Prompt:
Human: They are based on management's [Technical Issues].
We expect to file our 10-Q later today.
As mentioned, this teleconference is being recorded and will be available on our website following the call.
News media may also contact me.
We look forward to see many of you at the American Gas Association Financial Forum in a few weeks.
Please also contact me if you have any questions about the event or meeting with our management team.
Well, our year is off to a great start.
Our financial results are solid, and we continue to make progress on all key objectives.
We reported net income of $1.94 per share in the first quarter that compares to net income from continuing operations of $1.58 per share for the same period last year.
New rates in Oregon drove results of the Gas Utility along with continued healthy customer growth and improved results from our interstate storage business.
I'm pleased with how all of our systems operated over the winter and specifically during the widespread cold snap in February.
Our extensive resource planning and the value of our gas storage assets were proven once again.
Our team successfully managed gas supplies to mitigate the impact of the event on customers and additionally through a third-party, we were able to optimize our gas supply portfolio, capturing asset management revenues, which aid results but also offset higher gas cost for our customers.
While many areas of the country will experience significantly elevated bills, our customers are going to fare quite well.
Our commitment to safety and reliability served Northwest Natural Water customers well in February also.
Our water utilities operating in the Pacific Northwest served customers through the February event without disruption.
In Texas, power outages resulted in freezing and bursting pipes on roughly half of our systems, but we were able to restore water service within 24 to 48 hours to all customers.
Now a few notes on the economy.
The COVID vaccine has been rolled out in all states that we operate, economic reports for our region continued to show good recovery and growth in several important areas.
Oregon's unemployment rate was 6.1% in February, which is comparable to the national rate.
Single-family housing activity remained strong.
In the Portland metro region, home sales were up 7.4% from 2020 with price growth of about 12% on average.
And new single-family permits issued were up 5.7% in Oregon over the last 12 months compared to the prior period.
We continue to see good customer growth.
New construction plus conversions translated into connecting over 11,000 meters during the 12 months ended March 31, which equates to a growth rate of 1.4%.
Our water and wastewater utilities also continue to grow.
Strong residential housing construction primarily in Idaho, Texas and Washington translated into a strong 3% growth rate.
We also closed on tuck-in acquisitions this past year, leading to an overall customer growth rate of almost 6% -- actually 5.8% to be exact.
Frank, over to you.
I will begin today by discussing the highlights of first quarter 2021 results and conclude with guidance for the year.
I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%.
As a reminder, Northwest Natural's earnings are seasonal with a majority of revenues and earnings generated in the first and fourth quarters during the winter heating months.
For the quarter, we reported net income of $59.5 million or $1.94 per share compared to net $48.3 million or $1.58 per share of net income from continuing operations for the same period in 2020.
The Gas Utility posted an increase of $0.19 per share and our other activities contributed an additional $0.17 per share compared to last year.
Higher earnings at the Gas Utility were primarily related to new rates set in Oregon in November of 2020, offset in part by higher depreciation and general tax expense.
Utility margin in the Gas Distribution segment increased $13.6 million as a result of the new rates and customer growth, which were partly offset by the $1.8 million greater loss from the gas cost incentive sharing mechanism as we purchased higher gas -- priced gas during the February cold weather event than was forecasted for the year.
Utility O&M increased $2.1 million in the quarter, reflecting higher compensation and non-payroll expenses.
Depreciation expense and general taxes increased $3.3 million.
In addition to the impact of the higher pre-tax income, tax expense increased $1.7 million due to the net effect of the Oregon Corporate Activity Tax and the ongoing amortization of tax benefits from the Tax Cuts and Jobs Act.
This impact is largely a timing matter, which will correct over the course of the year with no significant expected effect on net income.
Net income from our other businesses increased $5.3 million due to $4.6 million of higher asset management revenues from the weather event as David mentioned.
In addition, other businesses benefited from higher earnings at the water and wastewater utilities, from assets we acquired in Washington and Texas last year, as well as lower expenses at our holding company.
Cash provided by operating activities was $137 million or an increase of $32 million compared to last year.
We reinvested $64 million into the business, most of which was Gas Utility capital expenditures.
Our balance sheet remains strong with ample liquidity.
From an earnings perspective, the ongoing effects of COVID are largely limited to commercial customer disconnects and slightly lower usage from non-decoupled customers, as well as late fee revenues that will be recognized at a future date when we begin recovery.
And as David noted, commercial customer accounts remained steady during the first quarter, even as we began normal collection practices.
Furthermore, we have a good -- had a good response to past due notices with a substantial reduction in delinquent balances.
We will continue to closely monitor usage levels and commercial customer losses and be disciplined in cost management.
We are pleased to note that 97% of our commercial and industrial customers are current with their bills.
The company reaffirmed 2021 earnings guidance today for net income in the range of $2.40 to $2.60 per share.
The guidance assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant changes in laws, legislation or regulations.
While our business model allows us to adapt to unforeseen challenges such as the coronavirus pandemic and the most recent weather event, while also delivering on our commitments to all of our stakeholders, our decisions are guided by our long-standing core values and those values inform our environmental, social and governance goals and actions.
So today, I'll walk you through just a few of our priorities and progress.
It's our greatest responsibility to our customers, our employees and the communities we serve.
In the 1980s, Northwest Natural proactively created a pipeline replacement program with our public utility commissions.
And by 2015, we had replaced all of our cast iron and bare steel pipe.
We are one of the first local distribution companies to completely remove those legacy pipelines and, today, as a result, operate one of the most modern and tightest systems in the nation, but we remain vigilant.
For example, we performed safety inspections on our transmission system at nearly three times the rate required by federal and state regulations.
Our long-standing core value of environmental stewardship is also a driving force behind the choices we make every day in our operations in planning for the future.
We believe climate change requires rapid innovation and collective action, which is why we're committed to reimagining the role of our system and the fuel we deliver.
In 2016, we established a 30% carbon savings goal to be achieved by 2035 starting from a 2015 baseline.
This goal is for our own operations and importantly, the use.
It also includes the use of natural gas by our customers and I want to underscore, this is a very unique and aggressive voluntary goal as compared to others.
It has been a catalyst for us to lead beyond our walls by building public policy coalitions that support innovation and new thinking.
One example of that is the groundbreaking Oregon Senate Bill 98, which allows us to procure renewable natural gas, including hydrogen, for our customers here in Oregon.
This law goes further than any other current law in the U.S. by outlining goals for adding as much as 30% renewables on the system by 2050.
I'm proud to report that we made good progress on our carbon savings goal and results through 2020 show we are on track to meet or exceed that original target.
Energy efficiency contributed nearly half of the savings achieved, with our voluntary carbon offset program also providing significant savings.
And finally our producer emissions screening tool allows us to prioritize purchases from lower and medium producers and also contributed to the goal.
The benefits we're reaping today are from programs and efforts that we began many years ago.
It's a good reminder that having a vision and a commitment to pursue it is critical to realizing significant change, which is why we're not stopping there.
We believe we can leverage renewables in our existing modern system along with other innovations to further decarbonize our system.
Our vision forward is to be carbon-neutral energy provider by 2050.
We know the current tools for driving to carbon neutrality, but this year, we are modeling multiple scenarios to better understand the different pathways.
While we expect this analysis to evolve over time, having a start to specific roadmaps and options will allow us to begin advocating for additional policy support and putting programs and people in place for long-term success.
We know our customers and communities value finding the right environmental solutions along -- among many other priorities, which is why we monitor customer satisfaction carefully to inform our work.
And I'm pleased to report this is an area our employees continue to excel.
Last year, Northwest Natural scored second in the West for large utilities in the J.D. Power Gas Utility Residential Customer Satisfaction Study and were named a Customer Champion by Escalent after placing second in the nation among electric and gas utilities in their most recent study.
And finally, just a few weeks ago, Northwest Natural was also named an Environmental Champion among 140 of the largest utilities in a national study by Cogent.
I am so proud of customers' recognition of our dedication and leadership in this area and extremely proud of our employees.
Now a few items on our water utilities.
As part of our focus to build a healthy, growing water business, we regularly invest in infrastructure improvements, such as pipe replacements, new wells and execute on multi-year plans for larger upgrades.
In 2020, we worked to upgrade technology across our water platform, making it possible to proactively detect and fix issues that caused service interruptions.
To build a culture of safety, we began implementing consistent safety standards and trainings across all locations.
All of this preparation came into play with good results.
In 2020, our water systems experienced no COVID-related service interruptions.
And as I mentioned, our employees in Texas were able to quickly get systems back up and running during the February 2021 winter event.
We're also staying focused on supporting our water utilities with a comprehensive analysis and assistance during rate cases.
In 2020, we filed three rate cases and have already concluded one of those in Idaho.
At the same time, we continue acquiring water utilities and expanding our water family.
I continue to remain very excited about the investment potential and the growth opportunities in this business.
And with that, Nick, I think we're ready to open it up for anybody that has any questions.
 Assistant:

Chosen response:
compname reports q1 earnings per share $1.94.
q1 earnings per share $1.94.
compname says reaffirmed 2021 earnings guidance in range of $2.40 to $2.60 per share.


Prompt:
Human: They are based on management's assumptions, which may or may not occur.
