Prompt:
Human: We refer to certain of these risks in our SEC filings.
Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Taryn Fielder, Senior Vice President and General Counsel; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research.
I hope you and your families are keeping safe and well.
Last evening, we released our fourth quarter earnings results, which rounded out a year, dedicated to stabilizing our operating fundamentals and maintaining and preserving future growth drivers against the backdrop of one of the most challenging operating environments in recent history.
With the vaccine roll-out that commenced toward the end of last year, we are seeing signs of increased activity across both our multifamily and commercial portfolios.
For multifamily, net applications were up 30% year-over-year in January for our urban properties, and year-to-date trends already reflect improvement in occupancy as we head into the spring leasing season.
We are focused on growing occupancy to begin reducing concessions and increasing rents.
Currently, multifamily occupancy is over 95%, excluding our two rent-controlled properties where we are not emphasizing occupancy gains as they offer limited rent growth potential in the current environment.
Multifamily credit performance continues to remain very strong at both our urban and suburban properties and has consistently outperformed the national average by a wide margin over the past year.
While multifamily lease rates declined 3.6% and 5.7% on a gross and effective blended basis during the fourth quarter, we believe that December represented the height of rental rate pressure as lease rate changes improved in January on a month-over-month basis and concession declined.
Furthermore, new and renewal lease executions with commencement dates in February and March indicate continued improvement and effective lease rate growth.
Our renewal rates were strong during the fourth quarter and that strength has continued into 2021.
Both urban and suburban renewal lease rate growth increased by 90 basis points during the fourth quarter to 1.7% and 3.1% respectively, and those renewal rate increases remained stable through January.
The continued pricing power that we are experiencing at our suburban assets, combined with the ability to influence lease terms with concessions, has allowed us to roll more leases into future spring and summer lease maturities at our newest multifamily assets.
As a result of the strategic management of our lease expiration schedule, only 20% of our leases expired during the fourth quarter and only 17% expire in the first quarter.
We think December marked the low point for pricing given the improving year-to-date trends that we are seeing.
We believe the vaccine-led recovery will lead to an inflection in 2021 heading into 2022.
However, it is too early to know the precise timing and extent of this benefit in 2021.
Approximately two-thirds of our multifamily leases expire in the stronger spring and summer months, and we anticipate that these leases will benefit from an increased number of vaccinations.
In the meantime, we plan to continue to focus on building occupancy and maximizing our retention rates, which continue to outperform our region.
Moving onto commercial, our credit performance continues to hold up very well as Steve will discuss in greater detail.
And we expect that the vast majority of our commercial credit losses are behind us.
Our forecast indicates that commercial occupancy could increase by nearly 4% by year-end although there is still too much uncertainty to accurately forecast occupancy gains over the course of the year.
However, our outlook is improving, and we are seeing signs that tenant decision-making is accelerating.
Leasing activity picked up significantly in January and active long-term renewal discussions with significant tenants are progressing well.
For example, in January, we've received the signed LOI from Sunrise Senior Living to renew their space at Silverline, which currently represents approximately 1.5% of office revenue.
We also have signed LOIs with B. Riley and then an accredited third-party at Arlington Tower.
B. Riley has a termination option in December 2022 and will exercise this option on only one of its three floors, which allow the third-party to enter into a sublease for this entire floor through 2022 and then, enter into a direct lease with us through 2029.
B. Riley will extend the balance of their premises through 2026.
Additionally, in January, we signed a 45,000 square foot five-year lease renewal with Giant Food that at Takoma Park, which represents our second largest retail tenant and over 6% of other rental income.
We also signed a 15,000 square foot 10-year lease renewal with our grocery-anchored at Montrose Shopping Center.
These two lease renewals represent approximately 10% of our retail rental income.
Heading into the recovery, our office portfolio offers substantial growth potential given that much of the available space is high-quality, move-in ready and located in our best assets.
We have a weighted average lease term of approximately five years, limited near-term lease expirations, and our price points and floor layouts are well positioned for our market.
The average tenant size in our market and the space requirement that seizes the most volume is about 4,000 to 6,000 square feet, which is both our medium tenant size and the tenant size with the highest demand in the current environment.
We have zero exposure to co-working operators, no co-working tenants and no single-tenant risk.
We continue to see good traction with Space Plus, which is our proprietary flexible office program that is managed in-house with spaces strategically located in our portfolio.
Space Plus represents approximately 3% of our office portfolio and is very well positioned once decision-making picks up.
Space Plus is move-in ready space that is private, not co-working space that allows tenants to control the health and safety of their environment and it offers more flexibility than traditional leases.
Additionally, Space Plus offers premium pricing compared to traditional leases and on average, has much longer terms than co-working providers achieve allowing us to participate in the increasing demand for flexible office space, while preserving our weighted average lease term, and thus our opportunities for future portfolio transformation.
While uncertainty about the timing and pace of reopening remains, the resilience of our region provides relative stability compared to other major metropolitan areas.
Since the onset of the pandemic, the Washington Metro has benefited from fewer job losses than other major metropolitan areas and has already gained back roughly 180,000 jobs or 56% of the jobs lost from February to May.
Additionally, those job losses have been largely contained to non-office-using sectors as office-using sector employment in the Washington Metro market declined only 2% year-over-year in 2020 according to BLS data.
As we continued down the path toward a vaccine-driven recovery, our region has several unique catalysts to accelerate the rebound in demand.
The growing, high-tech labor pool, federal investments in cloud, cyber and artificial intelligence as well as affordable office rents continue to drive information sector leasing activity in Northern Virginia.
Amazon continues to expand their regional office footprint and remains on pace with HQ2 hiring.
Over the course of 2020, the tech sector contributed 36% of total leasing volume and more than 800,000 square feet of occupancy growth in Northern Virginia according to CBRE.
Tech-driven leasing demand drove positive absorption for the sector in the fourth quarter and that momentum has continued into January with the announcement of Microsoft's new 180,000 square foot sales headquarters in Rosslyn, next door to Arlington Tower and strategically located at the nexus of four bridges, five major road networks and three metro lines and offers easy access to the Pentagon and Downtown DC.
Government contract awards should remain at record highs in 2021 and the cloud market alone is forecasted to grow 9% to 10% annually over the next three years according to JLL.
Lot of Virginia's diversification over the past decade, blending government contracting with direct federal leasing, technology sector growth, investments in higher education, and medicine have set it up for a quicker-than-average office market recovery in 2021 and beyond according to Newmark.
With the arrival of our newly aligned administration, the Washington Metro market is positioned to benefit from a surge in activity.
Historically, alignment between the executive and legislative branches has resulted in a higher number of legislative bills passed with increased lobbying and legal presence in DC to influence, write and then implement legislation resulting in higher absorption in the DC office market.
A historical correlation to office absorption in years with aligned [Phonetic] branches of the government is very strong.
Additionally, the election should have a positive effect on our local partner market and may even accelerate a shift back into the city for renters.
Data analyzed by CBRE over the past six Presidential elections indicates that on average DC Metro rent growth was more than double the US average during the six months subsequent to each election.
Furthermore, market-level data indicates that urban submarkets, which have underperformed suburban areas during this downturn, will likely benefit the most from the boost of activity associated with the Presidential election.
Again these are catalysts historically unique to the Washington Metro area as opposed to other gateway metropolitan markets.
It has been an eventful and unexpected year and alongside the challenges that we have successfully navigated, we continue to make progress on derisking and improving our portfolio.
This pandemic has reaffirmed our commitment to and the direction of our capital allocation strategy as part of the WashREIT transformation.
Following our fourth quarter office asset sales and including stabilized income from Trove, multifamily comprises 53% of our NOI, while office and retail comprise 41% and 6% respectively.
I'll start off today by reviewing the balance sheet before discussing our fourth quarter and full-year financial performance and future outlook.
In the midst of the uncertainty that dominated the capital markets during 2020, we took steps to strengthen our balance sheet and increase our operational flexibility, which has put us in a stronger position as we head toward the recovery phase of the pandemic.
First, we made sure that we had ample liquidity at the onset of the pandemic by entering into a $150 million one-year term loan with extension rights.
Second, we closed and funded in December a $350 million 10-year Green Bond at 3.44%, and we used the proceeds to pay off the new $150 million term loan and our other $150 million term loan that was scheduled to expire in March of 2021.
