused on the safety of our teams around the world.
We are appreciative of the resiliency of the entire Skechers organization.
Without them we wouldn't have achieved our strong results and do what we do best; design, deliver, and market what we believe is the most comfortable and innovative footwear available today.
Before we share details of our record third quarter sales, it is important to note that the pandemic continues to impact our business globally.
While many markets, including the United States and Europe eased restrictions, others particularly the Asia Pacific region experienced extended and even renewed lockdown measures.
Further, the global supply chain disruptions, including the congestion at ports around the world, especially in the United States and the COVID-19 related closures of factories in South Vietnam where we manufacture a limited amount of our product have delayed our ability to ship goods.
Transit times doubled from what they were in the pre-pandemic period.
This is a global phenomenon that we believe will continue to impact our business into the first half of 2022.
However, we are seeing positive signs that conditions are improving.
Factory production in South Vietnam has restarted, albeit at a reduced capacity in some areas and the congestion at some global ports has improved.
We are optimistic given our strong start to the fourth quarter.
Skechers third quarter revenue of $1.55 billion was a new record for the period and a remarkable achievement given the ongoing global supply chain disruptions just discussed.
For the nine months period we also achieved a sales record of over $4.6 billion.
Quarterly gross margin remained strong at 49.6% primarily driven by higher average selling prices and fewer promotions in our direct-to-consumer business, partially offset by increases in freight costs.
The third quarter sales gain of 19% was the result of a 20% increase in our domestic business and a 19% increase in our international business, which represented 58% of our total sales for the period.
We achieved double-digit increases across all our reportable segments, driven by the continued global demand for our Comfort Technology footwear.
Skechers direct-to-consumer business achieved the highest quarterly sales gains, increasing 44%, driven by a 61% increase in our international business and a 35% increase in our domestic business.
Worldwide comparable same-store sales increased 31% including 34% domestically and 25% internationally.
Importantly, unit volume improved 17% with an average selling price per unit increase of 23%, reflective of our less promotional stance, the success of our Comfort Technology product and a return to a more normal lifestyle and shopping behavior.
The increase in our domestic direct-to-consumer business was driven by a 43% gain in our brick-and-mortar stores where we saw higher traffic and normalized operating hours.
Our domestic e-commerce channel increased 3% year-over-year, but 180% over the same period in 2019.
Our domestic e-commerce business was particularly impacted by limited product availability in the quarter.
The increase in our international direct-to-consumer business was primarily driven by a rebounding demand and easing of COVID restrictions.
This growth came from triple-digit increases in Chile and Korea and double-digit increases in the United Kingdom and Mexico, as well as strong growth in Canada, Peru and India.
We continue to invest in our e-commerce infrastructure and launched new sites on our new platform in Ireland in September and the United Kingdom this month, with more markets planned for the fourth quarter and into 2022.
In the third quarter we opened 10 company-owned Skechers stores, including two in Columbia and one each in Peru, India, Germany and France.
We also opened a store in downtown Los Angeles in a renovated historic building, marking our first street location in this evolving urban center.
We closed one location in the quarter.
To date in the fourth quarter, we've opened three stores, including one in Naples, Italy and we plan to open an additional 15 to 20 locations by year end.
An additional net 119 third-party Skechers stores opened in the third quarter across 28 countries, including a net new 67 in China, 9 in India, 6 in Australia, and 4 in New Zealand.
In total, at quarter end, there were 4170 Skechers stores around the world.
Our international wholesale business grew 11% year-over-year.
The quarterly sales growth was primarily driven by an increase of 62% in our distributor business and a 10% increase in China.
Our distributor business performed well, reflecting a more normal selling environment, particularly with our largest partner base in the Middle East and Africa.
Our joint venture business increased 5% for the quarter due to a 10% increase in China, as well as strong sales in Mexico and Israel.
These improvements were partially offset by declines in several markets in Asia due to continuing COVID related restrictions.
Subsidiary sales increased 6%, primarily driven by improvements in India, as well as Colombia and Canada.
This growth was partially offset by a 11% decrease in Europe, primarily due to supply chain issues.
We are currently seeing progress in European ports with improvements in the flow of goods resulting in a strong October.
Sales in our domestic wholesale business improved 10% in the third quarter.
The growth came primarily from women's GO WALK, men's sport, work, all [Phonetic] from Skechers, as well as our performance in casual running style for men and women.
Central to our global success is our Comfort Technology footwear.
Comfort, innovation, style and quality are the Skechers product tenets.
In the third quarter and over the last 18 months, consumers have been increasingly loyal to Skechers Comfort as we elevated our products with more fit offerings, as well as lightweight cushioning options and added durability to many styles.
We also have focused our efforts on an expanding collection at futures recycled materials.
Our ongoing goal is to meet consumers' needs with comfortable footwear at a reasonable price.
We drove awareness of our available collections through our multiplatform approach to marketing that included television, outdoor, digital, influencers and more.
This approach resulted in influencers from Tokyo, London, and Los Angeles, all wearing Skechers times, Kansai Yamamoto limited edition collection and localized campaigns featuring key opinion leaders in key global markets.
Given Skechers global growth, we are strategically investing in both our distribution and corporate infrastructure.
Our UK and China distribution centers became fully operational in the third quarter and we narrowed down locations for a new DC in India.
We completed the first phase of our corporate headquarters expansion at Manhattan Beach and we are working on the expansion of our North American distribution center that will bring our facility in Southern California to 2.6 million square feet in 2022.
Both of these expansions will be LEED certified gold.
We believe our record results in the third quarter reflect our powerful global brand.
With factory production in South Vietnam restarted and transit times and port constraints improving, we are optimistic about the holiday season.
Our results this quarter demonstrate the strength of our brand as the Comfort Technology leader, as well as our immense opportunities for global expansion.
What makes us even more impressive is that we delivered this growth despite severe and ongoing supply chain challenges that significantly restricted product availability across the globe.
Let me elaborate on that topic first.
There has been a lot of discussion about the factory closures in Vietnam over the summer.
This certainly impacted production at Skechers, though to a more limited degree than others as the majority of our Vietnam production is not in the South of the country.
The more disruptive issues have been widespread shipping container shortages, port congestion and last mile transportation delays.
The combination of these factors negatively impacted Skechers sales in the third quarter.
This is evident in our quarter end inventory balance which includes an incremental 218 million in-transit inventory, a year-over-year increase of over 140%.
Under normal conditions we believe a meaningful portion of that inventory would have been delivered to customers in the third quarter.
At Skechers our main objective remains delivering great comfort infused products to our dedicated consumers and once product availability is normalized, we fully expect to deliver even better results than the remarkable growth of this quarter.
Now let's turn to our third quarter results, where we will provide comparisons to both prior year and where appropriate 2019.
Sales in the quarter achieved a new third quarter record totaling $1.55 billion, an increase of $250.1 million or 19% from the prior year, and a 15% increase over the third quarter of 2019.
On a constant currency basis, sales increased $222 million or 17% from the prior year.
Direct-to-consumer sales increased 44% year-over-year supported by growth in domestic and international markets of 35% and 61% respectively.
Both markets delivered meaningful improvements in gross margins and strong year-over-year average selling price growth.
As compared with the third quarter of 2019, direct-to-consumer sales increased 20% the result of a 14% increase domestically and a 30% increase internationally.
International wholesale sales increased 11% year-over-year and grew 10% compared to the third quarter of 2019.
Our distributor business grew 62% year-over-year, but still remained about 9% below 2019 levels.
This channel continues to make good strides toward recovery, particularly in critical markets like the Middle East and Russia.
Particularly sales increased 6% year-over-year and as compared to the third quarter of 2019 grew 8%.
The improvement was primarily the result of higher average selling prices and a strong recovery in India, as well as increases in Latin America and Canada.
Our joint ventures grew 5% year-over-year led by 10% growth in China, driven by strong e-commerce demand, somewhat tempered by slower traffic patterns in retail stores, as well as temporary pandemic related store closures.
Continuing weakness in several adjacent markets also weighed on joint venture growth in Asia.
