Prompt:
Human: Also joining me on the call today are Rick Muncrief, our president, and CEO; Clay Gaspar, our chief operating officer; Jeff Ritenour, our chief financial officer; and a few other members of our senior management team.
We appreciate everyone taking the time to join us on the call today.
For Devon Energy, 2021, as a transformational year that can best be defined by our willingness to be a first mover and pursue bold strategic consolidation.
Our operational excellence and unyielding commitment to capital discipline, and the groundbreaking deployment of our industry-leading cash return business model, underpinned by our fixed plus variable dividend.
This transaction was perfectly timed at the very bottom of the cycle and set the groundwork for Devon's significant value creation during the year.
With this Advantage platform, we executed on her Delaware focused operating plan and captured cost synergies that resulted in $600 million of annual cash flow improvements.
These margin expansion efforts, combined with a disciplined capital allocation framework that prioritize value over volumes, resulted in Devon generating the highest level of free cash flow in our prestigious 50-year history.
With this powerful stream of free cash flow, we delivered on exactly what our shareholder-friendly business model was designed for, and that is to leave the industry in cash returns.
As you can see on the graphic, we rewarded shareholders with outsized dividends, opportunistic share buybacks, and we took meaningful steps to strengthen our investment-grade balance sheet.
This disciplined execution was rewarded by the market, with our share price achieving the highest return of any stock in the entire S&P 500 index during 2021.
I am so very proud of what we accomplished, and I want to extend my sincerest gratitude to everyone involved.
Our team comprehensively executed on the tenets of our strategy while responsibly providing our nation with a low-cost and reliable energy source, that is the lifeblood of our a modern economy.
Now turning to slide six, while 2021 was a record-setting year for Devon, the setup for 2022 is even better.
With the operational momentum we've established, we have designed a capital program to efficiently sustain production at a ultra-low WTI breakeven funding level of around $30 a barrel.
Combined with the full benefit of merger-related costs synergies and a vastly improved hedge book, we're positioned to deliver free cash flow growth of more than 70% compared to 2021.
As you can see on the graph, the strong outlook translates into a free cash flow yield of 14%, assuming an $85 WTI price.
Play will run through the details of our operating plan later but simply put, we expect 2022 to be another great year for Devon.
Turning your attention to slide seven, with this significant stream of free cash flow, the top priority for our free cash flow is the funding of our fixed plus variable dividend.
This cash return strategy is a staple of our capital allocation process, allowing us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions.
With this differentiated framework, we've increased Devon's dividend payout for five consecutive quarters, and in aggregate, we paid out $1.3 billion of dividends in 2021, which is a per share increase of roughly two times that of 2020.
Importantly, we expect our dividend growth story to only strengthen in 2022.
As you can see on the bar chart, we're on pace to essentially double our dividend again in the upcoming year, which equates to around 8%.
I would like to highlight that this attractive yield includes a substantial increase to our fixed dividend that we announced last night.
There's 45% increase in the fixed dividend reflects the confidence we have in our underlying business and financial performance as we head into 2022.
Now Slide nine, I want to briefly showcase how our unique dividend policy offers a quite compelling alternative for yield-seeking investors.
To demonstrate this point, we've included a simple comparison of our estimated dividend yield in 2022 compared to other commonly referenced yields in financial markets.
As you can see, Devon's yield of 8% is approximately six times higher than the S&P 500 index, and well in excess of the prevailing interest rate you can get from a 10-year treasury.
On Slide 10, in addition to our market-leading dividend payout, we're also excited to announce that we are increasing our share repurchase authorization by 60% to $1.6 billion.
At a multiple of less than five times cash flow, we believe our business trades at a substantial discount to the intrinsic value, especially given the structural improvements we've made to expand margins and returns.
Given this favorable setup, we put our money where our mouth is by aggressively repurchasing $589 million of shares just in the fourth quarter alone.
With the board expanding the capacity of our repurchase program, we will continue to be opportunistic buyers of our stock throughout the upcoming year.
And lastly, the diagram on Slide 12, I believe, does a great job of summarizing what we've created here at Devon.
We've assembled a high-quality asset portfolio, and a team that has worked incredibly hard to deliver on our commitment to expand margins, and deliver growth, and free cash flow, accelerate our cash returns with our market leading dividend payout, enhance per share growth with opportunistic buybacks, and take consistent and meaningful steps to further enhance our financial strength.
While 2021 was a record year, we're only getting started.
At Devon, we have the right mix of assets, proven management, the right team, and a shareholder-friendly business model designed to continue to lead the energy industry and capital discipline, and cash returns.
And with that, I'll now turn it to Clay for the call to continue and provide an overview of our recent operational results and upcoming capital plan.
As Rick touched on, 2021 was a pivotal year for Devon, that demonstrated the power of our asset portfolio and the capabilities of our talented organization.