These actions address all of our debt maturities through the fourth quarter of 2022 and turned out our maturity ladder.
Third, we fully unencumbered the balance sheet, allowing us optimal flexibility as we continue to allocate capital to further multifamily growth.
Finally, we increased our balance sheet flexibility heading into 2021 with our strategic office asset sales and issued some equity through the ATM program to be ready to continue our capital allocation when visibility into the recovery is more clear.
In that regard, at year-end, we only had $42 million outstanding on our fully available $700 million line of credit, underscoring that we increased our liquidity further during the pandemic.
All of our covenant ratios remained strong, and we maintained our Baa2 and BBB flat investment-grade ratings with Moody's and S&P.
Now, I'll turn to our cash collection performance.
Our multifamily collections continue to be excellent trucking well above national averages.
We collected 99% of cash and contractual rents during the fourth quarter, and our rent collections through January are in line with our quarterly trend.
We've offered deferred payment programs to residents who've been financially impacted by the pandemic and only a very small amount, about $15,000 of deferred multifamily rent remains outstanding.
Our office and retail collections for the fourth quarter improved sequentially, continuing the trend of steady quarterly improvement since the beginning of the pandemic.
We collected 99% of cash rents from office rents -- from office tenants during the fourth quarter and over 99% of contractual rents, which excludes rent that has been deferred.
We deferred rent associated with office tenants and that amount was $1 million as of January 31.
And we expect to collect approximately 75% of that rent that was deferred by year-end with the balance thereafter.
We collected 94% of retail cash rents in the fourth quarter and excluding deferred rent, our collection rate was approximately 97%.
Net deferred rent associated with retail tenants was $1 million as of January 31, 2021 and we expect to collect 40% of that rent at year-end.
Overall, we've only deferred a small portion of rent and the expected cumulative cash NOI impact is less than $0.01 per share through year-end 2021.
Now turning to our financial performance.
Net loss for 2020 was $15.7 million or $0.20 per diluted share, compared to net income of $383.6 million or $4.75 per diluted share in the prior year.
The largest decrease is primarily due to the net gains on asset sales that were executed during 2019 compared to small losses recorded on sales in 2020.
Core FFO of $1.45 per diluted share for full-year 2020 was in line with the midpoint of our guidance range.
On a year-over-year basis, core FFO per share declined by $0.26 due to the strategic transactions completed during 2019 as well as the impact of the pandemic on leasing activity, parking income and credit losses.
Overall, same NOI declined 5.4% year-over-year on a GAAP basis and 4.9% on a cash basis for the full-year 2020.
Multifamily same-store NOI declined 0.9% and 1% on a GAAP and cash basis for the year and 7.2% and 7.3% on a GAAP and cash basis for the fourth quarter.
The full-year and fourth quarter declines were primarily driven by the year-over-year new lease rate declines at our urban assets, which comprise 100% of our same-store portfolio during 2020.
The impact of lease rate declines has an outsized impact on our same-store results during the fourth quarter as the impact of urban flight [Phonetic] on overall demand levels had a greater impact on lease rates during the winter months that were weaker.
Our suburban properties where lease rate performance has been the best will be included in the same-store results in 2021.
During the fourth quarter, we focused on maintaining occupancy and ended at 94.3%, excluding Trove.
Office same-store NOI declined 7.1% and 6.4% on a GAAP and cash basis for the year and 12.7% on a GAAP and cash basis for the fourth quarter.
The full Year and fourth quarter declines were primarily driven by lower parking income, no move-outs and increased credit losses reflected in the write-off of two isolated and specific receivables and a more significant lease intangibles related to COVID-19.
Same-store GAAP NOI decreased for our remaining retail centers, which we report as other, by $2.1 million and $1.8 million on a GAAP and cash basis for the year and $0.7 million on a GAAP and cash basis for the fourth quarter.
The full year and fourth quarter declines were primarily driven by credit losses related to COVID-19, which increased in the fourth quarter primarily due to the write-off of intangibles related to two leases.
Overall, commercial credit losses reduced our core FFO by approximately $0.02 per share this quarter, which is higher than the third quarter impact and in line with the second quarter.
However, the sequential increase this quarter was primarily driven by the write-off of intangibles related to the aforementioned leases, which are not indicative of change in the credit performance of our overall portfolio, which remains very strong and stable.
Over 60% of the credit losses related to these leases were non-cash straight-line rent write-offs as our cash losses were relatively flat on a sequential basis.
We believe that we've addressed the credit risks that are apparent at this point in time.
And we anticipate steady improvement in credit performance over the coming year.
Turning to leasing activity for the fourth quarter and full year, we signed approximately 9,000 square feet of new office leases and 22,000 square feet of office renewals in the fourth quarter.
Office rental rates declined 5% on a GAAP and 9% on a cash basis for new office leases, but increased 22% on a GAAP basis and 8% on a cash basis for office renewals.
More importantly, in December, the exchange of proposals and the negotiation of lease renewals picked up substantially and that momentum has carried into January.
Earlier, Paul gave color on two of our largest renewals and extensions at Silverline Center and Arlington Tower, for example.
Retail signed approximately 8,000 square feet of new leases and 3,000 square feet of renewals during the quarter and achieved rental rate increases of 13% on a GAAP basis for new retail leases and 3% on a GAAP basis for retail renewals.
And as Paul referenced, we signed approximately 60,000 square feet of retail leases, representing 10% of our retail portfolio revenues since year-end.
Now turning to our outlook.
With the development and roll-out of vaccine programs and our growth prospects heading into 2021 have improved, but the timing of when we will reach, an inflection point is still unknown.
Therefore, the extent that vaccine roll-outs will offset the pandemic in 2021 prior to the inflection is uncertain.
We do, however, believe we will see rapid improvement once we get to that point and then, it will carry over into 2022 given that the embedded growth drivers that we had prior to the pandemic are still intact.
While we believe the most disruptive part of the pandemic is behind us, the timing and pace of the economy reopening still remains uncertain.
And we're not ready to forecast with a sufficient degree of accuracy, the timing and extent of the recovery over the course of the full year.
Just close to quarter-end, we have enough visibility to provide FFO guidance for the first quarter.
However, we do not have enough visibility to provide FFO guidance for the full year.
We are, however, providing full-year guidance ranges for the financial performance metrics that we believe we are able to forecast with a reasonable degree of accuracy.
While we're not calling the timing of and therefore, the full impact of the pandemic prior to the anticipated inflection point, we will discuss the areas of our portfolio that we would expect to be the most responsive and to offer the most upside growth potential once the economy resumes.
Starting with multifamily, total operating portfolio occupancy ended the year at 94.3%, which is in line with our expectations and represents a relatively stable trend since the end of the second quarter.
On a positive note, as Paul mentioned, we've gained occupancy since year-end and leading indicators point toward steady improvement in occupancy as we head into the strong leasing season.
We've increased occupancy to slightly over 95%, excluding our two rent-controlled assets, and we are seeing effective lease rates trending in the right direction.
Additionally, net application volumes have increased significantly on a year-over-year basis for urban properties.
Overall, we have previously expected significant multifamily growth in 2020 and that growth is likely now going to be deferred until the economic recovery led by the greater vaccination takes hold.
While we do expect the seasonal lift in the second quarter, we expect the broader inflections incur at some point in 2021 heading into 2022.
It's important to have a greater impact on 2022.
We have a five-year pipeline of value-add renovations ready to resume once conditions improve.
And we still expect future NOI growth in the Trove, which I'll cover next.
In terms of our renovation pipeline, we're constantly evaluating the health of each of our submarkets for rent growth and renovation potential, and we are encouraged by the metrics that we're seeing, especially in our newly acquired suburban portfolio.
Certain submarkets in the metro area are seeing the rent gaps between Class A and Class B rents widening, which is an early indicator of renovation potential, while other submarkets continue to see rent gaps tightening.
We are monitoring these trends, and we will resume renovations when the sub-market fundamentals allow for rent increases to deliver the appropriate ROI and we know that capital allocation is accretive.
Trove delivered its final phase in the fourth quarter, and leasing momentum continues to increase.
While lease-up has just begun when social distancing measures drew on-site touring to a halt in April, we continue to make substantial progress on lease-up and have maintained the monthly lease-up rate that is above long-term regional average against an extremely challenging backdrop.
We reached breakeven in December and remain on track to reach stabilization in early 2022.