In addition, some of our comments today reference non-GAAP adjusted measures.
We expect to file our 10-Q later today.
[Operator Instructions] and will be available on our website following the call.
Please note these calls are designed for the financial community.
I hope you, your families, your work colleagues are safe and well.
Like all of you, we continue to navigate these unusual times.
Cities within our service territory began reopening in the second quarter.
And like many parts of our country, we began seeing an increase in COVID cases in late July.
But it has appeared to plateau lightly.
Now more than ever, we are tapping into our core value of caring for each other and the communities we serve.
From a business perspective, we continue to focus on providing safe and reliable service while ensuring the health and safety of our employees.
We continue to benefit from a conservative business model with stable utility margins.
A majority of our revenues have recovery mechanisms in place to weather normalize and to decouple margins.
We also remain focused on efficient operations.
That, combined with the decline in natural gas prices, has led to natural gas bills that are about 40% lower today than they were 15 years ago, which is very good news for our customers.
The third leg to our strategy is to look for growth that fits our conservative risk profile.
Most recently, this has been a new contractual revenue stream from the North Mist gas storage expansion and, of course, our water and wastewater businesses.
Our solid business strategy allows us to adapt to unforeseen challenges, such as the coronavirus.
And our core values of integrity, safety, caring, service ethic and environmental stewardship are the foundation and guiding principles for all we do.
Safety continues to be a value at the forefront of our minds, and we remain vigilant during this pandemic regarding the safety of our 1,200 employees and, of course, the 2.5 million people that we serve.
Our natural gas and water utilities are critical infrastructure.
We've continued all essential options to provide reliable service while following relevant health and safety guidelines, including guidance from OSHA and the CDC.
We've created a specialized field team that takes extra precautions when responding to calls where there's a known or suspected case of COVID.
In the vein of caring and customer assistance, we temporarily stopped disconnecting customers and charging late fees on past-due bills.
We are also providing financial assistance through a variety of programs, including our corporate philanthropy fund, easy for me to say, our gas assistance program, several state and federal programs and, of course, a special employee giving campaign.
In June, we issued a $17 million bill credit to Oregon customers, which is a record amount under this sharing mechanism.
At the same time, we continue to see strong customer growth.
New construction plus conversions translated into connecting over 13,000 new customers during the last 12 months, which equated to a growth rate of 1.7%.
While we can't predict the full economic effects of the pandemic, we continue to see mitigating factors for our business with our resilient business model, the timing of the onset of the pandemic and our conservative and efficient business operations.
Not only do we care for customers, we also care deeply about our employees, and I am proud of how quickly our employees have adapted adopted rather, new safety procedures and embraced working remotely, all the while they have maintained the highest service and productivity levels.
During this excuse me, we're also reminded of the importance of social justice in our workplace.
As a company, we have publicly stated that racism in any shape or form is not tolerated at Northwest Natural.
And for years, we have actively progressed in the anti-racism and equity agenda, not only internally with our employees, but also founding and supporting wider community diversity initiatives and meeting aggressive goals to provide business opportunities to minority and female-owned businesses.
Today, our culture is one of accountability, creativity and collaboration that is inclusive and supports opportunities for all employees.
This work is not easy, and there are no shortcuts.
We are focused on continuous improvement and we'll keep fostering such an environment, building diverse workforce across all levels in our organization, providing equity in pay and development opportunities and ensuring inclusion so all voices are heard and respected.
Now turning to the progress we've made related to environmental stewardship.
I'm pleased to share that in July, we've reached an important milestone here in Oregon.
Rulemaking was completed on groundbreaking renewable natural gas legislation, what we call Senate Bill 98, which enables us to put renewable natural gas, or RNG, on our system and take the next step in our state's energy transition.
RNG is a zero-carbon resource produced from organic materials like food, agriculture and forestry waste, wastewater or landfills that can be added into the existing natural gas system.
All forms of RNG are supported in the law, including renewable hydrogen.
The law enables us to acquire RNG on behalf of Oregon customers and goes further than any other law by outlining goals for adding as much as 30% RNG into the state's pipeline system by 2050.
It allows up to 5% of a utility's revenue requirement to be used to cover the incremental costs of RNG.
Currently, that equates to about $30 million annually for Northwest Natural.
Gas utilities are also allowed to rate base interconnections with the gas system and could include RNG facilities and rate base, if that is the lowest-cost option for customers.
We're pleased to take this significant step forward with the support of the legislator legislature, governor and regulators.
Last week, Northwest Natural and all parties in the Oregon general rate case filed a comprehensive stipulation with the Public Utility Commission of Oregon.
The filing includes a $45.8 million increase in revenue requirement compared to a requested $71.4 million amount.
This stipulation is based on the previously settled capital components, including a capital structure of 50-50 debt and equity and a return on Equity of 9.4% and a cost of capital of just under 7%.
In addition, the stipulation reflects average rate base of approximately $1.45 billion.
Northwest Natural's filing is subject to OPUC approval.
And if approved, new rates are expected to take effect on November one this year.
This is also the time that our revised purchased gas adjustment, or PGA, takes effect.
This year's PGA forecasts a reduction to customers' bills, which offset the majority of this base rate increase we just settled on.
We commend the commissioners and parties for their ability to continue working virtually under less-than-ideal conditions.
I'll begin with a summary of our second quarter and year-to-date financials, and then discuss the key metrics and financial implications of COVID-19 on our business and guidance for 2020.
I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%.
Our effective tax rate for the quarter was 24.6% as a result of the return of excess deferred income taxes to our Oregon customers.
Also note that earnings per share comparisons were impacted by the issuance of 1.4 million shares in June of 2019 as we raised equity to fund investments in our gas utility.
For the quarter, we reported a net loss from continuing operations of $5.1 million or $0.17 per share compared to net income of $2.1 million or $0.07 per share for the same period in 2019.
The decline in earnings for the quarter reflects two key drivers.
First, the second quarter results reflect the financial impacts of COVID-19 on margin, O&M and interest expense.
We estimate the total impact of COVID-19 to be in about approximate to be approximately $4 million or $0.12 per share, most of which hit in the second quarter.
We have recorded a deferral for a portion of these costs with an offsetting reserve until we have more clarity with regulators as to the recoverability of these costs.
Second, last year's second quarter results benefited from the reversal of an earnings test reserved for environmental remediation expenses that we booked in the first quarter equal to $0.11 per share.
Looking at the gas distribution segment.
Utility margin decreased $1 million.
Higher customer rates in Washington, customer growth and revenues from the North Mist expansion project contributed $2.9 million, which was more than offset by a $3.2 million increase in environmental remediation expense due to the reserve release in the prior year.
COVID impacts on margin are estimated to be $1.5 million, including a $700,000 decline in revenues from lower late charges and disconnection fees as we temporarily and voluntarily suspended these charges in March.
In addition, we experienced slightly lower usage from industrial and commercial use customers that were not decoupled.
Utility O&M increased $2.8 million in the quarter as we incurred higher contractor service costs related to pipeline and meter safety as well as moving expenses as we transition to a new headquarters and operations center.
In addition, compensation costs increased related to additional IT staff and higher wages under the new five-year union contract.
Finally, O&M increased $200,000 due to the higher reserve for bad debt related to COVID.
Depreciation expense and general taxes increased $2 million related to our continued investment in our system, including the North Mist gas storage facility, which was placed into rates in May of 2019.
Interest expense increased $1.1 million related to several financings undertaken in March to increase cash on hand as a precautionary measure during a significant market period of significant market volatility amid the early stages of the pandemic.
For the first six months of 2020, we reported net income from continuing operations of $43.1 million or $1.41 per share compared to net income of $45.5 million or $1.56 per share for the same period in 2019.
Last year's results included a regulatory disallowance of $0.23 per share related to an Oregon Commission order.
Excluding that disallowance, on an adjusted non-GAAP basis, earnings per share from continuing operations was $1.79 for 2019.
The $0.38 per share decline is largely due to year-over-year growth in expenses and the effects of COVID-19.
In the gas distribution segment, utility margin increased $100,000.
Higher customer rates in Washington, customer growth and revenues from the North Mist expansion project contributed an additional $10.1 million.
This was partially offset by lower entitlement and curtailment fees related to pipeline constraints in 2019 and warmer weather in 2020 compared to 2019, which collectively reduced margin by $4.9 million.
The remaining $5.2 million decline in utility margin is a result of the March 2019 Oregon order related to tax reform and pension expense.
With the exception of the first quarter pension disallowance, this order has no impact on net income as offsetting adjustments were recognized through expenses and income taxes, as I'll describe in a moment.
Utility O&M and other expenses declined $6.9 million during the first six months of 2020.
This decrease is the result of accounting entries associated with the 2019 Oregon order, which resulted in $14 million of additional expense in the first quarter of 2019, as discussed previously.
This was offset by a $5.8 million increase in underlying O&M related to the cost drivers I described in the quarterly results.
Over the last several years, we have invested in our gas system at historically high levels, and we placed the North Mist gas facility into service.
As a result, depreciation expense increased $4.9 million.
Finally, 2019 utility segment tax expense included a $5.9 million benefit related to implementing the March order with no significant resulting effect on net income.
Net income from our other businesses declined $1.5 million from lower asset management revenues due to less favorable market conditions.