Domestic wholesale sales grew 10% year-over-year and as compared to the third quarter of 2019 increased 17%.
We continue to see very positive underlying trends with the majority of our domestic wholesale partners, including healthy sell-through rates and steady and average selling prices.
Gross profit was $769.4 million, up 23% or $144.3 million compared to the prior year.
Gross margin for the quarter was 49.6%, an increase of 150 basis points.
On a year-over-year basis, gross margins improved as a result of higher average selling prices, partially offset by a higher unit cost across all segments and the impact of product mix in our wholesale business.
Total operating expenses increased by $94.5 million or 18% to $630.7 million in the quarter versus the prior year, but decreased 50 basis point as a percentage of sales from 41.2% to 40.7%.
Selling expenses in the quarter increased year-over-year by $33.8 million or 39% to $119.8 million.
The year-over-year increase was primarily due to higher demand creation spending as markets reopened globally.
General and administrative expenses in the quarter increased year-over-year by $60.7 million or 13% to $510.9 million.
However, as a percentage of sales, this represented a year-over-year decrease of 170 basis points.
The dollar increase was due to a combination of factors, including increased retail store labor, incentive costs, rent expense related to new store openings and distribution center expansions, as well as volume-driven warehouse and distribution expenses.
This is partially offset by the $18.2 million corporate compensation expense last year related to the one-time cancellation of restricted share grants.
Earnings from operations were $146.2 million versus prior year earnings of $92.1 million, an increase of $54.1 million or 59%.
Operating margin improved 230 basis points to 9.4% as compared with 7.1% in the prior year.
Net earnings were $103.1 million or $0.66 per diluted share on $157.1 million diluted shares outstanding.
This compares to prior year net earnings of $64.3 million or $0.41 per diluted share on $155 million diluted shares outstanding.
Our effective income tax rate for the quarter was 15.6% versus 15.4% in the prior year.
And now turning to our balance sheet.
Our cash and liquidity position remained extremely healthy.
We ended the quarter with $1.18 billion in cash, cash equivalents and investments.
This reflects a decrease of $318 million or 21% from September 30, 2020.
But as a reminder, we fully repaid our revolving credit facility in the second quarter of which approximately $450 million was outstanding last year.
Trade accounts receivable at quarter end were $758.7 million an increase of $49.8 million from September 30, 2020, predominantly the result of higher wholesale sales.
Total inventory was $1.23 billion, an increase of 17% or $177 million from September 30, 2020.
However, as previously noted, this balance reflects a significant increase in in-transit inventory of $218 million on an inventory, that is inventory available to deliver to customers and our retail stores was lower by approximately 5% overall and in critical markets like the United States and Europe on-hand inventory was lower by over 20%.
Total debt including both current and long-term portions was $327 million at September 30, 2021 compared to $812 million at September 30, 2020 reflecting the repayment of our revolving credit facility last quarter.
Capital expenditure in the quarter were $89.4 million of which 38 million related to investments in our new corporate offices and other real estate, $16.2 million related to the expansion of our joint venture owned domestic distribution center, $15.3 million related to investments in our direct-to-consumer technologies and retail stores, and $10 million related to our new, now fully operational distribution centers in China and the United Kingdom.
Our capital investments remain focused on supporting our strategic priorities, growing our direct-to-consumer business, as well as expanding the presence of our brand internationally.
For the remainder of 2021, we expect total capital expenditures to be between $80 million and $110 million.
Now I will turn to guidance.
Given the severe supply chain constraints we experienced throughout the third quarter, which we believe will continue for the remainder of the year and into the first half of 2022, we are updating our previous guidance.
For fiscal 2021 we now expect sales to be in the range of $6.15 billion to $6.2 billion and net earnings per diluted share to be in the range of $2.45 to $2.50.
For the fourth quarter this implied sales in the range of $1.5 billion to 1.56 billion and net earnings per diluted share in the range of $0.28 to $0.33.
We anticipate the gross margins will be essentially flat compared to last year as freight costs will largely offset improved pricing.
Our effective tax rate for the year will be between 19% and 20% as compared to a rate of 5.5% in 2020 and 17.2% in 2019.
Our third quarter revenues of $1.55 billion was a record for the period and represented our second highest sales quarter in our history and we achieved impressive gross margins of 49.6% and diluted earnings per share of $0.66, a year-over-year increase of 61%.
Our innovative Comfort product resonated with consumers around the world and demand remains strong, demonstrated by both units sold and the average selling price increases.
We remain focused on developing more Comfort footwear.
expanding our apparel offering, reaching more consumers through our e-commerce expansion and looking at new opportunities to drive sales globally, including in the Philippines where this month we have transitioned from a third-party distributor model to directly managing our business.
Our teams are working tirelessly to address the supply chain challenges across all touch points, resources, factories, container shortages, port congestion and in-country transit, all with a goal of delivering Skechers Comfort footwear to our customers and consumers.
We are also keeping a close watch on local pandemic-related restrictions and the health of our global teams.
We believe 2021 will be another record year for Skechers, a remarkable achievement given the uncertainties globally.
We look forward to 2022, a year that will mark our 30th anniversary.
We believe we'll be exceptional from a marketing product and sales perspective and a time where we will continue communicating our message to consumers that Skechers is the Comfort Technology company.
 Assistant:

Chosen response:
skechers q3 earnings per share $0.66.
q3 earnings per share $0.66.
q3 sales rose 19.2 percent to $1.55 billion.
sees fy earnings per share $2.45 to $2.50.
sees q4 earnings per share $0.28 to $0.33.
sees q4 sales $1.51 billion to $1.56 billion.
sees fy sales $6.15 billion to $6.2 billion.


Prompt:
Human: One quick bit of housekeeping.
Cory and I will be participating in the Raymond James consumer conference on September 14 which will be held virtually.
We'll publish more details related to the time and date a couple of weeks in advance.
With that, let's move on to today's call.
Investors should familiarize themselves with the full range of risk factors that could impact our results.
Those are filed with our Form 10-K, which is filed with the Securities and Exchange Commission.
I also want to remind everyone that today's call is being recorded.
An archived version of the call will be available on our website.
This is an important call today, perhaps the most important call with the investment community over the past year.
It has nothing to do with the fact that we posted another strong quarter and remain on pace for a record year.
It's because we're finally at the inflection point, everyone knew was coming.
Yes, we're starting the run-up against tough comps in both businesses.
Yes, we're starting to see consumers get back to their normal routines.
And yes, like a lot of consumer companies, the cost pressures we're seeing from commodities are starting to feel unrelenting.
But as I take a deeper look at our business, I can't help but feel positive.
If you only look at a quarterly P&L, you can't possibly understand what's happening here.
You have to dig, you have to analyze.
You have to find the answers to questions you've never been thought about asking in the past.
For more than a year, I've been telling anyone who would listen that I believe Scotts Miracle-Gro would exit COVID as a fundamentally stronger company.
And the deeper we dig, the more we analyze, the more I'm convinced that is exactly what's happened.
Our consumer base today is vastly bigger and more engaged than prior to the pandemic.
Our ability to engage on their terms is better today due to the vast improvements in our direct-to-consumer initiatives.
And our ability to provide them the best possible outcomes has been made even easier by an innovation team that continues to turn out important new innovation.
Our growth engine, Hawthorne, continues to outperform the market and is positioning itself for long-term success.
We've built competitive advantages that others in the industry can't match.
We brought science-based innovation to this industry, and we continue to embrace a vision that is driving us to explore new and creative opportunities for growth.
In addition to the strength of our businesses, our balance sheet gives us more financial flexibility than we've had in a decade.
We have opportunities to invest in immediate growth, and we'll pursue those.
We have opportunities to invest in long-term growth, and we'll pursue that too.
And we have the opportunity to return cash to shareholders, which we'll also pursue especially given the recent pullback in our share price.
We're not doing everything perfectly here.
But when I look for major weaknesses, I just don't see them right now.
We've taken full advantage of the unique opportunity that presented itself over the past 18 months and have put ourselves in a great position.
First, I want to discuss the continued strength of our U.S. consumer business.