We expect Trove to add $100,000 of income in the first quarter, ramping up each quarter to approximately $1 billion by the fourth quarter of 2021 with significantly greater growth in 2022 over 2021 levels.
Now moving onto commercial.
As expected, occupancy remained relatively flat through the year-end.
And while we only have a small amount, approximately 20,000 square feet of signed new leases that have not yet rent commenced and approximately 20,000 square feet of signed LOIs for new leases that are expected to rent commence during 2021, we have minimal lease expirations during 2021.
Our 2021 office lease expirations represent less than 3% of our overall revenue.
And we believe that our renewals likely over go [Phonetic] or we are under negotiation for renewal for over 60% of that space.
We do not have enough visibility on the timing of the inflection point for new office leasing, but it will be driven by combination of widespread vaccination roll-out, schools reopening and the general community returning to more normalized activities.
When that occurs, it will impact the timing of new lease commencements.
We have a forecast that can result an occupancy growth of up to 4%, but that forecast is at risk if new leasing is delayed.
For example, that forecast includes a little over $3 million of new leasing revenue in the fourth quarter.
That would be at risk if the infection does not happen sooner.
So we're not ready to provide a guidance range yet without more visibility.
Following the two retail renewals, which were executed in January and which represent 10% of our retail NOI, we have less than 3% of retail revenue expiring in 2021.
While we are seeing recent signs, I've been experiencing increased activity across our office portfolio.
One of the most challenging calls for us to make is when sentiment will return and decision-making will pick up to even higher levels again and when those additional lease commencements will begin.
With that said, we believe that we are positioned well once activity improves.
And we expect our office portfolio to be highly responsive to the economy reopening.
The majority of our vacancy is in high-quality space, some of which is in move-in ready status.
Nearly 60% of our current vacancy in Northern Virginia where job growth and absorption rates were the strongest and where we are seeing the most touring and leasing activity.
Parking revenue improved slightly over the course of 2020, driven by an increase in transient parking, but remains below normalized levels.
Compared to other major metropolitan areas, our parking coverage is higher, which allows more of our tenants to choose to drive instead of taking public transportation.
Our parking garages' capacity can serve over 50% of our building population prior to the pandemic on average, and we still currently have at least 50% parking capacity available, which provides an option for companies that want to encourage employees to return to the office before sentiment improves toward public transportation.
We are guiding to a core FFO per share range of $0.29 to $0.32 per share for the first quarter.
We expect multifamily NOI to range from $20.25 million to $20.75 million, office NOI to range from $17.75 million to $18.5 million and other NOI of approximately $3 million.
G&A is projected to range from $6 million to $6.25 million; interest expense is expected to range from $10 million to $10.25 million; and development expenditures are expected to range from $5 million to $7.5 million.
We expect NOI to bottom in the first quarter, driven primarily by our year-end asset sales.
Following the first quarter and absent any major setbacks through the current gradual pace of reopening, we expect sequential growth throughout the year to be driven by the lease-up of the Trove, the benefit of the more favorable multifamily leasing seasons coming off in the winter months, the phased resumption of unit renovations and commercial rent commencements.
Therefore, we expect our full-year results for 2021 to be higher than the first quarter annualized results.
Since our last earnings call, we sold two office assets and issued approximately 2 million shares through our ATM program at an average price of $23.86 per share to improve our balance sheet and position us to further strengthen our capital allocation once visibility aligns with opportunity to increase multifamily.
Currently, we are not planning on reinvesting those proceeds in the near term.
Thus we estimate at this time that these two initiatives, net of their interest impact, will further strengthen our balance sheet and lower full-year 2021 core FFO by approximately $0.09 per share.
For the full year, we expect G&A to range from $22.25 million to $23.25 million and interest expense to range from approximately $41.5 million to $42.5 million.
These ranges do not assume any acquisitions are completed during the year.
Additionally, assuming that leasing activity and utilization continues to increase and we achieve occupancy growth by year-end, we expect commercial operating expenses to increase by approximately $1 million by the fourth quarter from the first quarter expected range of $11.75 million to $12.25 million.
We believe that during '21, the vaccine distribution should create a positive recovery inflection point.
And from that point forward, we should see improvement with more to follow in 2022.
During what was a challenging and unexpected year, we supported and protected our residents and tenants, stabilized our operating fundamentals, strengthened our balance sheet and preserved long-term growth opportunities.
While the timing of when we will reach an inflection remains uncertain, we believe that it will happen at some time in the second half of 2021 and that we are positioned for rapid improvement once we reach that point.
Our region has several unique catalysts to accelerate the rebound in demand, including a strong economy and favorable demographics.
Historically, we have seen Washington office absorption increase significantly when the White House and both branches of Congress are aligned with one party correlating with increased legislation, lobbying and law implementation.
That is a promising opportunities that we will be monitoring.
We also expect the apartment market in the region to receive a relative boost compared to other markets over the six months based on historical patterns following Presidential elections, which should coincide with our strongest seasonal leasing months.
Long-term, our research indicates that we should expect sustained growth in Northern Virginia, driven by government contracting, technology sector growth and investments in higher education.
While we certainly have not emerged from the pandemic at this point, we are seeing signs of our multifamily occupancy strengthening, concessions starting to decline and improvement in effective lease rates, all of which are positive trends heading into our stronger, seasonal leasing months.
 Assistant:

Chosen response: qtrly nareit ffo was $26.7 million, or $0.32 per diluted share.


Prompt:
Human: Although, we believe these statements reflect our best estimates and all available information, we cannot make any assurances that these statements will materialize, and actual results may different significantly from our expectations.
The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after the today's call.
Additionally, we will refer to certain non-GAAP financial measures.
These measures should not be considered replacements for and should be read together with our GAAP results.
We're extremely proud to deliver yet another quarter of outperformance with comps of 16.9%, building to an accelerated two-year stack of 41.3% and operating margin expansion of 60 basis points.
These results are a function of both the advantages of our distinctive positioning in the market and our successful execution against our long-term growth strategy.
Furthermore, our performance demonstrates that we continue to take share in a fractured market and deliver high-quality, sustainable earnings.
As a result, we are raising our full year outlook to reflect revenue growth of 22% to 23% and operating margins of 16.9% to 17.1%.
Customers are clearly responding to our products and channel strategies, and we expect to drive an outstanding finish to the year and beyond.
On the macro front, the industry remains large and fragmented, with more than half of its sales generated from smaller brick-and-mortar retailers.
We are one of the strongest market players and have incredible opportunity to capture more of an almost $1 trillion market opportunity.
We are at a pivotal point of change, both in the way we live and work, and we will intensely focus on our unique ability to capitalize on this change and, in turn, capture market share.
The housing market continues to hold strong with purchases of larger first and second homes.
Additionally, hybrid work arrangements continue to gain traction as a permanent work model.
Both of these trends result in a stronger need and desire to outfit the home for working, entertaining, and cooking.
In addition, another large point of disruption is the shift of the consumers to make purchases online.
Certain factors continue to bolster the shift in behavior, including the lasting impact of the stay-at-home dynamics of the pandemic and the entrance of the millennial generation into their home formation years, a customer segment who naturally gravitates toward digital purchasing.
In an industry occupied by market players who have not yet made significant investment in their e-commerce capabilities and pure e-commerce players without the service element of our retail business, we believe we are uniquely positioned to benefit from this trend as a digital first, but not digital-only company.
Our incredible store shopping experience satisfies our cross-channel customers who shop both online and in-store.
Our customers continue to place importance on and in many instances, demands the prioritization of sustainability.
In fact, almost 70% of consumers today want to support brands that are purpose-driven and doing good in the world we share.
Our company is committed to being a value-led, sustainable company and is proud to be a leader in the home furnishing industry.
In short, the fragmented industry, the strong housing market, the shift of the consumer online, and the consumer demand for sustainability provide specific unique and sizable opportunities for our company to continue to grow.
And these macro trends are a perfect fit with our key differentiators.
Our in-house design capabilities, along with our depth ability to value engineer our products, allow us to offer exclusive, relevant, and high-quality products.
Our channel strategy provides a competitive edge in scaling the business into the future compared to both the retail and marketplace dominant players.
And of course, our values, which are deeply rooted in sustainability, diversity, equity, and inclusion, are embedded in our products and central in our actions.