Now regarding the financial effects of COVID-19.
While our business model is resilient and the initial timing of the event occurred after Northwest Natural's peak heating season, we are experiencing some financial impacts related to the pandemic.
Through June 30, we have an estimated $4 million of combined incremental costs and lower revenues.
Based on our experience to date and expectations for the future, we'll closely monitor the following items.
First, we continue to track commercial customer losses as a result of businesses closing their doors and today have not seen a significant change or near-term implications on customer growth, but it is still very early in the economic contraction.
Second, we are also monitoring the loss of late fee revenue and potential bad debt expense.
We have doubled our reserve for bad debts from $800,000 in June 2019 to $1.6 million at June of 2020.
Third, we have experienced some decline in industrial and large commercial customer usage, but have not seen a substantial reduction to date.
As discussed, we took several steps to improve our liquidity position by increasing cash on hand.
As a result, we had over $470 million of cash at the end of the first quarter.
As market conditions have improved, we reduced that to $137 million.
While there is an incremental interest costs associated with these financings, we believe it is relatively inexpensive insurance given the volatility in the market.
We've applied for regulatory deferrals to recover certain of these costs and are working closely with our regulators to reach agreement on the type and amount of costs that will be eligible for recovery.
In addition, we are taking actions to ensure we are operating effectively and efficiently, and these savings also moderate the impact of COVID.
In summary, second quarter results are coming in about where we expected them to be, and we continue to monitor this evolving situation as we approach the next heating season.
Today, we reaffirm guidance for the continuing operations in the range of $2.25 to $2.45 per share and guide toward the lower end of the range due to the potential implications of COVID-19.
Guidance also assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws, legislation or regulations.
Finally, this guidance excludes any gain related to the sale of Gill Ranch and associated operating results.
These items are reported in discontinued operations.
We continue to monitor the impact of the pandemic on our capital programs.
At this time, we do not expect a material change in our capital expenditure range of $240 million to $280 million.
We are anticipating some lower expenditures related to customer acquisition due to the economic downturn, but the majority of our capex is maintenance in nature and includes some large projects that have already begun.
While we continue to focus on day-to-day operations, we're also advancing key long-term objectives.
As I mentioned earlier, we strive to provide stable earnings while adding new earnings streams with similar risk and cash flow profiles as our regulated gas utility.
We believe the regulated water utility sector fits this profile and aligns with our core capabilities.
Furthermore, the investment potential is promising as the water industry is highly fragmented, and in many cases, these utilities have not been able to adequately invest in their infrastructure.
To that end, in 2017, we began building our water utility business, and I'm very proud of the progress we've made to date with regulatory policies, mechanisms.
While we've seen some decline in activity lately due to travel restrictions related to COVID, so far, in 2020, we closed several transactions, including Suncadia in Washington State and our first water utility in Texas.
In addition, we continue to execute on our tuck-in strategy and around our existing systems.
Just a few days ago, we closed our first municipal transaction in Idaho, acquiring water and wastewater utilities near our falls water system in Idaho Falls and signed another agreement to acquire a small water system in the region.
Cumulatively, we've invested $110 million in this space.
Operationally, the water utilities continue performing well amid the pandemic.
We leveraged our natural gas expertise to follow best practices regarding health and safety guidance for COVID, provide centralized resources and planning as well as provide a larger, stronger balance sheet.
The ability of our water utilities to work together along with our gas utility during this crisis further validates our roll-up strategy.
In closing, our company has weathered many things in the last 162 years, and I'm confident in our ability to handle the challenges at hand.
I stand behind our commitment to customers to provide safe and reliable service, and I believe in our regulated business strategy and the resilience of this team.
 Assistant:

Chosen response:
compname reports q2 loss per share $0.17 from continuing operations.
q2 loss per share $0.17 from continuing operations.
northwest natural - reaffirmed 2020 gaap earnings guidance from continuing operations in range of $2.25 to $2.45 per share.


Prompt:
Human: I'll now discuss the financial results.
We reported revenue of $230.1 million during the first quarter of 2021, which represents an increase of 17.1%, compared to $196.6 million during the first quarter of 2020.
The increase was primarily the result of increased demand for our products across all product lines and operating segments.
We reported net income of $7.9 million or $0.24 per diluted share for the three months ended January 31, 2021, compared to $10,000 or $0.00 per diluted share during the three months ended January 31, 2020.
The increase in net income was somewhat offset by a $6.7 million increase in SG&A during the quarter, $4.6 million of which was related to the valuation of our stock-based comp awards, mainly due to an increase in our stock price, and $1.6 million of which was due to higher medical claims.
On an adjusted basis, net income increased to $9 million or $0.27 per diluted share during the first quarter of 2021, compared to $1.2 million or $0.04 per diluted share during the first quarter of 2020.
The adjustments being made to earnings per share are for restructuring charges, certain executive severance charges, loss on the sale of plant, accelerated D&A, foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis, EBITDA for the quarter increased by 55.4% to $24.3 million, compared to $15.7 million during the same period of last year.
The increase is largely due to operating leverage from higher volumes.
From a margin standpoint, this increase represents adjusted EBITDA margin expansion of approximately 260 basis points.
Moving on to cash flow and the balance sheet.
Cash used for operating activities was $3.4 million during the three months ended January 31, 2021, and compared to $3.7 million for the three months ended January 31, 2020.
While our free cash flow was negative, this is typical for the first quarter of each year, and we did show improvement compared to last year.
In fact, we did not need to borrow on our revolver during the quarter and still managed to both repay $5 million in bank debt and repurchase approximately $1.9 million of our stock.
Our balance sheet is strong, our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA is unchanged at 0.6 times as of January 31, 2021.
We will remain focused on managing working capital and generating cash as the year progresses.
We will also continue to be opportunistic with respect to repurchasing our stock.
Based on our strong first-quarter results and ongoing conversations with our customers, we are raising our expectations for the year and now expect approximately 12% sales growth in our North American fenestration segment, approximately 5% sales growth in our North American cabinet components segment and approximately 22% sales growth in our European fenestration segment.
We're now comfortable providing the following full-year 2021 guidance: Net sales of $945 million to $965 million; adjusted EBITDA of $112 million to $122 million; depreciation of approximately $33 million; amortization of approximately $14 million; SG&A of approximately $105 million.
Note that this is higher than previously expected due to an increase in stock-based comp expense and more normalized medical costs; interest expense of $3 million to $4 million; a tax rate of 26% to 27%; capex of about $30 million; and then free cash flow of approximately $60 million.
If you adjust for the expected increase in SG&A, the implied incremental adjusted EBITDA margin is in the mid-20% range.
So we feel it would be necessary to provide some direction on a quarterly basis.
From a cadence perspective for Q2, on a consolidated basis, we expect net sales to be up approximately 25% year over year.
We believe the strongest revenue growth and margin expansion in Q2 will likely come from our European fenestration segment, since our plants in the U.K. were shut down in March of last year and didn't come back online completely until May.
Looking ahead, on a consolidated basis, we currently expect net sales growth of approximately 12% year over year in Q3.
And due to the tough comp, we may not see any growth in Q4.
In addition, again, on a consolidated basis, it could prove challenging to realize margin expansion in the second half due to inflationary pressures, increased stock-based comp expense and a normalization of medical expenses.
To summarize, on a consolidated basis for the full year, we currently expect to generate net sales growth of approximately 12% year over year to the midpoint of guidance, while maintaining adjusted EBITDA margin in the low 12% range.
Demand for our products during the first quarter of 2021 proved to be even stronger than our expectations.
And I'm very pleased with the results in what is traditionally our weakest quarter.
We remain steadfast in our pursuit of operational excellence, cash flow optimization and improving return on invested capital throughout all segments of our business.
Continued success on all these efforts will create further value for our shareholders and should position the company well for any opportunities that may arise in the future.
Prior to discussing the segment detail, I'd like to provide some color on the macroeconomic conditions of the markets we serve.
Overall, we are still experiencing high demand across all of our product lines.
In North America, the new construction market remains strong and sales of existing homes, which is a key indicator for repair and remodel also remains healthy.
Specific to cabinet components, the semi-custom segment, which is the main segment we serve, is starting to show growth above that of the stock segment.
As a matter of reference, there was a significant shift in market share away from the semi-custom segment to the stock segment over the past few years.
So the recent KCMA data is encouraging in that it shows the semi-custom segment gaining ground over stock.
and Germany remains robust despite the strict and ongoing COVID-related measures.
We believe the demand is strong because many international markets remain underbuilt with an infrastructure that is aging, and regulatory requirements on energy efficiency align very well with our product offering.
We also believe demand in Europe and the U.K. is being favorably impacted by the continued shift of the discretionary income away from travel and leisure activities into home improvement projects.
Although we remain optimistic on macroeconomic conditions in all the markets we serve, we also see some challenging headwinds.
We are seeing increased inflationary pressures on most of our major raw material input costs, as well as some large dollar expense items such as freight.
These pressures were recently exasperated due to the severe winter weather in Texas and along the Gulf Coast, which caused delays and shortages of key chemicals, feedstocks and energy supply.
As a reminder, for the most part, we have contractual pass-throughs for the major raw materials we use in North America, but there is often a lag depending on the contract, anywhere from 30 to 90 days.