Consumer engagement remain strong; and by the time we navigate through the next year, we expect to have retained nearly all of the growth we captured in 2020.
I'm not sure many other CPG companies can say that.
Again, the trends are extremely strong.
We were up 48% in the quarter, and we continue to expect growth of 40% to 45% on a full-year basis.
We continue exploring opportunities that are bigger in scope, and we are increasingly committed to finding creative ways to invest in other areas of the cannabis industry.
Fourth, I'll share some early thoughts about our view of next year.
We're not providing fiscal '22 guidance today, but we do have a working thesis about next year, and I believe long-term shareholders will like what they hear.
And fifth, I want to touch on our evolving thoughts about returning cash to shareholders.
Let's start with U.S. consumer.
Clearly, we've done a better job on the top line than we expected coming into the year.
Consumer engagement exceeded our expectations and allowed us to call up our numbers twice this season.
Of course, a lot of that benefit in excess of $1 a share has been offset by commodity pressures that every company in the consumer product space is trying to navigate.
I'll let Cory dive deeper into those details.
I want to focus my time on the strong underlying foundation of the business.
The most critical takeaway is this: Consumer engagement remains extremely high.
Entering the season, our research suggested about 85% of consumers who came into the category last year would return.
We believe the actual number was probably closer to 75%; however, we're confident we benefited from a higher overall level of participation as one-third of all consumers said they increased their participation in our category this spring.
When we subtract consumers who did less gardening this year from those who did more, our data suggests participation was up 8%.
And that aligns pretty well with consumer purchase of our products at our largest retail partners.
Entering August, POS dollars at our largest four retail partners were up 4%.
In units, the number is 8%.
There's a story here and it's important to understand.
In most years, the gap between units and dollars is negligible.
In 2020, however, retailers did almost no promotional activity, so POS dollars far outpaced units.
This year, retailers promoted more than in 2020.
The change in their behavior meant the difference between POS dollars and units swung back in the other direction.
In our soils business, where four-for-10 and five-for-10 promotions were reintroduced, POS dollars are up 5% year to date.
But units, a more accurate reflection of our shipments, as well as consumer activity, are up 8%.
In mulch, dollars were up 11% and units up 20%.
And our other branded categories where the year-over-year impact of promotional activity is less pronounced, like lawn fertilizer, weed control, and grass seed, POS dollars were up 3%, 8%, and 14%, respectively.
This is the third straight year we're seeing double-digit growth in grass seed.
So across all categories, the numbers we're posting would be good in any year.
So we're extremely pleased given the tough comps.
Still, we've given up a lot of the POS gains we reported on the last call when the year-to-date number was plus 20%.
Most of the reduction was expected because of the difficult comparisons.
However, we believe the result would have been better if had not been for the weather challenges that undoubtedly drove the number lower in May and June.
On Mother's Day weekend, historically the largest weekend of the gardening season, it snowed in some key markets.
Memorial Day brought record cold through most of the Midwest and Northeast.
Father's Day was not much better.
In fact, June as a whole was extremely wet in much of the Midwest.
And of course, the record heat and drought conditions in the Western U.S. have not helped either.
We believe the impact from weather was magnified this year.
Last year, when people were working from home, we saw a lot more POS happening on weekdays than we were accustomed to seeing.
So if the weekend weather was lousy, it wasn't a big deal because more people were shopping on weekdays.
But this year, because weekday foot traffic was closer to normal, the weekends have become much more important again.
So lousy weather is more difficult to overcome this year and we've seen a lot of it.
This is not an excuse.
Weather can impact the business and it was a significant headwind this year.
By September 30, I suspect weather will have cost us at least 2 points of growth in fiscal '21.
Nonetheless, consumer engagement remains encouraging.
Our third quarter historically accounts for about 55% of full-year POS.
In the 13-week period from April through June, POS was down 1% this year compared to 2020, but it's up 24% in those same weeks compared to 2019.
If we look only at the last nine weeks of that period, that's when we started to hit tougher comps.
POS was down 12% from 2020 levels.
However, it's up 30% from 2019 during that same nine-week window.
If we extrapolate the current trends for the balance of the year, we expect full-year POS dollars to be up slightly from last year.
POS units are likely to be up low to mid-single digits.
Compared to 2019, we expect POS for 2021 to be up more than 25%.
The current consumer trends, combined with planned higher retail inventory levels, give us a high degree of confidence in our full-year sales growth guidance for the U.S. consumer business, which we set at the range of 7% to 9%.
Behind the numbers, there are a lot of great stories.
I'd love to share details on all of them, but I'm going to turn the page and share some of the highlights from Hawthorne where we continue to see strength across the board.
Through June, sales are 60% higher on a year-to-date basis as the business continues to build on its market-leading position.
In Q3, our lighting business grew 77%.
Within that number, our market-leading Gavita brand grew at more than twice that rate.
We continue to see new growth facilities come online across the country and the retrofit market remained an important part of the story in legacy markets in the Western United States.
Our success in lighting continues to be led by innovation.
In particular, we continue to see great success with our new LED lighting products that provide growers a one-for-one replacement for existing, high-pressure sodium lights.
Outside of lighting, we continue to see strength in the consumable category as well, which is a more accurate reflection of growth in the actual cannabis market.
Nutrient sales were up 54% in the quarter and growing media was up 32%.
Our signature brands significantly outperformed the overall category.
General Hydroponics grew roughly 30 points more than the total nutrient portfolio, and our Mother Earth and Botanicare brands grew three times faster than the rest of our growing media business.
The across-the-board strength led to the 48% growth we saw in the quarter, which ended with our largest sales month ever in June.
The growth rate we expect for the full year is a little more than two times higher than our initial guidance.
The upside this year allowed us to upgrade our talent, enhance our innovation efforts and improve our marketing.
We expect those investments will help drive the business again next year and the years to follow.
The acquisition of HydroLogic is pretty straightforward.
This is an easily integrated bolt-on deal that is highly strategic.
HydroLogic is a leading provider of products and systems related to water filtration and purification.
That makes it a strong complement to our existing irrigation supply business in a high-margin category.
We continue to have more M&A opportunities in the pipeline in both business segments than we can digest right now.
The challenge for Hawthorne is that many of the targets are small- to medium-sized businesses.
You might think that small deals are easy to get done.
In most cases, it's just the opposite.
The lack of sophisticated IT systems and financial controls makes the due diligence process harder and more time-consuming.
And we're not going to rush the deal just to get it done, but I will tell you we're making good progress.
Separately, we remain committed to putting capital to work in areas of the cannabis industry that are closer to the end consumer and to the grower and within the balance of current federal law, as well as the requirements of our lenders.
After months of work by an internal task force, we've created a process that will allow us to make nonequity investments in other entities that invest in cannabis brands and operations.
In fact, we've been in discussions with potential partners to bring this strategy to life and hope to see significant movement in the near future.
We've developed a highly successful business in Hawthorne based on the current state-authorized marketplace.
Even though we've never been involved with plant-touching activities, we understand the space, as well as anyone, perhaps better than anyone.
Our evolving vision is to create the optionality to have an early mover advantage in the broader U.S. cannabis market when federal law allows.
There is little doubt this industry is poised for significant growth.
And given our track record, I believe we have an absolute right to win here.
I look forward to sharing more details in the months ahead.
Speaking of the months ahead, I realize everyone wants to know what's in store for fiscal '22, so let me change gears and share some high-level thoughts.
The easy part of this equation is Hawthorne.
The run rate of this business segment remains strong.
We just completed an acquisition and hopefully, there are more on the horizon.
We continue to extend our leadership in the overall marketplace.
We continue to face the same challenge we've had for several years.
We entered fiscal '22 against pretty tough comps.
But based on everything we're seeing, it's hard to imagine growth being below 10% to 20% next year.
I know that feels like a conservative estimate to many, perhaps it is, and perhaps our guidance range will be different.
But taking a conservative approach has worked for us over the past several years and we'll continue down that same path.
I'm not going to overcommit to growth here.
The more challenging questions for next year are related to the growth in the U.S. consumer business and the continued pressures from higher commodity costs.