These principles have been and will continue to be fundamental and nonnegotiable to the customers and communities we serve.
This, combined with our growth strategies, not only provide for sizable opportunities to grow our core businesses, but also to drive momentum in reaching new customers, geographies, and industries.
This expansion and diversification of our customer base present many exciting opportunities to deliver solutions for underserved spaces and places, from B2B which brings an exciting new customer profile, to our global business which drives expansion across new geographies, to our cross-brand and marketplace opportunities which expands the reach of our current bank and to the expansion of Williams-Sonoma Home, which attends to an underserved, high-end luxury market and has massive future potential for scaling.
We have, in fact, many opportunities to drive our business forward into the next chapter of growth.
Simply put, it's these macro shifts, combined with our key differentiators and our long-term growth prospects that result in us strongly believing in our ability to continue to take market share and deliver earnings well into the future.
Before we talk about Q3, let's take a minute to review the supply chain, which I know is top of mind for all.
It is no surprise that we have been intensely focused on the supply chain bottlenecks around the world.
Like all companies, we are not immune to the ripple effect from these short-term and long-term delays.
I want to share with you our status and the extraordinary accomplishments of the team.
Our upholstery lead times continue to improve and are industry leading as a result of our in-house domestic capabilities.
Our immediate and decisive responsiveness, our strong long-term vendor relationships and our scale have all minimized production and delivery delays relative to our competition.
And as a result, approximately 85% of our holiday receipts have already been received.
And finally, when we have delays, customer service is our priority, which has resulted in declines in escalations, cancellations, and calls into the care center.
All that said, I do want to highlight some important challenges we are facing as a result of this supply chain disruption.
First, as you know, we sourced a sizable amount of inventory out of Vietnam, which was recently shut down for three months.
This country has since reopened but is experiencing significant backlog across factories as they ramp up.
As a result, we are experiencing some inventory delays, particularly in our children's home furnishings businesses.
Second, given the ongoing strong demand we are seeing across our business and the impact of the Vietnam delays, we do not expect full recovery of our inventory levels until the middle of 2022.
Now let's turn to the results of the third quarter, which clearly demonstrates the strength of our business and our ability to execute with all brands outperforming again this quarter.
West Elm delivered a 22.5% comp, with all categories driving strong growth.
The upholstery business was very strong, and customers responded well to new products, including best sellers in bedroom, dining, and occasional categories.
Additionally, new categories such as Bass, Kids and Kitchens, also contributed to incremental growth.
Pottery Barn delivered another high-performance quarter, with a comp of 15.9%, driven by strong growth in all product categories, including our seasonal decorating business.
In addition, we saw strength across our core lifestyle furniture category, our design services, and our furniture advantage growth initiatives such as apartment and our curated marketplace assortments.
Pottery Barn Kids and Teens grew with a comp of 16.9%.
The demand for our GREENGUARD Gold-certified furniture remains strong, emphasizing the importance of both our proprietary design aesthetic and our commitment to sustainability in our customers' buying decisions.
Our baby business continues to accelerate as our customers expand their families and the response to our holiday and gifting offerings was strong with Halloween products driving record results.
Both our exclusive products and WS branded products continued to grow, and we saw strength in key entertaining items.
Operationally, an intensified focus in our key vendor partnerships has allowed us to increase inventory positions in high-demand categories, despite a supply chain-constrained environment.
And we believe the improvements made to our online and store experience yield momentum in the quarter.
Finally, last week, the brand launched a new recipe app and a reserve membership program, both of which provide a new way for our customers to engage with the brand while supporting our ongoing strategic initiative to develop and deploy content distribution.
Our Williams-Sonoma Home business is also accelerating as a result of our strategy to reposition the brand as a premium online furniture destination.
Pottery Barn, we're excited to share that our B2B growth initiative continues to produce record performance with our largest quarter ever, generating over $200 million of sales, nearly double that of last year.
Significant accomplishments of the business include an increase of 44% in new clients over last year, an acceleration of our contract grade lineup as businesses reopen and growth and diversification in our large project pipeline.
The business is also building across industries, capturing additional market share.
This growth initiative continues to outperform, and we see significant opportunity for this business to contribute long term.
In our cross-brand global business, we are focused on expansion, but through a disciplined capital-light brand-enhancing franchise model.
This quarter, we opened our first franchise store in India and rolled out e-commerce capabilities across that country to great success.
As we look forward, we see additional opportunities to lead in digital around the world.
Additionally, our initiatives to promote selling across our brands continue to yield results.
Cross-selling metrics, including total customers and percent of total of customers shopping across brands, are at record levels.
Not surprisingly, the spend of a cross-brand customer is a multiple of that, a single brand shopper, and increasing our share of spend with these customers will have a significant impact on incremental volume for the long term.
We are excited about the many initiatives we have in place to capture this opportunity.
Also in this quarter, we launched our new cross-brand credit card program, where customers can apply for credit, purchase, and earn rewards any of our brands.
This new initiative complements our existing loyalty program for all other tenders.
These two tiers of loyalty programs help us acquire and retain customers irrespective of their method of payment.
The advantage of our loyalty program is twofold.
First, as we previously shared, the multi-brand customers were two to three times more than the single brand customer.
We know we have an opportunity to increase our share of wallet with these customers.
And with our portfolio of complementary brands, this is a tremendous competitive advantage, few, if any, have in our industry.
Second, our loyalty program dramatically enhances the richness of our first-party data.
With almost 70% of our volume derived from e-commerce, we understand the importance of first-party data in the cookie less future that is rapidly approaching.
The loyalty program, along with hundreds of other attributes, in our in-house file is consolidated across our brands and channels, which allows us the ability to aggregate browsing behavior, transactions, demographics, channel preferences, and many other attributes.
This rich first-party data, along with our own in-house advertising expertise, allows us to be prepared and equipped as privacy rules evolve across the digital space.
And finally, I'd like to spend a minute on our impact initiatives.
We are proud to announce that in the third quarter, we raised minimum wages again to at least $15 an hour for all of our employees.
Additionally, we also announced new goals to both expand our purchase of next ethically handcrafted products to 50 million and to nearly double our investments in fair trade certified products to 10 million by 2025.
As the first home furnishings retailer to set significant ESG goals, we continue to lead the industry.
These actions not only positively impact people and communities that make source and distribute our products but also deliver value to our stakeholders, customers, vendors, shareholders, and our communities.
And our unwavering commitment to values is gaining further recognition.
For example, our Pottery Barn renewed program was included in Fast Company's 2021 Innovation By Design Awards.
We are rated top score about the Sustainability Furnishings Council for the fourth year running.
And our MSCI ESG rating was upgraded to AA, driven by our strong commitment to ethical production and our newly announced climate goals, which further distinguishes our company as a leader in sustainability.
As we enter the fourth quarter, we are seeing strong sales and margins continuing.
We are thrilled with our customers' response to our holiday and gifting assortment, and we are ready to drive an outstanding finish to the year.
Our teams are prepared to fulfill record orders leveraging our new technological capabilities and maximizing our digital-first omni advantage to meet the outsized demand we are seeing from our customers.
In summary, with our strong results to date, our winning positioning in the industry and our outperforming growth strategies, we are more confident than ever in the long-term strength of our business into fiscal 2022 and beyond.
We continue to be confident in our outlook of at least mid- to high single-digit comps, accelerating our revenues to 10 billion by 2024, with operating margins at least that of fiscal 2021.
Their talent, energy, and commitment underscore all of the success that we have had.
And with that, I'd like to wish you all a happy holiday season.
We are pleased to report another quarter of record revenues and profitability.
It is clear that our high-quality products and value proposition are resonating with our customers.
Our growth strategies are outperforming, and our operating model is positioned well to continue to deliver revenue growth and profitability into the future.
Our unique operating model has proven to be a competitive advantage and difficult to replicate.
95% of our products are proprietary or exclusive to our brands.
We have a vertically integrated digital first but not digital-only operating model that is nearly 70% e-commerce in an industry that primarily consists of brick-and-mortar or pure e-commerce players, and we are a sustainable and values-led company.
These advantages, along with the macro trends that favor our business, a strong housing market, the permanent adoption of hybrid work, a shift to online purchasing and the demand from customers for values and sustainability in their products are clearly driving our results and will fuel our growth and profitability for the long term.
Turning to our third quarter results in more detail.