We do not have these contractual pass-throughs in Europe and the U.K. So our ability to pass on any increases through price becomes more important.
And for the most part, we've been very successful in doing just that.
Another current headwind is the availability of labor.
Company wide, we have approximately 400 open positions, which equates to roughly 10% of our global workforce.
This is an issue that is not unique to Quanex, and it's impacting manufacturing operations in many different markets and industries.
In some of our plants, this issue has resulted in high levels of overtime, extended lead times and even customer allocations in some limited circumstances.
I will now provide my comments on performance by segment for our fiscal first quarter.
And as a general statement, results were outstanding in each of these operating segments.
Our North American fenestration segment generated revenue of $128.1 million in Q1, which was $17.7 million or approximately 16% higher than prior-year Q1.
Strong demand across all product lines, share gains in our screens business and increased capacity utilization on our vinyl extrusion assets, all contributed to the above market performance.
Adjusted EBITDA of $16.4 million in this segment was $7.7 million or approximately 88% higher than prior-year Q1.
Volume-related operating leverage, the implementation of annual pricing adjustments, operational improvements and lower SG&A, all contributed to the improved performance year over year.
Our European fenestration segment generated revenue of $49.1 million in the first quarter, which is $12.3 million or approximately 34% higher than prior year.
Excluding foreign exchange impact, this would equate to an increase of approximately 28%.
and Continental Europe remains strong.
Adjusted EBITDA of $10.7 million, resulted in margin expansion of approximately 660 basis points year over year.
Volume-related impacts, timing of pricing actions and operational improvements more than offset inflationary pressure toward the end of the quarter.
Our North American cabinet components segment reported net sales of $54 million in Q1, which was $4 million or approximately 8% better than prior year.
Demand for our cabinet components products was solid throughout the quarter as the market continued to see strength in new construction and R&R.
Adjusted EBITDA was $3.3 million in this segment which represents margin expansion of approximately 330 basis points compared to prior year.
Increased volume and benefits realized from new assets put into service last year were the primary drivers of improvements in the quarter.
Unallocated corporate and other costs were $6 million for the quarter, which is $5.4 million higher than prior year.
As Scott mentioned, the primary drivers of this increase were stock-based compensation expense related to share price appreciation, along with higher medical expenses, as our employees have started to feel more comfortable going back to their doctors.
It is also worth noting that we realized the benefit for medical cost in Q1 of last year.
As I mentioned earlier, we remain focused on operational excellence, cash flow optimization and improving return on invested capital throughout all segments of our business.
Our continued progress on these fronts is driving results and has allowed us to continue to strengthen our balance sheet by paying down debt further during a quarter where we have historically been a net borrower.
In summary, macro data points for our business are positive.
We are executing on our plan and performing well from an operational standpoint, and our orders remain strong.
As such, on a consolidated basis, we are confident in our ability to deliver low double-digit revenue growth this year while maintaining adjusted EBITDA margins in the low 12% range, despite the increasing inflationary pressures.
And with that, operator, we are now ready to take questions.
 Assistant:

Chosen response:
compname posts quarterly earnings per share of $0.24.
quanex building products corp qtrly diluted earnings per share $0.24.
quanex building products corp qtrly adjusted diluted earnings per share $0.27.
quanex building products corp- qtrly net sales $230.1 million versus $196.6 million.
quanex building products - raising expectations for year and now expect approximately 12% sales growth in north american fenestration segment.
quanex building products corp sees fiscal 2021 net sales of approximately $945 million to $965 million.
quanex building products corp - expect will generate between $112 million and $122 million in adjusted ebitda in fiscal 2021.


Prompt:
Human: I'll now discuss the financial results.
Net sales increased by 6.3% during the fourth quarter of 2020, mainly due to increased demand for our products across all of our operating segments.
Conversely, net sales decreased to $851.6 million for the full-year 2020, compared to $893.9 million in 2019.
The decrease was largely due to lower volume-related to the COVID-19 pandemic in 2Q and 3Q.
More specifically, in addition to softer demand in North America and Continental Europe during the early stages of pandemic.
were closed in compliance with government orders in late March.
And manufacturing operations at those plants did not restart until mid- to late May.
However, volume increased significantly in June across all product lines and net sales in July through October exceeded prior year on a consolidated basis.
We reported net income of $22.2 million or $0.68 per diluted share for the three months ended October 31, 2020, compared to a net loss of $30.9 million or $0.94 per diluted share during the three months ended October 31, 2019.
For fiscal 2020, we reported net income of $38.5 million or $1.17 per diluted share, compared to a net loss of $46.7 million or $1.42 per diluted share for fiscal 2019.
The reported net losses in 2019 were primarily attributable to a $44.6 million noncash goodwill impairment in the fourth quarter of last year and a $30 million noncash goodwill impairment in the second quarter of last year both in the North American cabinet components segment, mainly due to lower volume expectations related to the shift in the market from semi-custom to stock cabinets and customer-specific strategy changes.
On an adjusted basis, net income was $22 million or $0.67 per diluted share during the fourth quarter of 2020, compared to $14 million or $0.42 per diluted share during the fourth quarter of 2019.
Adjusted net income was $40.7 million or $1.24 per diluted share for fiscal 2020, compared to $31.4 million or $0.95 per diluted share for fiscal '19.
The adjustments being made to earnings per share are for restructuring charges, certain executive severance charges, noncash asset impairment charges, accelerated D&A, foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis, EBITDA increased by 14.3% to $39.4 million in the fourth quarter of 2020 and compared to $34.4 million in the fourth quarter of last year.
For the full-year 2020, adjusted EBITDA increased by almost 2% to $104.5 million, compared to $102.7 million in 2019.
The increase in earnings for the three months ended October 31, 2020, were mainly due to higher volumes, improved operating leverage and lower raw material costs.
The increases in earnings for the 12 months ended October 31, 2020, were primarily driven by a decrease in SG&A expenses, mainly due to lower medical costs.
I'll now move on to cash flow and the balance sheet.
Cash provided by operating activities was $100.8 million for the 12 months ended October 31, 2020, which represents an increase of 4.6% when compared to $96.4 million for the 12 months ended October 31, 2019.
We generated free cash flow of $75.1 million in 2020, compared to $71.5 million in 2019.
As a result of our strong free cash flow profile, we repurchased $7.2 million in stock and repaid $39.5 million of bank debt during fiscal 2020, $35 million of which was repaid in the fourth quarter alone.
Our balance sheet is healthy.
Our liquidity position is strong and getting stronger, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.6 times as of October 31, 2020, which is 50% lower than where we exited fiscal 2019.
In fact, the interest rate on our revolver will drop by another 25 basis points to the lowest tier, which is LIBOR plus 125 basis points.
Overall, on a consolidated basis, this should equate to net sales of approximately $900 million to $920 million, and we expect to generate between $108 million and $118 million in adjusted EBITDA in fiscal 2021.
This guidance assumes no adverse impact from the ongoing COVID-19 pandemic.
We intend to concentrate on executing our 2021 plan with a continued focus on creating shareholder value.
For modeling purposes, it's appropriate to make the following assumptions for 2021.
Depreciation of approximately $33 million, amortization of approximately $14 million, SG&A of $95 million to $100 million, interest expense of $3.5 million to $4.5 million and a tax rate of approximately 26%.
From a capex standpoint, we expect to spend about $30 million in 2021.
We've been very good at managing working capital and have implemented a number of successful systemic changes over the past two to three years.
However, now that all of these fundamental systemic changes are in place, it will be more difficult to realize a benefit from working capital moving forward.
Our goal is to generate free cash flow of approximately $60 million in fiscal 2021.
We are extremely pleased with our fourth-quarter and full-year 2020 results, especially considering the uncertainty that has existed since the beginning of the pandemic.
The full-year 2020 results were like a roller coaster ride.
The year started very strong before COVID began to impact operations during our second quarter.
The pandemic caused uncertainty at all levels of our business, slowdowns across all of our product lines and temporary plant closures in the U.K. Then volumes rebounded swiftly midway through the third quarter, which has continued through year-end.
We ended 2020 with record order and sales levels in October.
As Scott mentioned, we generated net sales of $851.6 million in 2020, which was 4.7% lower than 2019.
However, even with the lower volume in sales in 2020, we were able to increase adjusted EBITDA on a consolidated basis.
The increase was driven by our continued focus on operational improvements, along with SG&A reductions.
Also, in a renewed effort to improve our return on invested capital metric over time, we have implemented various processes designed to improve capital efficiency, reduce costs and really scrub the expected returns on our capital projects.
In fact, over the course of the last three years, we have significantly improved ROIC, and we plan to stay the course and expect further improvement in this metric in the coming years.
It has been a challenging year for everybody.
And I am very proud of what the Quanex team has accomplished.
From a macro perspective, the markets we operate in are all showing robust activity despite the ongoing challenges presented by COVID.
Pre-pandemic, we strongly believe that the U.S. housing market was underbuilt.
Fast forward to today, and you can see a growing migration from urban to suburban living, low existing housing inventory, low mortgage rates, and what appears to be a pickup in millennial household purchases.
Given all these factors, we believe the stage is set for what should translate into continued high demand for building products for the foreseeable future.