I'll cover the first part, Cory will cover the second.
We still have two months to go in the year, so Mike and I are working to keep the team focused all the way to the finish line.
That said, I like where we are.
That remains my view.
We're probably going to continue to feel some top-line pressure through next April because of the difficult comps.
So to some extent, fiscal '22 will be a mirror image of this year, a tough start that should get easier as the year goes on.
Right now, I believe it's prudent to plan for the U.S. consumer business to decline slightly next year.
Some of you have models suggesting a double-digit decline.
We're hoping to do better than that given the expected benefits from pricing, but it's still too early to tell.
Obviously, we won't really know until this time next year.
But our consumer business picked up nearly a decade worth of growth in the last year, and it feels pretty sticky so far.
Coupled with the changing demographics of the lawn and garden market and a red hot real estate market, it leaves us in a far stronger position in a post-COVID world.
That's why we've been investing so hard in our brands this season and why we'll do so again next year.
That's a point of view right now, not guidance.
We have a lot of work to do over the next 90 days and our thoughts could change.
We are still finalizing listings and programs with some major retailers for next year.
We also may take a second price increase in January, depending on what happens with commodities.
And of course, we need to get through the fall season to understand what retail inventory picture looks like as we prepare for next season.
So we'd expect to give you a much clearer picture when we talk again in November.
I said at the outset that it's tough to understand the business by just looking at the P&L.
And I hope it's clear that we're feeling bullish and it's in that vein, I want to briefly cover one more subject: Returning cash to shareholders.
As we look at the pullback in our equity price since early June, it's clear that the uncertainty about next year is creating a drag on our value.
I've said repeatedly that I think about this business with a long-term perspective, and I don't worry about quarter-to-quarter fluctuations.
I like our strategy.
I like how we're set up to execute, and I believe in this team.
And though I've hinted at the possibility of a special dividend multiple times this year, I'm a big fan of buying our shares at these prices.
I told Cory, I'm comfortable allocating upwards of $250 million to share repurchase in the months ahead under our existing authorization, so look for us to do that.
Before I turn things over to Cory, I just want to add one last bit of perspective.
I was walking around our campus in Ohio last week and came across a group of our R&D associates, plant scientists conducting field research.
Their enthusiasm for their work and their belief in what it could mean for our future was inspiring.
It reminded me of why I love working here.
There's an optimism here that I don't think you'll find at many other companies.
It's what carried us through the early days of COVID and has helped us drive the record results we've been posting every quarter since.
So we aren't worried about the difficult comps we continue to face, or the fact that we're likely to see a couple of negative quarters coming up.
And we aren't worried that our consumers will disappear when the world goes back to normal.
We believe in our vision here.
We believe in the mission we're executing against.
We believe our business does make the world a better place, and we believe the opportunities have never been more plentiful and that the future has never been brighter.
With that, let me turn things over to Cory for a brief overview of the numbers and to share some of his own early thoughts about next year.
I agree with Jim.
Q3 was another strong quarter.
From my new vantage point in the CFO seat, I've had the opportunity to watch our team navigate a pretty unusual marketplace.
They're doing a great job, leveraging the opportunities in front of us while managing and overcoming the challenges.
Companywide sales were up 8% in Q3 and we're now up 29% year to date.
We remain on pace to deliver our guidance on both the top line and bottom line.
Although we're likely to see even more gross margin rate pressure than we expected when we talked last, we're also seeing some unexpected pressure below the line from Bonnie.
I'll get to those items in a few minutes.
But overall, I want to spend my time providing a clear understanding of three things: what we've seen in the recent months; what we expect to see for the balance of the year; and how we expect some of the current trends to spill over into next year.
consumer business, where sales declined 4% in the quarter but are 19% higher year to date.
That leaves us right on track with the guidance I provided back in June when we said we expect a sales growth of 7% to 9%.
As Jim already said, consumer engagement has remained extremely solid throughout the season.
Retailer inventory levels have also increased over the past several months.
This is getting inventory levels back to where they needed to be.
You've already heard the details of what we've been seeing at Hawthorne, so there's no need to elaborate on Q3.
We remain confident in our growth outlook for the year on that business, too.
So in both major reporting segments, in order to maintain our sales guidance, you have to see a pretty dramatic change in the trajectory in Q4.
To get to our guidance means shipments in the U.S. consumer would decline by 40% to 50% year over year in Q4, and for our Hawthorne guidance to hold means a range of flat growth to plus 15%, which is obviously lower than what we've been seeing over the past year.
But those lower growth rates have nothing to do with the underlying strength of either business, so let me break that down for you.
consumer business grew 92% in Q4 and Hawthorne grew by 64%, so the comps are extremely high.
That's the first headwind.
The second is the shift in our fiscal calendar in 2021 that we talked about in Q1.
On a year-to-date basis, through Q3, we've had more days than a year ago.
While the shift had a negative impact of approximately $115 million on companywide sales in Q3, it has added approximately $50 million on a year-to-date basis, which is pretty evenly divided between U.S. consumer and Hawthorne.
Of course, that means we'll have fewer days in Q4 so that $50 million would come out of Q4 in order for the shift to be neutral on a full-year basis.
consumer, we're in the midst of shipping fall products and continue replenishing in other categories to keep the stores at the right level of inventory.
We've got good line of sight here, which gives us a high degree of confidence in our guidance, barring any unforeseen event.
In Hawthorne, the other major year-over-year headwind in Q4 is the 82% comp we're up against in California, which accounts for about 45% of our annual sales in the U.S.
We would expect the growth rate in California to be significantly lower this Q4 for a few reasons: First, obviously, is the difficult comp that we're up against.
Second is the fact that weather has had a strange impact on the outdoor growing season out West this year, which is an important part of that business.
Good weather early in the year allowed outdoor growers to get off to a good start, and many of them have already turned their crops for a second time.
For those who haven't, the heat and drought over the past handful of weeks have negatively impacted their business and the need for some of our products.
Third is simply a timing issue and the fact that we believe we saw a pull-forward of some sales into June.
When we reset guidance at the beginning of June, we said we plan to reinvest some of the upside in both U.S. consumer and Hawthorne to continue driving growth.
In Hawthorne, that meant some previously unplanned promotions in June, which contributed to a record performance for the month that Jim referenced.
So we expect to give up some of that year-to-date growth over the balance of the year.
But net-net, we still expect Hawthorne to finish the year with 40% to 50% growth on top of last year's 60% growth.
In fact, our sales after nine months this year are already 7% higher than all of 2020.
This business continues to thrive.
Let's move down the P&L and focus on gross margins, where we continue to feel the impact from inflation.
Clearly, this is an issue that all of you have been hearing about from other companies that you cover.
For Scotts Miracle-Gro, we've seen a steady increase in the commodities like urea, diesel, and resin that are easy for all of you to track yourselves.
Typically, we expect to see some relief in urea prices over the summer, but that's not happening as global demand has kept prices stubbornly elevated.
We're also now seeing pressure from inputs you can't track as easily, such as grass seed and sphagnum peat moss.
Grass seed has probably moved further than any of our commodities over the past year due to a supply and demand imbalance.
Most of that seed is harvested in the Pacific Northwest.
So the harsh weather conditions out there this summer will likely impact plant yields and certainly aren't going to do anything to moderate the cost pressure.
In the third quarter, these issues led to an adjusted gross margin rate of 30.8%, a decline of 530 basis points from a year ago.
I expect another significant decline in the fourth quarter, which would likely result in a full-year decline of approximately 275 basis points.
Through nine months, the adjusted gross margin rate is 280 points lower than last year.
Year to date, higher distribution costs impacted the gross margin rate by 260 basis points and higher material costs put another 130 points of pressure on that rate.
Those pressures were partially offset by more than 100 basis points of fixed-cost leverage.
However, of the 390 points of downward rate pressure, about 235 basis points were unplanned.
And while a significant price increase has gone live this week and will help for the final eight weeks of the year, there really have been a few other offsets to those higher costs all year long.
As we look ahead to next year, only about 25% of our costs are locked right now.