Net revenues grew 16% to $2.048 billion, with comparable brand revenue growth of 16.9%, with comps accelerating to 41.3% on a two-year basis.
This strong performance was broad-based across all brands and both channels.
In fact, against tougher compares, our e-commerce business accelerated to over 67% of our total revenues from the second quarter and was our highest two-year comp ever at 64%.
By brand, West Elm delivered a 22.5% comp, taking year-to-date revenues for the brand to over $1.5 billion.
Pottery Barn, our largest brand, drove their fifth consecutive quarter of double-digit comps with a 15.9% comp.
Pottery Barn Kids and Teen grew at a comp of 16.9% and had their highest two-year comp ever.
Williams-Sonoma drove a 7.6% comp accelerating from the second quarter and on top of 30.4% last year.
And our emerging brands, Rejuvenation and Mark and Graham combined continue to drive significant growth at a 26.5% comp, and all brands grew nearly 40% or higher on a two-year basis.
Moving down the income statement.
Gross margin expanded 370 basis points to 43.7%.
Our selling margins drove 280 basis points of this expansion.
And relative to 2019, our selling margins are up 430 basis points, in line with our first half results, despite higher ocean freight costs incurred during the quarter.
These strong margin results reflect our pricing power from our proprietary design products and the advantage of our vertically integrated sourcing and production, which allows us to engineer our product for value and to best navigate through the various macro complexities.
We are pleased to deliver another quarter of strong top line sales and merchandise margin expansion.
Occupancy cost leverage was also a factor in our gross margin expansion, leveraging approximately 90 basis points, resulting from higher sales and low occupancy dollar growth.
Occupancy costs were approximately $183 million, up 5.1% year over year and relatively in line with our second quarter growth.
The year-over-year increase includes a one-time impact from rent true-ups and rent abatements last year, as well as the incremental impact from our new East Coast distribution center, which gives us additional capacity to support our strong customer demand.
We were pleased to see another quarter of occupancy leverage reflecting the strength of our top line and the ongoing success of our retail optimization efforts.
SG&A in the third quarter was in line with the prior quarters at 27.5% of net revenue.
Year over year, SG&A deleveraged 320 basis points, driven by higher advertising spend coming off of our substantially reduced costs in 2020 and our decision to incrementally invest in advertising.
As we have said all year, given our record levels of profitability, we have been strategically and aggressively investing in high ROI advertising to drive new customer acquisition, retention, and top-line growth, which clearly is working.
We continue to see record new customer counts and strong demand, which has benefited our business to date and will continue to drive growth well into the future.
Furthermore, we view it as a competitive advantage to be in a position to increase spend today while the competition may need to pull back to offset incremental supply chain costs.
And despite this expected deleverage, we still delivered SG&A rates near historically low pre-pandemic levels and another quarter of record profitability.
Operating income grew to a record $333 million, resulting in an operating margin of 16.3%, expanding 60 basis points over last year.
This resulted in diluted earnings per share of $3.32, up 30% from last year's record third quarter of $2.56 per diluted share.
Put these results in context, we have not seen our performance weighing all year despite any shifts in the consumer wallet as the world reopens and being up against accelerating tougher year-over-year comparison.
In fact, year to date, we are tracking to a 28% comp or 41% on a two-year basis, with 400 basis points of operating margin expansion at a 16.3% operating margin and over 85% growth in earnings.
Turning to the balance sheet.
We ended the quarter with strong liquidity levels and a cash balance of almost $660 million.
The strength of our business has generated operating cash flow of almost $790 million year to date, which is approximately $60 million over last year's elevated cash flow levels.
This cash flow strength has allowed us to fund the operations of the business to invest over $140 million in capital expenditures and to return almost $790 million to our shareholders in the form of over $135 million in dividends and over $650 million in share repurchases.
These decisions reflect our confidence in the sustainability of our growth and our commitment to maximizing returns for our shareholders.
Moving down the balance sheet, merchandise inventories, which includes inventory and transit, were $1.272 billion, representing an increase of 13% over last year.
Inventory on hand and available for sale was up 3% year over year.
While that is an improvement from where we were in the second quarter, our inventory levels are still not aligned with demand and are below optimal levels.
Our back-order levels continue to be at record highs, driven by our strong demand and the supply chain disruptions that unfortunately continue to delay our order fulfillment, including the most recent delays out of Vietnam.
As Laura mentioned, our phenomenal team and their aggressive actions, combined with our scale, has enabled us to navigate through these challenges better than others.
And given our ongoing strong demand, we expect a return to more normalized inventory levels by mid-2022, with back-order levels remaining elevated into the first half of 2022.
Now let's turn to our expectations for the rest of the year and longer term.
We are raising our 2021 outlook to reflect revenue growth from high teens to low 20s to now 22% to 23%, and operating margins from 16% to 17% to now 16.9% to 17.1%.
This is our third consecutive raise this year.
Additionally, we are also reiterating our longer-term outlook of revenues accelerating to $10 billion by 2024, with operating margins at least in line with our raised fiscal year '21 levels, which implies at least a mid- to high single-digit comp with margins at least holding over the next three-plus years.
We, of course, will revisit our 2022 and longer-term outlook next quarter in more detail.
We are very confident in the fundamentals of the business and our strategies to sustain our growth into the future.
In addition to the macro trends, our key differentiators, and our successful growth initiatives, as previously mentioned, we have several other factors that give us confidence.
First, our results to date.
We saw comps accelerating even before the pandemic as a result of our growth initiatives to a tie the 10% comp in February 2020.
Our results during the pandemic continued to accelerate despite our retail stores being closed.
And our results every quarter this year have halted a two-year comp of approximately 40%, despite accelerating tougher year-over-year compares.
And we did this while pulling back on all sitewide promotions and with low levels of available inventory for sale.
Second, our proprietary products and vertically integrated sourcing and production, which provide us pricing power and the ability to optimize and engineer our products for value, drive strong merchandise margins in an environment with rising costs to competition.
Third, our operating model.
In addition to our pricing power, our operating model provides several opportunities to drive strong operating margins.
From leverage from higher sales, including the additional accretion from our growth initiatives that have a higher operating margin to an accelerating shift online, which is more profitable.
The continued occupancy leverage from the renegotiation of our lease agreements and further store closures, the various supply chain efficiencies, including automation and in-stock inventory levels, and the continued emphasis on overall strong financial discipline, holding costs below sales growth.
And finally, our liquidity.
We have maintained a very strong and disciplined balance sheet with ample cash and no debt, which provides dry powder for opportunistic investments and incremental shareholder returns.
All of this is what gives us the confidence in our short- and long-term outlook and our ability to deliver sustainable long-term growth and profitability with strong financial returns for our shareholders in 2022 and beyond.
Happy holidays are all on the call.
 Assistant:

Chosen response:
compname reports q3 non-gaap earnings per share of $3.32.
q3 non-gaap earnings per share $3.32.
sees fy revenue up 22 to 23 percent.
q3 revenues grow 16.0% with comparable brand revenue growth of 16.9%.
qtrly comparable brand revenue growth of 16.9%.
for long-term, planning for annual net revenue growth of mid-to-high single digits.


Prompt:
Human: On Slide 2 is our safe harbor statement.
These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts.
During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin and adjusted diluted EPS.
I would like to begin by saying that I'm incredibly proud of how our team members across the globe have remained steadfast in our commitment to supply the much-needed components and solutions to our customers under tough circumstances.
Our Q2 performance emphasizes the continued resolve of our talented team members, the strength of our company and the criticality of the role West plays during these unprecedented times.
We are in the business of helping our customers bring new medicines and treatments that improve the lives of patients, which could be more meaningful than at times like today.
Driven by our mission, we experienced another solid quarter reinforced by the right market-led strategy to continuously deliver value for our customers and the patients we jointly serve.
Moving to Slide 4.
The pandemic remains our priority.
Given the ever-changing situation, there's a huge sense of urgency in vaccine development.
As the market leader, our teams are working tirelessly with our customers to ensure we supply the right components and solutions to help resolve this pandemic.
The process for selecting the best high-quality packaging components for use with injectable medicines, including vaccines, is a complex one, driven by years of science, which West has pioneered.
We're helping our customers in the selection, testing and verification of components.
We're doing this in a way that prepares our customers for the future commercial scale up and launch of any successful vaccine candidates.