Across the portfolio, our team delivered results that exceeded production and capital efficiency targets, while continuing to drive down per-unit operating costs and improving margins.
Results matter, and while I don't take any of these accomplishments lightly, I'm equally proud of the way that we were able to accomplish these financial metrics.
Overcoming the challenges of the merger, pandemic, and supply chain issues we built a unified culture took many best practices from both legacy companies, and we're now poised for further leverage of those collective wins.
The first key point that is there is no change to the upstream capital budget of $1.9 to $2.2 billion as we disclosed last quarter.
While inflation is an absolute reality, our teams have done a good job of working with our service companies, mitigating escalations where we can, and quantifying the remaining impact or forecast.
The great thing about a cyclical business is that if you're paying attention, you should have a pretty good idea of what the most critical thing is to focus on in anticipation of the next phase.
At this point in the cycle, we're focused on listening to our service company partners and helping them help us be successful.
In this very tight supply chain market, the key phrase we hear is predictable and reliable.
You'll notice that our 22 program looks quite a bit like our 21 program.
This is what has allowed us to telegraph to our service companies, midstream partners, and other key stakeholders to expect more of the same.
That predictability allows them to plan their own supply chain work, and the reliability allows them to know that we're going to do what we say we're going to do.
Relationships are one of our core values at Devon, and this listening and working with our critical partners is an example of that value in action.
The relatively steady level of activity in 22 is projected to sustain our production throughout the year, ranging from 570,000 to 600,000 Boe per day.
During 2021, we had great success with our capital program that resulted in production growth rate of 34% compared to our first quarter 21.
It's high margin growth was driven by consistent execution and outstanding well productivity that was headlined by several memorable projects such as Danger Noodle, Boundary Raider, and Fiscal Cobra, to name a few.
Each of these prolific projects eclipse 30-day rates of more than 5,000 Boe per day on a plural basis, exhibiting the world class reservoir potential that resides in the Delaware Basin.
It's important to note, the strong volume performance in 2021 was paired with excellent capital efficiency and substantial additions to our approved reserves.
While I would never point to a single year of reserves booking as the measure of success with consistent and reasonable conservative booking processes, which we have, it can provide insight into the quality of the underlying assets.
At year-end, our proved reserves in the Delaware increased 18% on a Pro Forma basis, and these reserve additions replaced more than 200% of what we produce during the year.
I find it especially impressive that our team added these reserves and an ultra-low F&D cost of only $5 per Boe.
This result is just another example how advantaged and sustainable our resources in the Delaware Basin.
Turning your attention to the map on the right, you can expect more of the same for us in 2022.
You have a great slate of projects lined up to execute on, and once again, most of our program will consist of the high impact opportunities focused on developing Upper Wolfcamp and Bone Spring Zones, and to a lesser degree, the wolf is going to be Avalon targets as well.
To execute on this plan, we expect to run 14 rigs in 4 [inaudible] during the year.
This capital activity will be diversified across our acreage footprint with sweet spots in Southern Lea and Eddy County, and state line receiving most of the funding.
Not only with this level of activity continuing to grow Delaware production in 22, but the benefits of our operating scale and best practices from the merger integration, we are well-positioned to continue to improve our execution capabilities.
As you can see on the slide, with the efficiencies captured in the Delaware, the team has essentially doubled the productivity of our rig and frac equipment compared to just a few years ago.
The operational improvements have also meaningfully reduced our cost over time to about $550 per lateral foot in 2021, which competes very well with anyone out there.
As I look ahead to 22, I expect our operational performance to continue to improve.
Our team consistently is identifying new ways to leverage technology, operational breakthroughs, and industry best practices.
Inflationary pressure and supply chain disruptions are reality.
Based on today's industry activity and commodity price projections, we've baked in around 15% higher costs than we saw in 2021.
We have been, and continue to be focused on consistency, planning, and staying out in front ahead of these in reacting to any unforeseen issues.
This work will be even more critical as the market continues to tighten.
On Slide 17, the next area I want to showcase is the momentum we're building in the Anadarko Basin, where we have a concentrated 300,000 net acre position in the liquids rig window of the play.
With the benefits of our $100 billion Dow JV Kerry, we drilled over 30 wells in 2021 and commenced the first production on 16 of those wells during the year.
As you can see on the charts, on the right, the initial capital efficiency is excellent.
With the benefit of state-of-the-art completion designs, and appropriately up spaced developments, per well capital cost of decrease by 25% versus legacy activity and well productivity to date has exceeded the type curve expectations by 35%.
With the strong execution, the carried returns we're seeing from this activity will compete for capital with any asset in our portfolio.
Given the success, we've elected to step up activity in the Anadarko Basin to 3 rigs and 22.
This program will result in around 40 new wells coming online in 2022, allowing us to maintain steady production profile throughout the year and harvest significant amounts of free cash flow.