In addition, travel restrictions and quarantine requirements have impacted discretionary spending choices and funds that historically might have been used for travel and leisure, appear to now be getting diverted into the repair & remodel of existing home spaces.
In the cabinet markets, we continue to see growth in total cabinet demand, as well as stabilization in the shift from semi-custom to stock segments.
According to KCMA data, the semi-custom cabinet market grew by 5.7% in the quarter, which compares favorably to the 5.9% growth we reported in our North American cabinet components segment.
If you adjust for the customer that exited the cabinet business in late 2019, this operating segment grew by over 9% in 4Q.
Year to date through October, the semi custom market is down 3.9% versus the same period of 2019, primarily due to the negative demand impact the pandemic had in 2Q and 3Q.
Revenue in our North American cabinet components segment decreased by 8.5% year over year.
But if you adjust for the customer that exited the business, we were well in line with the market for the full year.
and Continental Europe markets remain at record levels.
The repair and replacement market in Europe is being fueled by dynamics that are similar to the U.S., both in terms of being underbuilt and in terms of benefiting from ongoing travel restrictions and diversion of discretionary spending.
The repair and replacement market is a clear beneficiary of these dynamics and that is the market we primarily serve.
In addition, our products fulfill the governmental energy efficiency mandates that exist in these markets, so windows and doors that are replaced, our products meet all specifications and requirements.
Despite Brexit and COVID-related concerns, we still anticipate mid single-digit growth in our European fenestration segment in 2021.
I will now discuss quarterly segment results, which are highlighted by the fact that we saw margin expansion in each of our three operating segments.
Our North American fenestration segment reported revenue of $142 million in Q4, which was down only slightly from prior-year fourth quarter.
Solid demand across all product lines was offset by the loss of one vinyl profile customer that occurred on January 1, 2020.
Absent this loss, the segment grew at 3.9% year over year in Q4, which compares favorably to industry shipments.
Adjusted EBITDA of $23.8 million in this segment was $1.1 million or 4.8% better than prior-year fourth quarter.
volume-related impacts, favorable material costs and lower SG&A more than offset the higher levels of overtime and start-up costs associated with our new screens plant in Pennsylvania.
We generated revenue of $56.8 million in our European fenestration segment in Q4, which was $13 million or 29.6% higher than prior year or up 36.6% after excluding the foreign exchange impact.
As mentioned on our third-quarter call, sales rebounded quickly in June and July after the COVID-related shutdowns expired.
The uptick in volumes continued throughout Q4 and resulted in record quarterly revenue levels for the segment.
Adjusted EBITDA of $13.4 million in Q4 was also a record quarter and represents margin improvement of approximately 460 basis points over prior year.
This margin expansion was driven by higher volumes in the related operating leverage plus favorable material pricing.
Our North American cabinet components segment reported net sales of $57.5 million in Q4, which was 5.9% better than prior year.
Strong demand, combined with opportunities created by supply chain disruptions in the cabinet Component import markets continued into the quarter, and we have been successful in capitalizing on some of those opportunities.
Adjusted EBITDA for the segment was $4.6 million, which represents an increase of 53.8% compared to prior-year fourth quarter.
Volume benefits, combined with favorable raw material pricing, better wood yields and lower-than-anticipated medical expenses all contributed to favorable performance during the period.
Finally, unallocated corporate and SG&A costs were $2.9 million higher than prior-year fourth quarter.
The primary drivers of the higher expenses were higher incentive true-ups, combined with the decision to make a discretionary bonus payment to all of our employees that do not participate in a formal incentive plan.
As we look ahead to 2021, we remain very optimistic on our view of market dynamics and macro fundamentals.
Like everyone else, we know we will need to continue navigating pandemic-related challenges in the near term.
But we are encouraged by the recent vaccine news and excited to finally begin seeing some light at the end of this tunnel.
As Scott stated earlier, we expect to deliver net sales of $900 million to $920 million and adjusted EBITDA of $108 million to $118 million in 2021.
We will continue to invest in the business while still expecting to generate approximately $60 million of free cash flow.
We've worked very hard to position Quanex to succeed, and with our strong balance sheet and cash flow profile, our focus will remain on improving returns on invested capital and generating free cash flow.
We will also have a renewed focus on revenue growth since we now have a more stable base and tailwinds in the markets that we serve.
In summary, we have continued to execute successfully on our strategy, which has put us in a strong financial position to capitalize on potential future opportunities, even in this uncertain pandemic environment.
We feel the macroeconomic indicators should provide us with tailwinds that when combined with our expected operational execution, will make for another solid year in 2021.
We look forward to another year of strong performance as we continue to focus on ways to create further shareholder value.
And with that, operator, we are now ready to take some questions.
 Assistant:

Chosen response:
qtrly diluted earnings per share $0.68.
qtrly adjusted diluted earnings per share $0.67.
on a consolidated basis, believe net sales to be about $900 million to $920 million in fiscal 2021.
on a consolidated basis, expect co will generate between $108 million and $118 million in adjusted ebitda in fiscal 2021.


Prompt:
Human: On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer; and Roland Caputo, Executive Vice President and Chief Financial Officer.
These statements are based on our current expectations and assumptions, which may change over time.
Our actual results could differ materially due to a number of risks and uncertainties that are described in the company's 2020 10-K and subsequent SEC filings.
Given the impact of the COVID-19 pandemic had on our business in 2020, we will also present certain comparisons of our operating results in 2021 to 2019, which we believe, in many cases, provides useful context for our current year results.
[Technical Issues] on our path to scaling direct, paying subscriber relationships.
We now have more than eight million paid subscriptions across our digital and print products, a testament to the success of our strategy, the strength of the market for paid digital journalism and our unique opportunity to meet that demand.
That milestone follows the second quarter with strong revenue and profit growth, modest net subscription additions and progress on our -- advancing our underlying model.
Total subscription revenue grew 16% in the quarter, the largest year-on-year subscription revenue gain in more than a decade.
Advertising revenues surged compared with the same period last year.
The combined strength in these two revenue streams more than offset cost growth, and as a result, we recorded $93 million in adjusted operating profit, a 78% improvement compared to the same quarter in 2020.
We saw moderated growth in net subscription additions in the second quarter, which we expected given that Q2 is traditionally our softest of the year, and we were comparing against last year's historic results at the beginning of the COVID crisis.
We added 142,000 net digital subscriptions with roughly half in News and the balance in Cooking and Games.
We continue to expect that our total annual net subscription additions will be in the range of 2019, although that remains difficult to predict with precision.
Our advertising performance was better than expected, with total revenue up 66% year-on-year.
As with subscriptions, the biggest factor in the gain in advertising amortize up nearly 80% year-on-year and more than 22% over the same period in 2019.
It was also another strong quarter for demonstrating the breadth, reach and impact of our journalism with unparalleled coverage of the devastating events in South Florida, the political crisis in Haiti and the still surging pandemic.
Pulitzer prizes were announced in June and The Times was the only news organization to win more than one this year.
Pulitzer writer Wesley Morris won the Pulitzer for commentary for his urgent and moving essays exploring the intersection of race and culture.
And for the seventh time in our history, The Times won the Pulitzer Prize for Public Service, journalism's highest honor, for our coronavirus beverage.
This body of work is the quintessential example of the expansive journalism The Times can uniquely deliver.
More than 1,000 journalists contributed to our coronavirus reporting, as did many others across the company, including engineers, data scientists, product designers and product managers.
The work of our data journalism team, in particular, is worth noting.
The Times launched an around-the-clock effort to track every known coronavirus case in the U.S. and made that data publicly available.
That coverage continues to fill a vacuum that has helped local governments, healthcare workers, businesses and individuals better prepare through each stage of the pandemic and has also brought us new audiences who rely on and return to our products repeatedly.
Demonstrating the strength of our journalism across platforms and subject matters, in mid-July, The Times was nominated for the Primetime Emmy Award for Best Documentary for our film, Framing Britney Spears.
The film ignited intense scrutiny of court-ordered conservatorships and continues to resonate with audiences globally.
We produced it as part of our New York Times Presents series, a partnership with FX that was recently extended.
I'll turn now to our underlying revenue drivers in the quarter and share some specifics about the work ahead.
As we've said in prior calls, we expect to feel the effects of comparing our results against last year's heightened news cycle for the remainder of the year.
And we believe that while the news cycle will continue to have significant effects on our subscription growth, we are increasing our control over the levers of the model.
Our audience in the second quarter was below the historic highs of 2020, driven largely by declining engagement with the COVID story domestically.
But as we saw last quarter, our average weekly audience was larger than in the same period in 2019 and every prior period.
For the second quarter in a row, we were also pleased to see readers engage across a broader range of storylines than they did last year.
We view this as a positive leading indicator of future net subscription additions as we have seen that experiencing the breadth of our report correlates with paying and staying.
We're leaning into that breadth both within our core news experience and across our adjacent products like Cooking, Games and Wirecutter, by experimenting more aggressively with programming to expose more of our audience to the full value of The Times.
With sustained strength relative to 2019 and prior years in overall audience and with more than 100 million registered users, we are also experimenting more aggressively and we believe more successfully on our customer journey and access model.