As we stated during our first-quarter earnings call, we have seen a high adoption rate of our fluoropolymer coated stoppers made by both West and our partner, Daikyo.
These are the industry standard for packaging-sensitive molecules with an outstanding track record of quality and reliability.
Notably, some of our customers have selected NovaPure, as they have made this decision to use the best-in-industry component to ensure the highest degree of quality and safety.
As our customers' vaccine development rapidly moves into clinical trials, the entire West team has stepped up to make certain we can supply the demand for our high-value products, as well as any immediate surge in request for therapeutics.
The organization is also preparing for the potential volume surges that could come if and when vaccines are approved for human use.
All the work over the past few years across the enterprise to drive commercial and operational excellence along with globalizing West manufacturing operations has put us in the best possible position to meet the future pandemic demand.
We are accelerating our capacity expansion to manufacture FluroTec and NovaPure components.
These investments were in our five-year plan, and we have brought them forward to address the expected increase in demand the latter part of this year and into 2021.
From our perspective, it is still too early to estimate how much volume could be generated by vaccine packaging.
However, whether it's hundreds of millions or billions of doses, our West team is prepared and ready when the time comes.
Turning to Slide 5 and our performance in the second quarter.
Our financial position remains strong.
I'm pleased to say that the growth trends we have experienced over the past several quarters have continued in the second quarter, and the outlook for the balance of the year remains positive.
We had 14% organic sales growth in the second quarter driven, again, by robust high-value product sales.
And with HVP sales growth, we have experienced strong gross and operating profit margin expansion.
This resulted in a strong adjusted earnings per share for the second quarter.
To be clear, the majority of the organic growth in the second quarter was from our base business with some incremental growth coming from COVID-19 sales related to therapeutics.
As for guidance, we believe we are well-positioned for the second half of the year.
That said, because of the strength and resiliency of our core underlying business and the incremental opportunities being presented to support our customers with COVID-19 solutions, we are raising our guidance for the remainder of the year.
I hope everyone continues to be healthy and safe during this time.
So let's review the numbers in more detail.
We'll first look at Q2 2020 revenues and profits, where we saw strong sales and earnings per share growth, led by strong revenue performance primarily in our biologics and generics market units and contract manufacturing.
I will take you through the margin growth we saw in the quarter, as well as some balance sheet takeaways.
And finally, we'll review guidance for 2020.
GAAP measures are described in Slides 13 to 17.
We recorded net sales of $527.2 million, representing organic sales growth of 14.3%.
COVID-related net revenues are estimated to have been approximately $19 million in the quarter.
These net revenues include our assessment of components associated with treatment and diagnosis of COVID-19 patients, offset by lower sales to customers, affected by lower volumes due to the pandemic and stay-at-home restrictions, such as dental, veterinary and elective procedures.
We continue to see improvement in gross profit.
We recorded $195.1 million in gross profit, $37.2 million or 23.6% above Q2 of last year.
And our gross profit margin of 37% was a 340-basis-point expansion from the same period last year.
We saw improvement in adjusted operating profit, with $106 million recorded this quarter, compared to $81.9 million in the same period last year for a 29.4% increase.
Our adjusted operating profit margin of 20.1% was a 270-basis-point increase from the same period last year.
Finally, adjusted diluted earnings per share grew 40% for Q2.
Excluding stock tax benefit of $0.09 in Q2, earnings per share grew by approximately 38%.
Moving to Slide 7.
Our proprietary product sales grew organically by 13.3% in the quarter.
High-value products, which made up more than 65% of proprietary product sales in the quarter, grew double digits and had solid momentum across all market units throughout Q2.
Looking at the performance of the market units, the biologics market unit delivered strong double-digit growth.
We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings.
The generics market unit experienced double-digit growth led by FluroTec and film-coated products sales.
Our Pharma market unit saw low single-digit growth, with sales led by high-value products and services, including Westar and FluroTec components.
And contract manufacturing had double-digit organic sales growth for the second quarter, led, once again, by sales of diagnostic and healthcare-related injection devices.
So what's driving the growth in both revenue and profit?
On Slide 8, we show the contributions to sales growth in the quarter.
Volume and mix contributed $59.4 million or 12.6 percentage points of growth, including approximately $19 million of volume driven by COVID-19-related net demand.
Sales price increases contributed $7.8 million or 1.7 percentage points of growth, and changes in foreign currency exchange rates reduced sales by $9.6 million or a reduction of 2 percentage points.
Looking at margin performance.
Slide 9 shows our consolidated gross profit margin of 37% for Q2 2020, up from 33.6% in Q2 2019.
Proprietary products' second-quarter gross profit margin of 42.8% was 330 basis points above the margin achieved in the second quarter of 2019.
The key drivers for the continued improvement in proprietary products' gross profit margin were: favorable mix of products sold, driven by high-value products; production efficiencies and sales price increases, partially offset by increased overhead costs.
Contract manufacturing second-quarter gross profit margin of 19% was 470 basis points above the margin achieved in the second quarter of 2019.
Improvement is a result of improved efficiencies and plant utilization.
There was approximately 180 to 200 basis points positive impact on margin, primarily due to a onetime engineering project work.
Our adjusted operating profit margin of 20.1% with a 270-basis-point increase from the same period last year, largely attributable to our gross profit expansion.
One point to note, we took a onetime charge of $6.3 million for asset impairment.
This is included in other operating expenses.
Now let's look at our balance sheet and review how we've done in terms of generating more cash for the business.
On Slide 10, we have listed some key cash flow metrics.
Operating cash flow was $205.2 million for the year-to-date 2020, an increase of $52.5 million, compared to the same period last year, a 34% increase.
Our year-to-date capital spending was $69.2 million, $12.1 million higher than the same period last year and in line with guidance.
Working capital of $735.4 million at June 30, 2020, was $18.3 million higher than at December 31, 2019, primarily due to an increase in inventory, mainly as a result of increasing our safety stock levels and accounts receivable due to increased sales activity.
Both DSO and DPO improved in the quarter.
Our cash balance at June 30 of $445.9 million was $6.8 million more than our December 2019 balance, primarily due to our positive operating results.
Our capital and financial resources, including overall liquidity, remained strong.
Slide 11 provides a high-level summary.
Full-year 2020 net sales guidance will be in a range of between $2.035 billion and $2.055 billion.
This includes estimated net COVID incremental revenues of $60 million.
There is an estimated headwind of $26 million based on current foreign exchange rates.
We expect organic sales growth to be approximately 12.5%.
This compares to prior guidance of $1.95 billion to $1.97 billion and growth of 8%.
We do expect growth in contract manufacturing to be less in H2 versus H1 as a result of tougher comps.
We expect our full-year 2020 reported diluted earnings per share guidance to be in a range of $4.15 to $4.25, compared to prior guidance of $3.52 to $3.62.
As Eric discussed, we are expanding our HVP manufacturing capacity at our existing sites to meet anticipated 2021 COVID-19 vaccine demand.
Capex guidance has raised to $170 million to $180 million.
This compares to previous guidance of $130 million to $140 million.
There are some key elements I want to bring your attention to as you review our guidance.
Estimated FX headwind on earnings per share has an impact of approximately $0.07 based on current foreign currency exchange rates.
The revised guidance also includes $0.16 earnings per share impact from our H1 tax benefits from stock-based compensation.
So to summarize the key takeaways for the second quarter, strong top-line growth in both proprietary and contract manufacturing, gross profit margin improvement, growth in operating profit margin, growth in adjusted diluted earnings per share and growth in operating and free cash flow.
Our long-term construct remains at approximately 6% to 8% organic sales growth and continued earnings per share expansion.
We have a rich history of leading in times of great challenge.
Our customers expect this of us, and this is what we're committed and prepared to do.
I want to emphasize that across West, we are leveraging our global manufacturing capabilities, size and scale to innovate, lead and operate with a sense of urgency to make a positive impact in healthcare and society.
Our performance continue to reaffirm that our market-led strategy is delivering unique value propositions to our customers.
Our global operations team is efficiently manufacturing and delivering products with market-leading service and quality.
And we're continuing to invest in our business with digital technology and automation across our operations to feel an even brighter future.
We remain committed to deliver value to all our stakeholders on a sustainable basis, as well as to maintain and build upon the values that make up our One West team.
On behalf of the team members at West, we continue to wish you good health in the days ahead.
Josh, we're ready to take questions.