That's lower than normal for two reasons: First, it's been harder to lock in rates on some commodities, especially resin; and second, we've paused our hedging efforts for a few weeks with the hope of seeing some relief.
I'll reinforce Jim's point that our goal is to take enough pricing for fiscal '22 to offset the commodity pressure.
The pricing that just took effect in the U.S. consumer was a little more than 5%.
But if costs don't begin to moderate by the end of the calendar year, our plan is to take another round of pricing in January, and we've already communicated that intent to our retail partners.
Setting those issues aside, we still expect to make additional supply chain investments, and we will continue to see negative segment mix as Hawthorne will grow at a much higher rate than U.S. consumer.
So we're likely to see the overall rate decline again next year, though I can't give you a good range right now.
The team has done a great job over the past several months, offsetting the margin pressure by staying focused on reductions in SG&A.
In June, I said we expected full-year SG&A to be flat to slightly higher than 2020.
We've made some adjustments in the recent weeks, and I now expect the number to be flat to slightly down.
There are a couple of items below the operating line I want to explain as well, both of which are putting some downward pressure on EPS.
The first is the impact of Bonnie Plants.
If you recall, we originally said Bonnie would add $0.12 to $0.15 to earnings this year.
By the time we got to June, they had begun seeing lower profits than we expected because they had built too much inventory.
So when we reset the guidance in early June, our assumption was that Bonnie would have a neutral year-over-year impact on our adjusted EPS.
Since then, we saw further erosion of their results, which is now leading to about a $0.20 headwind for the full year.
While participation rates in edible gardening remain strong, Bonnie planned for a higher level of growth.
May and June came in light, in part because of multiple challenging weekends due to weather, which Jim explained earlier.
That meant they wound up growing more plants than they needed.
A critical difference between that business and our other two major segments is the inability to carry finished goods inventory.
If we build too much fertilizer inventory, we carry it into the next year, no big deal.
If Bonnie inventory doesn't sell and get stuck in a greenhouse, it gets destroyed, and there's no way to offset that cost.
So the gross margin hit will flow straight to their bottom line, and that obviously means the benefit we expected from equity income will be lower.
As you think about your models for next year, it's important to remember that we've always expected Bonnie to be a year-over-year headwind in fiscal '22.
It has nothing to do with the state of the business.
Remember, our results this year exclude Bonnie's first quarter due to the timing of when we struck our 50-50 JV with them.
Fiscal '22 will include Bonnie's first quarter, which is a lost quarter.
While the result of this year from Bonnie is frustrating, we remain absolutely committed to live goods, especially edible plants.
It remains critical to our strategy, and we are working with the Bonnie team on improving the planning process to better navigate the in-season volatility that naturally comes with this business.
There could be another pressure point on earnings per share from higher interest expense.
We currently are contemplating another bond offering to lock in longer-term bonds, probably with a 10- to 12-year maturity at roughly 4%.
If we decide to execute on that plan over the next few weeks, it could add a few more cents of headwind by the end of the year.
This will allow for flexibility and liquidity and lock in strong borrowing rates for the next decade.
Bringing things down to the bottom line, GAAP earnings were $4 per share in the quarter and $9.90 year to date, an increase of 12% and 47%, respectively.
On a non-GAAP adjusted basis, which is how we provide guidance, earnings per share in the quarter improved 5% to $3.98 per share and 39% to $10.04 per share year to date.
We believed a year ago that we could come out of COVID a better and stronger company and I share his conviction that this is exactly what happened.
In the U.S. consumer business, we've made investments in traditional marketing, direct-to-consumer, sales, supply chain, and R&D that leave us exceptionally well-positioned for the future.
And in Hawthorne, where I spent the previous six years, we have built competitive advantages that continue to propel that business forward too.
In addition, our low debt leverage, which was less than 2.2 times at the end of the quarter, gives us an enormous amount of financial flexibility to continue funding acquisitions and infrastructure improvement while also returning cash to shareholders.
And if we've taken the right steps for the business, that means we've taken the right steps for our shareholders.
 Assistant:

Chosen response:
q3 adjusted non-gaap earnings per share $3.98.
sees fy sales up 17 to 19 percent.
further strengthening of hawthorne gardening company portfolio with acquisition of hydrologic purification systems.
hydrologic will add about $20 million in annualized sales.


Prompt:
Human: So it was.com Kessel Stelling, Chairman and Chief Executive Officer will begin the call.
He will be followed by Jamie Gregory, Chief Financial Officer and Kevin Blair, President and Chief Operating Officer for more detailed information.
We ask that you limit yourselves to two questions.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now here's Kessel Stelling.
We have two main stories today and probably many more.
One is of our strong core operating performance for the first quarter pre and post coronavirus arrival.
The other equally important story is the strength and resilience of our company, which is again proven our ability to innovate to execute quickly and effectively manage day-to-day operations while also shifting priorities and resources to meet the emerging needs.
From the very beginning of this COVID-19 healthcare crisis, the decisions and actions taken by our team have been guided by two principles, doing what's best for the physical and financial well-being of our team members and doing what's best for our customers.
With those principles in mind, in March, our branches were converted to drive through and appointment only and we implemented aggressive cleaning, sanitizing, hygiene protocols at all of our company facilities.
More than 80% of 5,400 team members are now working from home and our IT team did a fabulous job quickly repositioning our workforce.
We've offered additional paid-time off the team members who are sick, who are quarantining or dealing with child care or other related family hardships and we're offering bonus payments to our hourly team members required to work on site to serve our customers.
To help our customers through this period of financial stress, we're waiting NSF and monthly service fees and offering payment the permit and other loan relief as appropriate.
Although social distancing is more or less eliminated the in-person hands on approach we usually take toward community service, we're doing everything we can to support needs across our footprint, including matching contributions to the American Red Cross, providing financial support for feeding America and funding meals for first responders and front-line healthcare providers.
I am especially proud of the effort our team has made to deliver paycheck protection program loans to our customers.
Since the launch of P3 on April 3, our team has processed, approved and funded more than $2 billion in loans for 8,300 customers.
We're continuing to process submissions in our pipeline, preparing to find as many as possible with the additional appropriations made available this week.
Kevin Blair will talk more about the key aspects of our COVID-19 response later in his remarks.
Before I cover highlights for the first quarter, I want to talk about our confidence in our ability to manage through this current crisis and to emerge from it in even stronger position.
Since the last crisis, our company has continually taken steps to prepare for an adverse economic environment including efforts to strengthen management in the key risk areas of capital credit and liquidity.
We routinely deploy stress testing and sensitivity analyzes to inform business decisions and we believe we're well positioned to sustain an economic downturn such as we're facing today.
On capital, our internal stress testing process gives us confidence in our ability to maintain strong capital ratios and stressed economic environments and our liquidity position remains strong.
We're also assessing and reprioritizing strategic initiatives under our Synovus forward program Kevin Blair is going to share more details later in the call on steps we're taking to ensure we're addressing the shorter term imperatives while also focusing on the right initiatives for strengthening our company long-term.
I'll briefly walk through highlights of the quarter on slide four.
Adjusted diluted earnings per share was $0.21 compared to $0.98 a year ago.
This year-over-year decline was driven by a 225 basis point reduction in the Fed funds rate, the schedule loss of loan accretion from acquired loans and a significant increase to the allowance that accounts for the anticipated impact of COVID-19 under the CECL framework.
We were very pleased with the fundamentals of our core performance including period end loan growth of $1.1 billion, deposit growth of $1.4 billion and core transaction deposit growth of more than $600 million.
Core net interest income, which excludes purchase accounting adjustments was flat for the quarter.
However, the core net interest margin declined 5 basis points from the prior quarter, slightly more than our original expectations due to the more significant reduction in interest rates.
Adjusted non-interest revenue of $99 million grew $7 million from fourth quarter benefiting from significant activity in mortgage, capital markets and fiduciary businesses.
This was despite lower seasonal core banking fees and increased fee waivers as part of our effort to serve clients during this COVID-19 disruption.
Adjusted non-interest expense totaled $271 million for the quarter, up $6 million versus the previous quarter, largely due to the $5 million increase in seasonal payroll taxes that were referenced during our fourth quarter earnings call.