And as our pace of new registrations continues to be healthy, we have now begun to focus even more on getting registered users to subscribe and to engage more deeply once they do.
That experimentation with our access model has given us increasing insight into when our readers are ready to subscribe, which in turn is leading to higher conversion rates.
As a result, our digital monthly net subscription additions have grown each month since lows in March.
We believe we have additional room to optimize conversion as we strengthen engagement in key areas like newsletters and our growing body of live experiences.
Last quarter, we noted that the newest cohort of news subscriptions appear to be retaining slightly less well than in the past, which contributed to a small increase in overall churn.
Q2 domestic news churn was unchanged from the first quarter and remains at a comfortable level.
While we experienced an uptick internationally in noncore markets, we believe our churn overall is generally at a healthy level.
We also believe that our increased focus on subscriber engagement and on making the subscriber experience clearly superior to registered and anonymous experiences will help maintain healthy churn levels.
And we remain confident in our overarching approach to graduating subscribers from promotional prices to step up and full prices.
We continued in the last quarter to lay the groundwork for a more strategic bundled subscription offering that has the potential to be more widely appealing and uniquely valuable to millions of people in their daily lives.
Throughout the quarter, we ran tests on our all digital access bundle, which combines News, Cooking and Games.
These tests demonstrated that there is meaningful demand for the bundle and that those who choose it are better at retaining than those who subscribe to only one product.
Building on these promising results, we plan to do more testing around pricing, positioning and marketing of the all digital access bundle in the second half of the year.
And this fall, we plan to launch our paid subscription product for Wirecutter and experiment further with Audm, both of which over time have the potential to widen the appeal and value of a Times bundle.
Given the opportunity we see, an addressable market of at least 100 million people who are expected to pay for English language journalism and a unique moment in which daily habits are up for grabs, we are continuing to invest in the value of our individual products and the broader bundle.
That includes investing thoughtfully into our news operations to cover the most important stories of our time and to meet more news needs.
It means investing into our adjacent products to meet a broader array of life needs as we have done with Cooking and Games, each of which is now closing in on one million subscriptions.
And it means investing to build the underlying tech product experience and company culture required for us to scale.
We believe these investments will enable us to grow our market share and also to build a larger and more profitable company over time.
I'll turn briefly now to the drivers of advertising growth.
Our ad business is no doubt benefiting from an advertising market recovery, but we also believe we're seeing the effect of the groundwork we laid to build competitive advantages.
Those advantages include our robust first-party data targeting capabilities, our large and growing suite of hit podcasts and our ability to create unique multi-platform collaborations that help marketers launch new ideas and products into the world.
Now before I turn things over to Roland, let me share an update on the company's ongoing emphasis on an investment in building out a world-class digital product development team.
As we focus on scaling our strategy of journalism worth paying for, our ability to attract, develop and retain top talent in areas well beyond journalism is paramount.
This is especially the case in engineering, which is now one of our largest business side functions.
Jason joins our other highly talented Times leaders who is steering our digital product development work to its next phase of growth.
While subscription unit growth was modest in the quarter, substantial growth in both subscription and advertising revenues, which were a result of fundamental strength in the underlying business, delivered strong financial results, especially when compared with the muted results from the second quarter of 2020.
Adjusted diluted earnings per share was $0.36 in the quarter, $0.18 higher than the prior year.
We reported adjusted operating profit of approximately $93 million, higher than the same period in 2020 by $41 million and higher than 2019 by $37 million which is an important comparison point given the impact that the pandemic had on our 2020 results.
We added 77,000 net new subscriptions to our core digital news product and 65,000 net new subscriptions to our stand-alone digital products for a total of 142,000 net new digital-only subscriptions.
As of the end of the quarter, we had approximately 930,000 Games subscriptions and approximately 830,000 Cooking subscriptions.
The international share of total new subscriptions remained at 18% as of the end of the quarter.
Total subscription revenues increased 15.7% in the quarter.
As Meredith said, this is the highest rate of subscription revenue growth in well over a decade, with digital-only subscription revenue growing more than 30% to $190 million.
Digital-only subscription revenue grew as a result of the large number of new subscriptions we have added in the past year, continued strength and retention of the $1 per week promotional subscriptions who graduated to higher prices, and finally, the positive impact from our digital subscription price increase, which began late in the first quarter of 2020.
Digital news subscription ARPU for the quarter increased approximately one percentage point compared to the prior year and nearly five percentage points compared to the prior quarter, which marks the first quarter with a positive year-over-year result since 2013.
This improvement was primarily a result of subscriptions graduating from their introductory price to either a full price or an intermediate step up price in the quarter as well as the continued benefit from price increases on our more tenured full price subscriptions.
ARPU related solely to domestic news subscriptions increased approximately 1.5 percentage points versus the prior year and nearly five percentage points versus the prior quarter.
We continue to expect to demonstrate pricing power throughout 2021 as the impact from subscriptions graduating from discounted promotions and the price increase on tenured digital subscription continues to provide a tailwind to digital news ARPU throughout the year.
Print subscription revenues increased more than 1% as home delivery revenues benefited from the first quarter price increase, which more than offset declines in subscription volume.
Total daily circulation declined 4.5% in the quarter compared with prior year, while Sunday circulation declined approximately 1%, which represents a significant improvement in the recent trend following the steep declines experienced as a result of the widespread business closures and a decrease in commuting of travel as a result of the pandemic.
As compared with 2019, print subscription revenues declined 5.5%, as single-copy and international bulk sale copy declined, while revenue from domestic home delivery subscriptions was flat.
Total advertising revenues increased more than 66% in the quarter as digital advertising grew nearly 80%, while print advertising increased by 48%, largely as a result of the impact of the comparison to weak advertising revenues in the second quarter of 2020 caused by reduced advertising spending during the COVID-19 pandemic.
Digital advertising was also growing by our proprietary first-party targeted ad products and expanded audio product portfolio.
Versus 2019, digital advertising grew 22% as a result of higher direct sold advertising, including traditional display and audio.
Second quarter digital advertising revenue exceeded the guidance we gave in early May, largely as a result of better-than-expected performance from larger technology and financial services advertisers spending heavily on our targeted and audio products.
Meanwhile, print advertising increased 48% as compared with 2020, primarily driven by growth in the luxury, media, technology and entertainment categories.
Despite this impressive level of year-on-year growth, print advertising revenue lagged 2019 by 33%.
Other revenues increased nearly 9% compared with the prior year to $47 million, primarily as a result of an increase in Wirecutter affiliate referral revenue.
It's worth noting that midway through the second quarter, we began printing The Wall Street Journal, Barron's and The New York Post out of our College Point production facility significantly increasing utilization of the company's wholly owned printing plant.
Adjusted operating costs were higher in the quarter by approximately 15% as compared with 2020 and 6.5% higher than 2019.
Cost of revenue increased approximately 9% as a result of growth in the number of newsrooms, games, cooking and audio employees, other costs associated with audio content, a higher incentive compensation accrual and higher subscriber servicing and digital content delivery costs.
This was partially offset by lower print production and distribution expenses.
Sales and marketing costs increased approximately 35%, driven primarily by higher media expenses, which has been reduced dramatically last year in light of the historically strong organic subscription demand experienced in the early months of the COVID-19 pandemic.
When compared to 2019, sales and marketing costs decreased 14% as a result of lower advertising sales costs, partially attributable to a workforce reduction that we enacted in the second quarter of 2020, as well as lower media expenses.
Media expenses in 2021 was 14% lower than in 2019.
It's worth noting that third quarter 2020 media expenses were also significantly favorable compared to 2019, which will make for another difficult comparison in the third quarter of 2021.
Product development costs increased by approximately 28%, largely due to growth in the number of engineers employed and a higher incentive compensation accrual than we had recorded in the second quarter of 2020.
I'll again reiterate that we plan to continue adding to head count in this area over the foreseeable future, as we expect to continue leaning into investments in product development as well as on our core news and stand-alone products to drive growth.
General and administrative costs increased by 6%.
And when you control for severance and multiemployer pension withdrawal obligation costs, G&A costs would have increased by 19%, largely due to increased head count in support of employee growth in other areas, higher outside services and a higher incentive compensation accrual.
Our second quarter cost growth came in at the low end of the guidance we issued on our first quarter call in early May, largely as a result of slower-than-expected hiring for our growth initiatives in a tight labor market.
We had one special item in the quarter and nearly $4 million charge resulting from the early termination of one of our tenant's leases in our headquarters building, as we add space to accommodate growing head count to support our growth initiatives.
Our effective tax rate for the second quarter was approximately 25%.
As we've said previously, we expect our tax rate to be approximately 27% on every dollar of marginal income we record with significant variability around the quarterly effective rate.
Moving to the balance sheet, our cash and marketable securities balance ended the quarter at $947 million, an increase of $56 million compared to the first quarter of 2021.
Company remains debt-free with a $250 million revolving line of credit available.
Now let me conclude with our outlook for the third quarter of 2021.
Total subscription revenues are expected to increase approximately 13% to 15% compared with the third quarter of 2020 with digital-only subscription revenue expected to increase approximately 25% to 30%.
Overall advertising revenues are expected to increase approximately 30% to 35% compared with the third quarter of 2020 and digital advertising revenues are expected to increase approximately 40% to 45%.