 Assistant:

Chosen response:
sees fy 2020 sales $2.035 billion to $2.055 billion.
q2 sales $527.2 million versus refinitiv ibes estimate of $496.1 million.
raising full-year 2020 adjusted-diluted earnings per share guidance to a new range of between $4.15 and $4.25.
west pharmaceutical services - net sales guidance includes estimated full-year headwind of $26 million for 2020 based on current foreign exchange rates.


Prompt:
Human: We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in earnings materials on our website.
Excluding a special item with a net after-tax benefit of $32 million, we earned $450 million or $0.60 per diluted share.
In the third quarter, we delivered strong results across each of our businesses despite weather-related disruptions, the ongoing COVID-19 pandemic and continued supply chain challenges.
Our teams did an exceptional job navigating these headwinds, and I'm incredibly proud of their collective efforts and focus on safely operating our businesses and continuing to serve our customers.
Truly, great execution across the entire supply chain in a difficult environment, which has resulted in record earnings and cash flow in 2021.
Year-to-date, we've generated more than $3.4 billion of adjusted EBITDA and $2.4 billion of adjusted funds available for distribution.
Turning now to our third quarter business results.
I'll begin the discussion with Timberlands, on pages six through nine of our earnings slides.
Timberlands earnings increased by $20 million in the quarter, which included a $32 million gain on the previously announced sale of our North Cascades Timberlands.
Adjusted EBITDA decreased by $15 million compared to the second quarter.
In the West, adjusted EBITDA decreased by $13 million compared to the second quarter.
Western domestic log markets started the quarter in a favorable position despite weakening lumber prices and ample log supply.
Demand remains elevated as mills continue to bolster log inventories during the peak of wildfire season, but weakened somewhat in September as a number of producers experienced COVID-related disruptions and finished lumber inventories increased above normal levels.
Despite these headwinds, our third quarter domestic sales realizations were comparable to the second quarter, driven by strong domestic log prices in July and August.
Salvage operations resulting from the 2020 Oregon wildfires continued in the third quarter.
The teams have done an outstanding job in managing these salvage efforts over the last year.
To date, we've completed approximately 80% of our planned salvage harvest and expect to conclude most of this work by year-end.
As expected, during the warmer and drier months in the summer, we transitioned to higher elevation and higher cost operations.
Additionally, although we experienced very minimal wildfire damage to our timberlands, active fires and dry conditions across the region resulted in restrictions on our harvest activity in the quarter, particularly in Oregon.
As a result, our fee harvest and domestic sales volumes were modestly lower in the third quarter, and per unit log and haul costs were higher.
Turning to our export markets.
In Japan, demand for our logs remained strong in the third quarter.
Lumber imports from Europe into Japan continue to be restricted by the ongoing shortage of global shipping containers.
This dynamic is driving increased market share for our customers and robust demand for our logs.
As a result, our Japanese log sales realizations increased moderately compared to the second quarter, and sales volumes were comparable.
In China, demand for our logs remained favorable in the quarter despite seasonally lower consumption, COVID impacts to construction activity and other supply chain disruptions.
Imports of lumber and logs into China continue to be constrained by global shipping container availability as well as the ban on Australian logs.
As a result, sales realizations for our China export logs increased moderately compared to the second quarter, but were more than offset by higher ocean freight rates.
Sales volumes to China were comparable to the second quarter.
Moving to the South.
Southern timberlands adjusted EBITDA was comparable to the second quarter.
Southern sawlog and fiber markets continued to strengthen as log supply was constrained and mill inventories remain lean, resulting from ongoing wet conditions and significant weather events.
As a result, our sales realizations were slightly higher than the second quarter.
Fee harvest and sales volumes increased slightly in the third quarter, but fell below our planned activity level as a result of persistent wet weather and operational disruptions from Hurricane Ida.
Per unit log and haul costs increased slightly in the quarter as did forestry and road costs.
On the export side, we continue to see growing demand for our Southern logs.
Our export log pricing increased substantially in the third quarter, but volumes were lower than second quarter as we continue to face challenges associated with container availability and increased freight rates.
In the North, adjusted EBITDA decreased slightly compared to the second quarter.
Sales volumes were significantly higher coming out of spring breakup conditions, though sales realizations were lower due to mix.
Turning to Real Estate, Energy and Natural Resources on pages 10 and 11.
Real estate and ENR contributed $45 million to third quarter earnings and $60 million to adjusted EBITDA.
Third quarter adjusted EBITDA was $31 million lower than the second quarter due to timing of transactions, but comparable to the year ago quarter.
Similar to last year, our 2021 real estate sales activity has been heavily weighted toward the first half of the year.
Third quarter earnings more than doubled compared to the third quarter of 2020 due to the mix of properties sold.
We continue to capitalize on strong demand for HBU properties, resulting in high-value transactions with significant premiums to timber value.
Moving to Wood Products, pages 12 through 14.
Wood Products earnings and adjusted EBITDA decreased by approximately 60% compared to the prior quarter as lumber and OSB pricing declined substantially from record levels earlier in the year before stabilizing later in the quarter.
Additionally, weather events in the U.S. South, including Hurricane Ida, resulted in temporary downtime and lost production in our lumber business.
And together with COVID-related staffing disruptions, further exacerbated transportation challenges in the region.
Despite these headwinds, our teams performed well and delivered strong results.
Our EWP business established a new quarterly EBITDA record in the third quarter and the overall Wood Products segment has achieved year-to-date adjusted EBITDA of more than $2.8 billion.
Lumber markets began the third quarter with elevated home center and treater inventory levels due to softening do-it-yourself repair and remodel activity.
As a result, pricing continued its downward trajectory in July and for much of August.
The market began to strengthen later in the quarter as home centers and treaters work through excess inventories and consumer spending shifted back to do-it-yourself repair and remodel activity after Labor Day.
When combined with solid demand from new home construction and professional repair and remodel activity, each of which remain healthy throughout the third quarter.
Adjusted EBITDA for our lumber business decreased $686 million compared to the second quarter.
Our sales realizations decreased by 52% in the third quarter while the framing lumber composite pricing decreased by 61%.
Our sales volumes increased moderately in the third quarter and log costs increased slightly, primarily for Canadian logs.
The OSB market weakened significantly at the outset of the third quarter with the softening of do-it-yourself repair and remodel activity.
This dynamic drove lower sales activity and higher inventories at the home centers.
As a result, we experienced a rapid decline in pricing from the peak record prices that we reached in July.
Pricing then stabilized above the historical average in August, as demand from strong new home construction activity continued and the market faced supply constraints resulting from ongoing resin availability and transportation challenges.
This dynamic, along with late quarter improvement in do-it-yourself repair and remodel demand, drove prices gradually higher through September.
Adjusted EBITDA for our OSB business decreased by $128 million compared to the second quarter.
Our sales realizations decreased by 24% in the third quarter while the OSB composite pricing decreased by 43%.
This relative outperformance was largely a result of our higher percentage of premium OSB products.
Our sales and production volumes improved modestly in the third quarter due to less downtime for planned maintenance.
Unit manufacturing costs increased slightly, primarily for resin costs.
Engineered Wood Products adjusted EBITDA increased $23 million compared to the second quarter, a 43% improvement.
Sales realizations improved significantly across most products, and we continue to benefit from previously announced price increases for solid section and I-joist products.
This was partially offset by higher raw material costs for OSB webstock, resin and veneer.
Sales and production volumes were moderately lower for most products as a result of planned annual maintenance during the quarter.
In Distribution, adjusted EBITDA decreased by $53 million compared to the second quarter.
Despite lower sales volumes for most products and significantly lower margins resulting from the commodity price correction, our teams did a great job navigating these challenges and delivered $22 million of adjusted EBITDA in the third quarter.
I'll begin with our key financial items, which are summarized on page 16.
We generated $659 million of cash from operations in the third quarter, bringing our year-to-date total to nearly $2.7 billion, our highest year-to-date operating cash flows on record.
Adjusted funds available for distribution or adjusted FAD, for year-to-date, third quarter 2021 totaled over $2.4 billion, as highlighted on page 17.
Year-to-date, we have returned $382 million to our shareholders through the payment of our quarterly base dividend, and we will supplement the base dividend each year with an additional return of cash to achieve the targeted 75% to 80% of adjusted FAD.