We also had an incremental $1 million in expenses associated with COVID related bonus payments for certain front line team members.
Provision for credit losses was $159 million and resulted in an allowance for credit losses ratio of 1.39%.
These metrics incorporate the impact from COVID and the first quarter of CECL.
Before I get started walking through the quarterly performance.
I'd like to highlight that we have withdrawn our 2020 guidance.
We will give some near term indications of financial performance on key metrics throughout my commentary and we are committed to reestablishing longer-term targets when the economy stabilizes.
We discussed our increased productivity a bit on the fourth quarter call and it continue on to the first quarter with $3.1 billion in total loan production.
Our Wholesale Banking team one boarded 155 new customers during the quarter, which represented $1 billion in new loans.
In March, we saw $300 million increase in line utilization.
C&I line utilization plateaued at 50% in March as some customers increased draw-out of an abundance of caution related to the economic situation.
We are confident in the credit quality of our growth this quarter as we remain disciplined in our underwriting.
In the second quarter, we expect loans from the paycheck protection program to serve as the primary engine for loan growth as additional pipelines have declined.
Rate cuts in March led to loan yields of 4.6% excluding purchase accounting a decline of 15 basis points from the prior quarter.
The full quarter impact of these March costs will have a greater impact on the average loan yields in the second quarter.
On adjusted for hedges, approximately 50% of our loans have a floating rate.
As previously discussed, we have a hedging program in place to help mitigate the impact of changes in short-term rates on our floating rate loan portfolio.
At quarter end, we had $2.8 billion in receipt fixed swaps associated with these hedges with an average rate of 1.4% versus one month LIBOR.
Slide six shows deposit growth of $1.4 billion, which included a continue to increases in core transaction deposits of $623 million.
In the first quarter, we took advantage of reduced pricing on wholesale broker deposits to increased balances and replace higher call single service deposits.
We will continue to monitor these markets for opportunities and while it remains a dynamic deposit environment and remain focused on growing our core deposit base and maintaining a prudent liquidity profile.
In terms of overall deposit pricing, we've certainly seen a response to the recent FOMC actions.
And as you can see our total interest-bearing cost in March were approximately 30 basis points lower than the average from the prior quarter.
In this easing cycle, the FOMC cut their target rate by 225 basis points and our general expectation is for cycle betas to end in the low to mid 30s as deposits repriced throughout the year.
As you can see on slide seven, net interest income of $373 million declined $26 million from the prior quarter.
The majority of that decline or $25 million was attributable to the expected decline in purchase accounting adjustments.
The core net interest margin, which excludes PAA decreased 5 basis points from the prior quarter to 3.35%.
As we look into the second quarter, we expect net interest income to remain relatively flat as a result of significant loan growth associated with P3.
However, this growth along with the depressed rate environment and an elevated cash position is expected to weigh on our net interest margin.
Excluding those impacts, we reiterate that we expect the margin to decline 4 basis points to 5 basis points per 25 basis point decrease.
We expect the majority of the impact from March rate cuts to be realized in the second quarter.
On slide eight, you will see that we have had continued success in fee revenue generation, which increased to $99 million adjusted.
That's an increase of $7 million from the prior quarter and up $21 million or 27% versus the prior year.
In the first quarter, we continue to have diversified strength in our fee revenue business.
Mortgage revenue driven by high production levels and elevated secondary gain on sale margins increased $3 million.
Capital markets volumes were higher by $2 million as our commercial clients locked in lower rates on their borrowings and income from brokerage grew $1 million, driven by increase in contributions of new hires in 2019 and higher transaction revenue from elevated market volatility.
These increases more than offset reductions in areas such as service charges on deposit accounts, primarily due to a decline in retail NSF fees.
However, COVID is already impacting customer behavior including significant declines in capital markets activity, lower debit and credit card transaction volumes and overall business disruption for commercial clients.
This disruption will likely result in fee revenue declining 15% to 25% in the second quarter from our recent run rate of approximately $90 million.
We would expect an increase in non-interest revenues as the economy stabilizes.
Moving to slide nine.
In the first quarter, non-interest expense was $276 million for $271 million adjusted.
Adjusted expenses increased $6 million from the prior quarter, generally in line with our prior guidance.
With the increased level of COVID related expenses, which we currently estimate of $5 million to $6 million in the second quarter we expect adjusted expenses to remain relatively stable quarter-on-quarter before declining in the second half of the year.
As Kevin will discuss in a moment, we remain confident that our efforts over the past six months to identify ways to improve our operating efficiency will result in positive operating leverage over the long-term.
We are tailoring the timing of our Synovus forward initiatives to ensure they do not distract from our focus on team members customers and communities.
This doesn't change our commitment to our strategy, it simply adjust the timing.
Slide 10 shows our credit quality metrics as well as the summary of our provision for credit losses and allowance.
Net charge-offs at 21 basis points remain within prior guidance.
The NPL ratio did increase from the prior quarter to 41 basis points and this is up 1 basis point from the prior year.
Additionally, past-dues return to the low end of the recent range at 22 basis points.
While we expect to experience stress in the portfolio as we progressed in the current economic environment, it is important to note that we are entering this downturn well positioned from a credit quality standpoint with NPAs, NPLs, past dues and charge-offs at or near lows for this economic cycle.
Provision for credit losses and allowance for the quarter were impacted by the adoption of CECL on January 1 which generally results in higher provision for credit losses compared to the incurred loss.
As you can see on slide 11, the day one reserve increase was $110 million or 39%.
We did a lag the five-year transition period for regulatory capital treatment.
Our 10-K reference the two-year reasonable and supportable period used in CECL estimate, but it was a more appropriate to reduce that for one-year horizon during this period of heightened economic uncertainty, a one-year reversion to the mean follows the reasonable and formal period.
The deterioration in the economic environment since January 1 due to the current healthcare crisis resulted in a higher allowance for credit losses ratio as of March 31st, then was modeled in the day one seasonal implementation and is currently at 1.39%.
Our modeling process incorporates quantitative and qualitative considerations that are used to inform CECL estimates.
The internally developed economic forecasts used to determine the allowance for credit losses as of March 31 was approved on March 20.
At the time, the approved forecast line with rating agency and Wall Street economic forecast between that approval date and quarter-end, we saw further deterioration in the economic outlook, which resulted in the need for a qualitative overlay to our allowance for credit losses.
The qualitative overlay of $37 million at 10 basis points to the allowance for credit losses and better aligns the total allowance with the economic indicators and forecast at the end of the first quarter.
Significant economic uncertainty remains as a result of the continuing healthcare crisis and the ultimate impact of government stimulus efforts.
If our economic outlook on June 30 resembles these more recent forecast, we would expect to see further increase in the allowance for credit losses.
Capital ratios on slide 12 include the impact of CECL and incorporate applicable regulatory transition period.
As we've shared in the past, our target capital ratios were determined through our routine internal capital adequacy assessment process and include the capital optimization efforts completed in 2019.
These capital ratios give us comfort that even in a severely adverse scenario we have a sufficient buffer to withstand the losses and our main well capital.
In the first quarter, our CET1 ratio declined 8.72% largely due to the increase in risk-weighted assets, which accounted for a reduction of 25 basis points.
Our continued strength and PPNR generated 39 basis points of capital, which more than offset the 21 basis point impact of CECL related allowance build.
As a result of CECL, we anticipate capital ratio degradation earlier in a recessionary environment than under prior accounting guidance.
However, it is that allowance, which will provide a significant buffer to absorb any realized losses later in the cycle and affords us the ability to return to our capital targets over-time.
Currently, the allowance bill was reflected in the total risk-based capital ratio, which increased 6 basis points from the prior quarter to 12.31%.
Based on the same framework that was established and utilized for stress testing under the Dodd-Frank Act, we continue to leverage our internal capital management processes.
These processes coupled with our risk appetite framework provide a road map and outlines capital preservation strategies in the event we see a more protracted period of economic weakness.
As we navigate through this recession, we will be very diligent in how we deploy our balance sheet with a clear prioritization toward core customer relationships.