Other revenues are expected to increase approximately 5%.
Both operating costs and adjusted operating costs are expected to increase approximately 18% to 20% compared with the third quarter of 2020 as we continue investment into the drivers of digital subscription growth and comp against another quarter of low spending last year as a result of actions taken during the first year of the pandemic.
And with that, we'd be happy to open it up to questions.
 Assistant:

Chosen response:
q2 adjusted earnings per share $0.36 from continuing operations.
paid digital-only subscriptions totaled about 7,133,000 at end of q2 2021, net increase of 142,000 subscriptions versus end of q1 2021.
total subscription revenues in third quarter of 2021 are expected to increase about 13% to 15% versus third quarter of 2020.
total advertising revenues in third quarter of 2021 are expected to increase about 30% to 35% compared with third quarter of 2020.
other revenues in the third quarter of 2021 are expected to increase about 5% compared with the third quarter of 2020.
continue to expect that total annual net subscription additions will be in the range of 2019.


Prompt:
Human: Speaking on the call will be Ocwen's chief executive officer, Glen Messina; and Chief Financial Officer June Campbell.
You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements.
We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructed.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States.
So we'll get started with some highlights for the third quarter.
I'm really proud of what our team has accomplished and really appreciate all their hard work.
We delivered strong GAAP net income and adjusted pre-tax income, and our ROE exceeded guidance largely due to strong top-line performance.
I believe this demonstrates the strong operating leverage we have in our business.
This was our eighth consecutive quarter of positive adjusted pre-tax income.
Our team continues to execute well against our operating objectives, strong originations growth and servicing additions, solid operational execution, and performance.
Cost reduction is tracking ahead of targets.
We also closed our planned call rights transaction for the third quarter and have deployed more than 50% of MAM's investment commitment.
October as well, we had some milestones.
So in October, we closed our acquisition of the RMS reverse mortgage servicing platform.
And also in October, I'm pleased to announce that we exceeded our recapture rate objective.
We continue to make solid progress on our actions to expand our addressable market.
We're growing in higher-margin channels, services, and products giving us strong momentum, and the RMS platform acquisition gives us access to a potential $86 billion reverse mortgage subservicing market, which is an exciting new growth opportunity for us.
And finally, we continue to navigate a volatile and unpredictable environment, and I'll talk a bit more about that later.
Originations again delivered really solid performance against our operating objectives.
We closed $20 billion in total servicing additions in the third quarter with very strong performance in subservicing additions.
With the closing of the TCB acquisition, correspondent volume doubled versus last quarter.
The TCB team is off to a really strong start, and I'm so glad to have them with us and appreciate the contributions they're making to the business.
We're seeing great results from our actions to grow subservicing.
We secured $20 billion in new awards and expect this volume to commence boarding in the fourth quarter.
Our subservicing pipeline has never been more robust.
Our top 10 prospects represent roughly $63 billion in opportunity, and our total prospect pipeline has grown to slightly over $200 billion.
We're excited about this activity level and believe we have a very compelling value proposition.
I'll spend a little bit more time on our subservicing value prop a little bit later.
Our enterprise sales approach and the TCP acquisition have allowed us to grow our base of sellers to 700 at the end of Q3.
That's roughly 2.5 times over third quarter last year, and we're continuing to grow.
Nondelegated and Best Efforts delivery services were rolled out as expected, and we're seeing steady adoption as well.
Our Ginnie Mae product mix is improving.
It's up to about 10% of total originations, excluding co-issue, we're still well below industry mix in Ginnie Mae.
So I believe we have room for improvement here.
We recently attended the MBA, Mortgage Bankers Association Annual Convention and client attendance at our meeting room exceeded our expectations, and the response to the quality of our team and operating execution was very positive.
We look forward to serving them and supporting new clients as we expand our addressable market.
Our Consumer Direct team continues to improve recapture performance.
We did see a little bit of slippage in the third quarter versus the second quarter due to accelerated runoff in select client portfolios versus Q2.
That said, we saw a very strong recovery in October with refinance recapture rate achievement of 36%, which is a milestone for us and a huge congratulations to our recapture team.
We believe we're on track to meet our 30% refinance recapture rate objectives in the fourth quarter.
Overall, our originations team is making terrific progress against their objectives for this year, and they're energized for the fourth quarter and for 2022.
The team continues to make strong progress growing higher-margin products, channels, and services.
These actions do help us expand our addressable market, as well as deflect margin pressure, as industry buying mobiles contract.
Year over year, consumer direct volume in both forward and reverse is up 61%, both forward and reverse delivered record retail funding and lock volumes in October.
The marketing eligible population for our forward recapture business increased about 43% from the second quarter to the third quarter.
And we now have roughly 174,000 loans where borrowers could save $100 or more per month by refinancing, and our team will be focused on trying to help these borrowers.
Total reverse originations were up 86% year over year.
Team is executing very well.
Our reverse market share is up from 6.5% in third quarter 2020 to 7% in third quarter 2021, and this compares to about 4.2% in the third quarter of 2019.
So great progress by the team, growing our share and our business.
In forward correspondent, we have meaningful opportunity to grow our best efforts and non-delegated delivery services.
Our team is focused there, and we've launched those recently.
Today, these services are just a fraction of the levels we see across the industry generally.
Our long-term goal is to get best efforts in non-delegated to roughly 25% to 30% of volume and about 40% to 50% of our gain on sale revenues.
In servicing, continuing to improve cost and customer experience are the key objectives for us, and the team is performing really well.
To achieve these objectives, we're focused on moving the needle in four key areas: technology, process simplification, scale, and portfolio composition.
The results have been good so far.
Overall, servicing operating costs are down roughly 25% from third quarter 2020 levels, and we've already achieved our full year target for 2021.
Technology is a big driver for us, and our technology agenda has a three-part focus.
That's reduce cost, improve execution and improve the customer experience.
We believe our actions to improve client borrower and investor experience are critical elements to support our growth and recapture rate objectives over the long run.
And with technology as the enabler, we can reduce cost and improve execution at the same time.
In terms of scale, we've increased our total servicing UPB about 33% versus the third quarter of 2020.
And our percentage of prime servicing is now 70% of our total servicing UPB.
In terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decrease delinquencies, both of these trends will improve our ratio of operating expenses as a percent of UPB.
We believe we have tremendous operating leverage in our servicing platform, and we're focused on increasing scale by growing our own servicing and subservicing.
Again, here, the team continues to perform very well in several areas.
Average beat of answer and call abandonment rate continued to outperform the industry average as reported by the MBA.
Our average speed of answer is just a fraction of the MBA average, and abandonment rates are roughly half the industry average.
We continue to be laser-focused on supporting borrowers who are exiting forbearance and helping them understand their options.
We believe the best path for the homeowner and the investor is to find what works within investor guidelines to keep the consumer in their home.
In this regard, we outperformed the industry as reported by the MBA, relating to the percentage of borrowers with an agency loan who exit forbearance with the reinstatement or loss mitigation solution in place.
Between September 2020 and June 2021, roughly 93% of our borrowers who exited forbearance had a reinstatement or loss mitigation plan in place, and that compares to the industry average of 83%.
And what that means is about 7% of our borrowers on forbearance have exited without a reinstatement plan or a loss mitigation solution versus over 17% for the industry.
Based on the MBA data, we're delivering 20% more loss mitigation solutions for homeowners versus the industry average.
And again, I believe this demonstrates how our servicing capabilities deliver superior performance for homeowners and investors.
NPS is up 6 points over third quarter 2020, and that's even with the impact of boarding over 280,000 loans in the third quarter onto our servicing platform and helping over 4,700 borrowers exit forbearance.
Also worth noting, Moody's and S&P upgraded our servicer quality assessment as Master servicer, along with Fitch -- and along with Fitch, all three affirmed our servicer ratings.
Some of the key strengths noted by the agencies were our reporting and remitting processes, proactive servicer oversight in master servicing, management and organization, industry experience, multiple levels of internal controls, and our diligent response to the pandemic, as well as our enterprisewide risk and compliance management framework.
We've put significant effort into diversifying our servicing revenue streams over the last two years.
Our focus has been on growing own servicing, growing our subservicing, and taking advantage of ancillary or intrinsic revenue streams in our business, Ginnie Mae EBO gains at call right opportunities.
These efforts have paid off as the percentage of our servicing revenue derived from the NRZ subservicing agreement has been reduced by more than 50%.
It's now just 17% of our revenues.
From a loan count perspective, the NRZ loans are down to 33% of the total as, compared to 54% in third quarter of last year, and the NRZ loans also comprise about two-thirds, 67% of our total nonperforming loans as of the third quarter of 2021.
EBOs and call rights continue to be an opportunity for us.
We settled our planned call rights transaction in the third quarter, involving seven deals, and we're pleased with the results.
As of the third quarter of 2021, our call rights, our owned call rights were approximately 121 deals.
And we estimate the near-term opportunity for call rights that could potentially be actionable is about 30 to 40 deals.
Market appetite for seasoned non-agency loans remain strong, and there is sustained activity from other legacy non-agency servicers.
With respect to our previously announced fourth quarter transaction, we received a request from the trustee Deutsche Bank asking us to pause the cleanup calls.