For this year, we intend to achieve this entirely through a variable supplemental cash dividend.
Though in future years, we may also utilize opportunistic share repurchase for a portion of this cash return.
The supplemental dividend will normally be paid in the first quarter of each year based on prior year cash flow.
However, as a result of the record year-to-date performance, we accelerated a portion of the supplemental dividend by returning $375 million to our shareholders through our previously announced $0.50 per share interim supplemental dividend earlier this month.
We look forward to returning the remaining portion of the supplemental dividend with a significant payment in first quarter 2022.
During the third quarter, we also returned $26 million to shareholders through share repurchases.
Further, as previously announced, we authorized a new $1 billion share repurchase program.
And as always, we'll look to repurchase shares opportunistically under circumstances when we believe it will create shareholder value.
Turning to the balance sheet.
We ended the quarter with approximately $2.3 billion of cash and just under $5.3 billion of debt.
Subsequent to quarter end, we repaid our $150 million or 9% note at maturity, which brings our debt balance to $5.1 billion.
After this repayment, we have no additional maturities until 2023.
Looking forward, key outlook items for the fourth quarter are presented on page 18.
In our Timberlands business, we expect fourth quarter earnings and adjusted EBITDA will be comparable to the third quarter.
Turning to our Western Timberland operations, although domestic log inventories ended the third quarter higher than normal, takeaway of finished lumber and log demand have improved following a brief pullback in September.
We anticipate this dynamic continuing for most of the fourth quarter.
As a result, we expect our domestic sales realizations to improve from the lower levels experienced in September.
For the fourth quarter, we anticipate our average domestic sales realizations to be moderately lower than the elevated third quarter levels.
As Devin discussed, we have made great progress within our salvage operations in Oregon and expect our salvage volumes to decrease in the fourth quarter.
As a result, we expect fourth quarter fee harvest volumes to be moderately higher with lower per unit log and haul costs.
Moving to the export markets.
In Japan, log demand remains favorable.
We anticipate our fourth quarter sales realizations to be comparable to the elevated third quarter levels, partially offset by moderately lower sales volumes due to the timing of vessels.
In China, despite elevated log inventories at the ports, demand for our logs is expected to remain favorable as construction activity increases seasonally and imports of lumber and logs continue to be constrained from other countries.
We expect our fourth quarter sales volumes to be higher than the third quarter, partially offset by slightly lower sales realizations.
Elevated freight costs and labor to load ships continue to be headwinds.
In the South, weather conditions improved at the outset of the fourth quarter.
As a result, we anticipate slightly higher fee harvest volumes compared to the third quarter.
Log demand continues to be favorable as mills work to bolster lean inventories, resulting from persistent wet conditions and reduced log supply.
As a result, we anticipate slightly higher sales realizations during the fourth quarter.
We expect this will be offset by slightly higher per unit log and haul costs as well as a moderately higher forestry and road costs as a portion of our planned activities in the third quarter were deferred due to weather disruptions.
As a result of persistent wet conditions in 2021 and significant weather events in the third quarter, we now expect full year Southern fee harvest volumes to be comparable to 2020.
In the North, sales realizations are expected to be slightly lower due to mix and fee harvest volumes are also expected to be slightly lower compared to the third quarter.
Turning to our Real Estate, Energy and Natural Resources segment.
Fourth quarter earnings and adjusted EBITDA will be significantly lower than third quarter due to timing of transactions.
We continue to predict full year 2021 adjusted EBITDA will be approximately $290 million, and we now expect basis as a percentage of real estate sales to be approximately 25% to 30% for the full year.
For our Wood Products segment, new residential construction activity remains strong and demand from the repair and remodel segment continues to strengthen following the improvement in do-it-yourself activity in September.
This dynamic should continue for most of the quarter before weakening seasonally into winter.
Excluding the effect of changes in average sales realizations for lumber and oriented strand board, we expect fourth quarter earnings and adjusted EBITDA will be higher than the third quarter.
For lumber, production volumes are expected to be comparable to the third quarter.
However, our sales volumes are expected to be modestly lower, resulting from the inventory drawdown we experienced in the third quarter.
We anticipate this will be offset by slightly lower log costs and improved unit manufacturing costs.
As shown on page 19, our current and quarter-to-date realizations for lumber are slightly higher than the third quarter average.
For oriented strand board, we anticipate moderately higher sales volumes and improved unit manufacturing costs, primarily due to less downtime for planned maintenance during the fourth quarter.
We expect this will be partially offset by moderately higher fiber costs.
As shown on page 19, our current and quarter-to-date realizations for oriented strand board are significantly lower than the third quarter average, but still elevated compared to historical standards.
For engineered wood products, we expect sales realizations for solid section and I-joist products will be comparable, while realizations for plywood will be lower.
We anticipate this will be more than offset by significantly lower raw material costs, primarily for OSB webstock.
For our distribution business, we're expecting higher adjusted EBITDA in the fourth quarter, primarily due to improved commodity margins, partially offset by seasonally lower sales volumes.
I'll wrap up with a couple of additional items or comments on our total company financial items.
We now anticipate our full year outlook for capital expenditures to be slightly below our previous guidance of $460 million as a result of supply chain and contract labor constraints with $15 million to $25 million potentially at risk.
The $90 million tax refund associated with our 2018 pension contribution was approved during the second quarter.
However, we are still awaiting the refund.
We expect to receive it by the end of fourth quarter 2021.
Excluding this refund, we now anticipate our full year cash taxes will be slightly lower than tax expense.
Notwithstanding a slight decrease from the prior quarter, U.S. housing activity remained strong in the third quarter, with total housing starts and permits averaging around 1.6 million units on a seasonally adjusted basis.
Although housing starts in 2021 continue at a strong pace, the cycle time between starts and completions has extended as homebuilders continue to experience supply chain and labor availability challenges.
Despite these headwinds, our customers tell us they continue to expect strong demand for new home construction for the balance of 2021.
The latest new home sales number released earlier this week further reinforces our positive view on the current state of the housing market.
With favorable long-term demand fundamentals, including a decade of underbuilding, favorable demographics, we continue to have a bullish outlook on U.S. housing activity well into the future.
Turning to repair and remodel.
We've continued to see strength in large professional projects over the course of 2021 and expect that to continue for the balance of the year and into 2022.
And while we did see some softening in the smaller do-it-yourself segment during the summer, demand has improved significantly coming out of Labor Day, and we've continued to see strong demand from the repair and remodel segment through October.
Overall, we continue to have a favorable long-term outlook for repair and remodel activity, supported by numerous demand drivers, including an aging housing stock, rising home equity and low interest rates.
Finally, we hope you have the opportunity to participate in our virtual Investor Day on September 22, where we outlined a series of multiyear strategic growth targets, including growing our Timberlands portfolio, growing our new Natural Climate Solutions business and organically growing our lumber business.
We also announced several capital allocation actions and enhanced our ESG leadership by releasing our carbon record and announcing new greenhouse gas emission reduction targets.
Our strategy, as we outlined at Investor Day, is simple.
We intend to grow the value of our portfolio, improve our cash flows, build on our competitive advantage in the marketplace and solidify Weyerhaeuser as a premier ESG investment opportunity.
These actions will ensure that we drive superior returns for our investors, including returning meaningful amounts of cash to shareholders through a growing base dividend, a variable supplemental dividend and opportunistic share repurchases, all while continuing to invest in our businesses and maintain an appropriate capital structure.
We're excited about the future of Weyerhaeuser, and we're well positioned to capitalize on strong macro trends driving continued growth and demand for our products and new opportunities for our businesses.
We're greatly appreciative of Beth's contributions to our IR function and look forward to our next opportunity at the company.
With Beth's transition, Andy Taylor has assumed the lead role of our Investor Relations program.
Andy joined Weyerhaeuser in October of last year after an 18-year career in the energy industry, where he served in numerous leadership roles, including Investor Relations.
He's been a great addition to the Weyerhaeuser team, and we're really excited to have him taking on this new role.
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Chosen response:
q3 sales $2.3 billion.
q3 earnings per share $0.60 excluding items.
expects q4 earnings and adjusted ebitda will be comparable to q3 for timberlands.
sees q4 earnings and adjusted ebitda will be higher than q3 for wood products.
sees q4 earnings, adjusted ebitda significantly lower than q3 due to timing of transactions for real estate, energy & natural resources.