These processes also govern how we consider share repurchases in our common equity dividend.
Through this process, we determined to suspend our previously approved share repurchase program.
We continually evaluate our approach to common equity dividends in our capital planning process, which is guided by our assessment of capital adequacy as well as our projection of sustainable long-term earnings.
We believe a change in the common dividend is not warranted at this time.
As discussed, we remain confident in our capital adequacy and we continuously assess our long-term earnings outlook.
Liquidity management has always been a priority at Synovus and we continue to improve our liquidity profile.
In the first quarter, we issued $400 million of bank debt at very attractive levels and we increased our collateral of the Federal Home Loan Bank by approximately $2 billion.
As shown on slide 13, you can see that we have approximately $14 billion in readily available balance sheet liquidity.
While we expect loan balances excluding P3 loans to remain fairly flat over the near term, we do anticipate considerable second quarter growth associated with our P3 lending effort.
To best manage our risk and to maintain our existing funding sources for other customer need.
we anticipate using the Federal Reserve's P3 lending facility to support funding for at least a portion of these loans.
We believe that this is the most effective way to manage our overall liquidity position and to mitigate the associated impact on our capital ratios.
Kevin will now share a deeper dive on credit portfolios most impacted by COVID, some details about our responses to this crisis and provide an update on Synovus forward.
Before I go into deeper detail on several industries where the COVID-19 crisis is currently having a greater impact on business operations, this seems like an appropriate time to take a deeper dive into the composition and the quality of our loan portfolio by category as well as the significance of the diversification and derisking benefits that have been realized since the last financial crisis.
The chart on the slide shows the key components of each of our three portfolio categories with the table on the bottom right showing the shift in the composition from 2009.
Our C&I book totaled $17.7 billion and is primarily comprised of general middle market and commercial banking clients across a diverse set of industries.
Within C&I, the specialty divisions such as senior housing and premium finance comprised about 14% of total loans and have been a significant contributor to our growth story while also possessing some of the best credit metrics over the last several years.
The overall portfolio is well diversified by industry and geography and is extremely granular with almost 35,000 loans with an average original loan balance of approximately $770,000.
The CRE portfolio is $10.7 billion and 86% of the book is comprised of income producing properties with multifamily office, shopping center and hotel being the largest property types within the portfolio.
We do adhere to a disciplined concentration management philosophy thus our largest CRE loan is less than $50 million with an average loan size of approximately $13 million.
This portfolio is diverse both from a geographic and property type standpoint with strong loan to value and debt service coverage levels.
As a result, this portfolio has continued to perform well and as it relates to net charge-offs, the CRE book is in a net recovery position over the last five quarters.
The consumer book is $10 billion, almost three quarters of the consumer portfolio is in mortgage and HELOC categories with the remainder in lending partnerships, credit cards and other consumer.
You can see by the credit score and loan to value statistics that this portfolio is super-prime and remains very healthy.
Under the existing economic conditions, we expect our consumer portfolio to decline in the near term as we decreased our appetite for unsecured lending and third party partnership purchases.
The last point I want to cover on this slide is the substantial improvement that we've made to the diversification and derisking of the entire loan portfolio.
From 2009 until first quarter of 2020 we have significantly reduced our exposure to one-to-four family residential land and investment properties as well as CRE in aggregate.
By simply utilizing historical loss rates, the remix of our portfolio alone would result in a 50% reduction in losses.
Combined with the improvements in underwriting and portfolio management, we would expect losses to decline even further when evaluating the impact of the severely adverse scenario.
Moving to slide 15.
While our entire loan portfolio is continuously assessed, we have introduced enhanced monitoring for the segments noted on slide 15.
These segments totaling $4.6 billion had been identified as having a more direct and immediate impact from the COVID-19 crisis.
We are continuously working with our customers to evaluate how the current economic conditions are impacting their business operations and ultimately their cash burn rate.
We are leveraging payment deferments as well as the CARES Act stimulus programs to help weather short-term financial effects.
Solid underwriting and strong credit performance coupled with stronger balance sheets that have been built during our extended expansionary period give us confidence that these portfolios enter this downturn in the best possible position.
In the appendix on slides 27 through 29 you will find more detail around each of these portfolios, but I will touch on a few of them now.
Our hotel book is over 85% franchised and primarily contains non-resort properties, more than 90% of our hotels are rated upper mid scale or above.
This portfolio has strong credit metrics with an average loan to value of 54% and debt service coverage ratios of 1.9 times.
We have about $1 billion of shopping center exposure to centers that aren't grocery pharmacy or discount store-anchored.
Based on our southeastern footprint, these locations are situated markets that have continue to see good population and household income growth, which has created growth and stability for these businesses.
As such, these portfolios continue to perform well from a credit quality standpoint.
The restaurant book is $800 million with 56% of the book in limited service restaurants and 40% in full service.
Over 60% of our restaurants are franchises and have an average loan size at origination of roughly $1.5 million.
The next 2 industries are non-essential retail trade and arts entertainment and recreation, combining for $1.2 billion in outstandings.
Both of these portfolios have performed well pre-crisis and are also very granular with average loan sizes at origination of $1.8 million and $1.2 million respectively.
Lastly, I will mention are relatively small exposure to oil-related industries at less than 1% of total loans.
Given our five state footprint, oil is not a prevalent industry, particularly as it relates to exploration and production.
Most of our exposures and transportation operations and support related to the industry.
This portfolio has exhibited strong credit performance, but given the current state of the oil industry, we are more closely monitoring our exposure.
Our bankers and credit team members continue to work with and provide financial advice and consultation to our customers and ensure we are providing the necessary support to mitigate the short-term disruption and cash flows.
As with our entire credit portfolio, each of these portfolios has exhibited strong performance over the trailing quarters and years and was as well positioned as could be expected coming into the current environment.
The duration of the downturn will obviously determine the impact on these businesses and how quickly these industries will return to more normalized cash flow levels.
Despite rolling out our Synovus forward playbook in March, we quickly reconfigured our efforts to focus on our COVID response starting with the safety and well-being of our team members who are vitally important to support our customers as well as the communities we serve.
We effectively exercised our business continuity plan, which enables our employees to work remotely while continuing to provide customer facing roles in our branches and call centers to meet the needs of our customers.
And quite frankly, that was our other primary focus, the safety and continued service of our customers.
Although we continue to practice social distancing, we are here to serve our customers and continue to provide advice and new solutions to help them navigate the changing business climate and support their business operations.
In fact, during the first quarter, we implemented over 6,000 new services in our Treasury & Payment Solutions area, which represented a 320% increase over the first quarter of 2019.
This is another proof point of our continued commitment to serve our customers and our ability to do so in a difficult climate.
And despite the crisis, our bankers continue to call on and on-board new prospects as our relationship-based approach is serving as a key differentiator in this trying environment.
We are going to deploy our capital in areas where we receive optimal returns and while this business approach may produce lower loan growth in aggregate, we will continue to focus on acquiring new full service relationships and deepening our current relationships with new opportunities.
As we have mentioned, we've also taken a proactive approach to providing relief to our customers when needed from waving fees to increasing ATM and mobile deposit limits to granting deferments on loan payments.
Our loan deferment program is constructed to allow smaller loans upon request to receive a short-term 90-day deferral of interest and principal to the maturity date of the loan.
For larger loans, we have initiated a credit driven approach to review the specific circumstances of each request, annualized cash burn and obtain updated financial information while determining the need for the deferment.
To-date, our percentage of total deferrals is around 13% of the overall portfolio with those industries more directly impacted by COVID-19 carrying higher percentages.
We also have closely monitored all of the stimulus actions and programs made available by the CARES Act.
Obviously the paycheck protection program has had the greatest impact on our customers to this point.
We began the P3 process on March 28 with an online expression of interest portal.
We began taking applications on April 3rd, the day the program went live.
As Kessel mentioned earlier, as of today, we have secured funding for over 8,000 customers for approximately $2 billion.
As I close, let me transition to the future at Synovus Forward.