They wanted to confirm the call price, met the requirements of underlying PSAs.
We believe the call price we've calculated is consistent with the applicable PSAs in our course of conduct with Deutsche Bank and relevant third parties and with established industry practice.
We intend to work with Deutsche Bank in their analysis, including if Deutsche Bank chooses to seek input from a court of competent jurisdiction.
Meanwhile, we have agreed to pause our calls to allow that analysis to take place.
Regarding EBOs, we realized $12.3 million in EBO gains year-to-date third quarter with loans now emerging from forbearance, we expect to see an increase in EBO activity as loans are modified throughout 2022.
We believe we've built a best-in-class servicing platform for performing and special servicing with capacity for growth that can offer a compelling value proposition to existing and prospective clients.
During 2020 and 2021, we performed an end-to-end review of our platform and capabilities against what we believe are client expectations.
Based on this review, we believe our platform delivers best-practice performance levels for clients across six C's of performance.
These include competency, putting the client first, customer centricity, technology-enabled capabilities, a well-staffed bank-grade risk, and compliance model and a strong value-based culture that underpins everything we do.
We've made several investments in bar and client-facing technology to address the needs of clients and consumers and to streamline our business and improve the ability for consumer and client self-service.
We can offer swift onboarding, responsive service to our clients and consumers.
And as we covered on Pages 7 and 8, industry-leading operating performance.
We believe our operations can deliver superior total cost and service-level performance versus our peers.
And we've been rewarded for the investments we've made in our platform.
We've secured $28 billion of subservicing additions in the last 12 months.
We secured $20 billion in new awards in the third quarter, and we have a $63 billion opportunity with our top 10 prospects and a potential prospect pipeline of $200 billion and growing.
With the closing of RMS as well, we are positioned to enter the $86 billion reverse mortgage servicing market once the integration is complete.
So while these opportunities do have a longer sales cycle, I'm nonetheless very excited about the opportunity we have here.
Generally, this year, industry volume levels continue to be very robust, certainly as compared to historic levels of both forward and reverse.
We continue to deal with incredible interest rate volatility in August.
The 10-year treasury rate was trading at 117 basis points.
By quarter end, it was 153.
It's now in the high 140s.
So it's been volatile.
We are seeing non parallel interest rate movements, as well as mortgage to treasury spread compression, and discount margin volatility in reverse as well.
These risks are not covered by our hedging program, and we did feel the effects of this in the third quarter.
June will talk a little bit more about that later.
Consensus industry forecast is for rising rates and about a 28% average reduction in industry origination volumes.
This is based upon the consensus of Fannie Mae, Freddie Mac, and MBA forecast.
That said, 2022 projected volume levels are still relatively high compared to historic levels, especially in the 2018, 2019 time frame.
Reverse mortgage endorsement volume remained strong and is expected to remain strong compared to last year.
In a contracting market, we would expect some continued pressure on originations margins until capacity -- excess capacity in industry could be eliminated.
That said, margins were roughly stable in the third quarter.
With rising rates, we would expect increased servicing profitability and MSR values as payoffs and runoff -- portfolio runoff decreases.
And we also expect perhaps some M&A and bulk purchase opportunities may emerge as market participants consider exiting as the origination market contracts.
And we also expect to see the agencies buy box expand a bit with higher loan limits and support for first-time and low- to moderate-income buyers.
To address the dynamic environment, we're focused on a few straightforward strategies, prudent growth by expanding our client base, product, services, and addressable markets.
continuing to drive best-in-class operating performance to deliver superior value proposition to clients, investors, and consumers, providing a service experience that delivers on our commitments, enhancing our competitiveness through scale and low cost aggressively pursuing our subservicing opportunity pipeline, and expanding into reverse subservicing.
And lastly, continuing to be prudent in bulk purchases through MAV and M&A opportunities to increase scale and capabilities.
By now, you're familiar with our key operating objectives for 2021, and we're well on our way to achieving our targets.
In each of the five categories, we believe we've got strong momentum.
And our key operating objective framework will remain the same for 2022.
We are targeting over $100 billion in total owned servicing and subservicing additions.
We're targeting to maintain recapture rates over 30% with the long-term objective of industry best practice levels by investor type.
Continuous cost and process improvement is part of our DNA, and we're driving base cost and variable cost productivity improvement to support our competitiveness.
We're targeting roughly another 1-basis-point reduction in servicing and overhead opex as a percent of UPB from third quarter 2021 levels.
Industry-leading operation execution and delivering on our commitments to clients, borrowers, and investors is a critical component of our value proposition.
So this will continue to be a focus and emphasis for us in 2022 and beyond.
And for 2022, we're targeting about 50% growth in subservicing additions and harvesting embedded EBO and call rights income to diversify and grow our revenue.
Consistent with our operating objectives this year, we continue to target low double-digit to mid-teen after-tax operating ROEs in 2022.
We reported $37 million in adjusted pre-tax income and 32% in adjusted pre-tax ROE.
This is the eighth consecutive quarter of positive adjusted pre-tax income.
Net income in the quarter was $22 million, including $27 million in unfavorable notables, largely driven by MSR fair value changes from higher actual prepayments than modeled, Negative effects of basis risk, partially offset by higher market interest rates net of hedging.
We achieved 19% after-tax GAAP ROE exceeding our low double-digit to mid-teen guidance.
Our earnings per share was $2.35, beating analyst consensus by over two times.
On the top right bar chart, you can see that we're delivering on our growth objectives and cost leadership.
Revenue increased 38% year over year, largely due to higher servicing fees on an additional $66 billion in UPB and executing the call right transactions.
Operating expense as a percentage of average UPB was favorable year over year after absorbing cost to maintain capacity for both the new bulk volume reported in August and September, incurring temporary interim subservicing expense on MSR bulk acquisitions and as I mentioned previous quarters, carrying excess costs during foreclosure moratorium and expectation of borrower need.
Equity increased to $470 million, and book value per share increased $2 to $51 per share.
This slide demonstrates that our balanced business model is operating well with originations growth replenishing our servicing portfolio more than offsetting runoff.
The replenishment rate in the quarter was 170%.
On the left side of the slide, you can see that volume is up across all channels, approximately 77% versus the same quarter last year.
Adjusted pre-tax income was impacted by lower revaluation gains on MSR cash window and flow purchases and expected margin normalization.
You can see on the margins graph, Consumer Direct margins increased slightly versus last quarter but lower than this time last year.
Mix-adjusted correspondent lending margins were relatively flat versus last quarter.
The adjustment in the second quarter correspondent margins is attributed to gains recognized in the second quarter on certain loans that were acquired under favorable circumstances, resulting in higher than market average margins for these loans.
Adjusting for these loans, second quarter margins were consistent with the first quarter at approximately 12 basis points.
As Glen mentioned, we're growing higher-margin products, channels and services, which we believe will help deflect margin pressure as industry volume levels contract.
On the right side of the slide, you can see the results in our Servicing segment from building scale.
Third quarter total servicing UPB is $248 billion, a $62 billion increase over the third quarter of 2020.
The Subservicing plus NAV UPB, and as you know, we began subservicing NAV this quarter, doubled year over year, largely replacing the NRZ UPB decline.
NRZ UPB concentration dropped from 46% to 24% year over year.
We expect this trend to accelerate as we grow subservicing for other clients in NAV.
Servicing adjusted pre-tax income of $41 million was largely driven by higher servicing fees from higher UPB, expanding servicing revenue with approximately $23 million in call right gains, as well as cost leadership.
You saw earlier that servicing operating costs are down 3 basis points year over year, and we expect continued improvement, which I'll show you on the next slide.
This is our road map page.
We told you last quarter that we were positioned for a step function change in profitability in the second half of the year, and we delivered on this in the third quarter with GAAP earnings and 19% ROE.
This is our operating framework for 2022 assuming a stable interest rate environment and no adverse changes in market conditions or legal and regulatory environment.
The page is broken down by our operating objectives in the origination, servicing, and corporate segments.
I'll provide a few highlights, but please let me know if any of you want to review in more detail separately, and I'd be happy to.
We reflect the full quarterly impact from the bulk transactions closed in June we talked about last quarter.
flow MSR volume was redirected to MAV in the third quarter, and we continue to grow performing subservicing, which results in a mix shift to higher-margin consumer direct and reverse channels.
We expect EBO, call rights, and other revenue diversification in the range of $20 million to $25 million, and the segments continue to achieve productivity targets.
A couple of comments just to wrap up before questions.
We had a great quarter, delivered really strong financial performance.
I'm proud of how the team is executing and we're excited about the opportunities ahead.
We're demonstrating a solid track record of delivering on our operational and financial commitments and continued development of our balanced and diversified business model.
We're focused on a few straightforward strategies to navigate this dynamic market environment, prudent growth by expanding client base product services to expand addressable markets.
superior value proposition to clients, investors, and consumers through best-in-class operating performance, providing a service experience that delivers on our commitments and enhancing our competitiveness through scale and low cost.
I'm proud of what our team accomplished in the third quarter and very appreciative of all their efforts.
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Chosen response:
ocwen financial q3 earnings per share $2.35.
compname says subservicing sales pipeline grew to more than $200 billion in quarter.
q3 earnings per share $2.35.