As we shared during an investor conference in March, Synovus Forward is our newly formed program that was built to generate an incremental $100 million of pre-tax income in the coming years and to lead to top quartile performance among mid cap banks in terms of profitability and efficiency.
During the development of this program, we evaluated over 20 unique and distinct initiatives that included a combination of expense and revenue opportunities.
We are confirming today that the incremental opportunity is still very achievable.
However, many of the benefits have been delayed due to the focus on the current crisis.
Many of the expense and revenue initiatives that were planned for the first half of 2020 will be recast into the second half of the year or in early 2021.
While we have had to delay some initiatives, we are also accelerating actions in others.
This includes increasing the efficiencies gained from the third-party spend initiatives, accelerating the development of digital and analytical capabilities to drive growth and manage risk and leveraging our remote environment to aggressively think about our physical distribution and locations.
We have also continue to invest in technology and more specifically, My Synovus, our consumer digital portal.
In March, we deployed major updates to enhance the bill-pay and transfer experiences of our customers.
And as we made improvements, we've seen higher levels of enrollment and utilization while seeing our overall operating increase and it's important to note that the current crisis is creating opportunities to add new initiatives to the portfolio and resize current initiatives that we had planned.
The Synovus Forward portfolio is not rigid it and will continue to evolve we are committed to delivering and growing the value as we address new economic and customer behavior realities.
There is much work ahead of us and we understand the need to balance both short term and long-term priorities.
The end state benefits, their timing and sizing may continue to evolve in this fluid environment.
And for a brief update on the weeks activities just wanted to share that on Wednesday, we hosted our first online only virtual shareholder meeting.
Among other actions our shareholders overwhelmingly approved the elimination of our 10 -1 voting structure and super majority voting requirements.
These changes reflect our Board's continuing commitment to best-in-class corporate governance.
 Assistant:

Chosen response:
q1 adjusted earnings per share $0.21.
withdrew 2020 guidance and long-term goals announced with 4q19 earnings call.


Prompt:
Human: Also on the call are Brian McDade, chief financial officer; and Adam Reuille, chief accounting officer.
For those who would like to participate in the question-and-answer session, we ask that you please respect that request to limit yourself to one question and one follow-up question, so we might allow everyone the opportunity to ask question and the opportunity to participate.
I'm pleased to report that our business has significantly improved after having addressed the impacts from COVID-19, including the restrictive governmental orders that have forced us to shut down, as well as reduce our operating capacity.
I'm pleased to report our continued improvement in our profitability and cash flow generated for the first quarter.
First-quarter funds from operation was $934 million or $2.48 per share.
FFO increased approximately $150 million or $0.31 per share compared to the fourth quarter of 2020.
Our international operations continued to be affected by governmental closure orders and capacity restrictions.
And in fact, the quarter was negatively impacted by approximately $0.08 per share compared to our expectations given the closures that have occurred internationally.
We also recorded additional COVID impacts in the first quarter of approximately $0.07 per share from -- based upon basically domestic rent abatements and uncollectible rents.
We generated $875 million in cash from operations in the quarter, which was an increase of 18% compared to the prior-year period.
We collected over 95% of our net billed rents for the first quarter and our in-line tenant collections are back to pre-COVID levels in the approximate 98% range.
Our operating metrics in the period were as follows: mall and outlet occupancy at the end of the first quarter was 90.8%, down 50 basis points compared to the fourth quarter of 2020.
This 50-basis-point decline for the quarter is approximately 75% -- 75 basis points less than the average historical seasonal decline from the fourth quarter to the first quarter.
Average base rents was $56.07, up 60 basis points year over year.
Leasing spreads declined for the 12 -- trailing 12 months, primarily due to the mix of deals that have fallen out, the spread calculation that have resulted in an increase to the average closing rate by approximately $8 per square foot for the trailing 12 months.
Pricing continues to improve with the average opening rate per square foot for the trailing 12 months of approximately $60 per foot.
And as you can see in the lease expiration schedule included in our supplemental, our expiring rents for the next few years are less than $60 per square foot.
Keep in mind that the opening rate included in our spread calculation does not include any estimates for variable lease income based on sales.
In certain circumstances in addressing tenant COVID negotiations last year, we, in certain cases, agreed to lower our initial base rent in exchange for lower unnatural sales breakpoints, allowing us to participate in the improved sales performance as the economy recovers.
Now we think that will end up being a very smart move on our behalf.
Those deals are included in the average opening rate at the lower base minimum rent and does not include our estimation of what the percentage rent could be, and we'll, obviously, believe those contributions in time will add to our cash flow.
Leasing momentum has continued across our portfolio.
We signed 1,100 leases for approximately 4.4 million square feet, and we have significant number of leases in our pipeline, our leasing volume in both number of leases in square feet was greater than the volume in each of the first quarter of 2020 and 2019.
The improving domestic economic environment, shopper sentiment, have increased shopper foot traffic and sales across our portfolio.
As I mentioned, increased in traffic for our open air and suburban centers has been very encouraging and retail sales continue to improve across the portfolio with higher sales volumes in March compared to 2019 levels.
We opened West Midlands Designer Outlet, our second outlet in the United Kingdom in early April.
This was behind schedule, was supposed to open in the fall of 2020 but was delayed due to COVID restrictions.
We're pleased that this has now been lifted and we're now able to open and serve the shoppers.
During the first quarter, we started construction of our fifth premium outlet in South Korea.
We're excited about that opportunity.
And hopefully by now, with respect to our brand and retailer investments, you've seen that we've been able to add significant value there.
Our global brands within SPARC outperformed their plans in March and April on both sales and gross margin, led by Forever 21 and Aéropostale.
For the two months combined, SPARC outperformed the sales plan by more than $135 million and our gross margin plan by more than $75 million.
And we're also very pleased with the JCPenney early results.
They continue to be above our plan.
Our company's liquidity position at Penney is strong at $1.2 billion, and balance sheet is in very good shape with leverage of less than 1.2 times net debt to projected EBITDA.
We continue to add new brands to the JCPenney portfolio, and we expect growth to be our focus going forward.
Just a quick update on Taubman, we're very pleased with our partnership and the results in the first quarter.
Our teams have collectively shared and implemented many best practices and are adding value to the assets.
We expect to step up redevelopment plans with mixed-use opportunities throughout their TRG portfolio.
Capital markets, very similar to what we always do.
We completed $1.5 billion senior note offering at 1.96%, weighted average term of 8.4 years.
We also completed a EUR 750 million note, shouldn't say dollar, at one and one-eighths percent coupon at a term of 12 years.
We used those proceeds to completely repay the $2 billion unsecured term facility associated with the Taubman deal, as well as pay off our $550 million senior notes.
We've also refinanced six mortgages for $1.3 billion, our share of which is $589 million at an average interest rate of 3.36%.
That market is continuing to improve.
And at the end of the quarter, with all this activity, we have $8.4 billion of liquidity, consisting of $6.9 billion available on our credit facility; $1.5 billion of cash, including our share of JV cash.
And reminder, that is net of $500 million of U.S. commercial paper outstanding at quarter end.
We paid $1.30 per share in cash, in terms of our dividend on April 23.
And then, finally, as you've seen, given our first-quarter results, we are increasing our full-year 2021 FFO guidance from $9.50 to $9.75 per share to $9.70 to $9.80 per.
This is an increase of $0.20 per share at the bottom end of the range and $0.05 at the top end of the range or a 13% -- or a $0.13 increase at midpoint and that represents a 6.5% to 7.6% growth rate compared to our 2020 results.
So in conclusion, pleased with the results, encouraged with what we're seeing in terms of sales, traffic, retail demand.
And we continue to continue to increase our performance and our Profitability.
 Assistant:

Chosen response:
simon property sees fy ffo per share $9.70 to $9.80.
sees fy ffo per share $9.70 to $9.80.
q1 ffo per share $2.48.
qtrly net income attributable to common stockholders was $1.36 per diluted share.u.s. malls and premium outlets operating statistics occupancy was 90.8% at march 31, 2021.
will declare a common stock cash dividend for q2 of 2021 on or before june 30, 2021.