Collectively, these assets generated more than a billion dollars of free cash flow in 2021, and we're on pace to produce a similar amount of free cash flow in 22.
We also remain some of the best returns in our portfolio.
The team has continued to unlock additional locations and has leveraged company best practices to significantly improve our ESG footprint.
Our Eagle Ford Asset continues to deliver solid returns.
The team is doing some very exciting work to unlock additional locations and a very significant refract potential.
The Powder, is a basin with the most upside yet to unlock.
Our team is making great progress in that regard by driving laterals longer to three miles and rebooting the stimulation design, we're seeing very encouraging results.
I'm proud of what these assets are delivering, and I appreciate the team's hard work and effort that goes into fulfilling this important role within our portfolio.
As many of you are aware, we set aggressive emissions reductions targets last year that covered a myriad of near, mid, and long-term priorities.
In addition, to ensure our organizational alignment, we directly tied progress on these targets to our annual compensation program.
We've also dedicated a board committee to engage in our ESG goal-setting process, performance, and reporting.
Since the announcement of these environmental targets, we've taken immediate action and delivered results.
We do not have finalized figures yet for this past year, but I can tell you our scope 1 & 2 GHG emissions will improve roughly by 20% in 2021 versus our 19 baseline, well ahead of that, stated the stated goals from this past summer.
Two of the key successes on reducing overall emissions is reducing methane emissions, and reducing flaring.
In 2020, we reduced methane emissions by 47% and we reduce flaring by 33%.
I expect this positive rate of change to continue.
Looking specifically at 22, we have many visible catalysts that will drive important results, such as advancing advancements and leak detection technologies, improved facility design, facility retrofits, wide-scale deployment of air-driven pneumatic controllers, and electrification of select field operations.
I believe that it's also important to point out that these efforts are focused on changes that will not only improve our ESG metrics, but will also improve our overall operations.
By focusing on these operational wins, we further align our organizational focus and excitement around ESG improvement.
My comments today will be focused on the key drivers of our financial results in 2021, and also provide some insights into our 2022 outlook.
Beginning with production, our total volumes in the fourth quarter averaged 611,000 Boe per day, exceeding the midpoint of our guidance by 3%.
This production B was across all products, with the most significant outperformance coming from NGLs, where processing and economics were exceptionally strong during the quarter.
In the upcoming quarter, we expect production to approximate 570,000 Boes' per day.
We expect this to be our lowest production quarter of the year due to winter weather downtime that reduced volumes by about 15,000 Boe per day.
All winter-related curtailments are back online, and we expect no impact to our full-year production estimates.
Moving to expenses, our lease operating GP&T costs exceeded 2021 at a rate of $7.25 per barrel.
This result represents a 1%t decline compared to where we started the year, but with slightly elevated compared to our forecast.
As you might expect, we experienced moderate pricing pressures across several service and supply cost categories in the quarter, and we are also incurred a non-recurring charge to GP&T expense in the Eagle Ford.
Another key variance was higher work-over activity, which contributed to our strong production results in the quarter.
Overall, our exposure to higher-value production, coupled with the low-cost structure, expanded Devon's field level cash margin to $42.37 per barrel, a 14% increase from last quarter.
Jumping to corporate cost, we did a great job of improving this expense category in 2021.
In aggregate, G&A and financing costs declined 31% year over year on a pro forma basis due to lower personnel cost and the company's ongoing debt reduction program.
These structural improvements will carry over into 2022 and act as an ongoing annuity for years to come.
Cutting to the bottom line, Devon's core earnings increase for the sixth quarter in a row to a $1.39 per share.
This level of earnings momentum translated into operating cash flow of $1.6 billion in the fourth quarter.
after funding our disciplined maintenance capital program, we generated $1.1 billion of free cash flow in the quarter.
This represents growth in free cash flow of more than 400% compared to where we started the year after closing the WPX merger.
The top priority of our free cash flow is the funding of our dividend.
As Rick covered earlier, in conjunction with our earnings report, we announced a fixed plus variable dividend of $1 per share that is payable in March and includes the benefit of our 45% raise to the fixed dividend.
This payout represents the highest quarterly payout in Devon's history.
Another avenue that we're returning cash to shareholders through is the execution of our share repurchase program.
Since we initiated the program in November, we're off to a great start by repurchasing $14 million shares at a total cost of $589 million.
This equates to an average price of $42 per share, which is around a 25% discount to our current trading levels.
With the board expanding our share repurchase program to $1.6 billion, we now have roughly $1 billion remaining on this authorization, and we expect to continue to opportunistically buy back stock in 2022.
We also have returned value to shareholders through our efforts to reduce debt and improve the balance sheet.
In 2021, we made significant progress strengthening Devon's financial position by retiring more than $1.2 billion of outstanding notes, and we achieved our net debt to EBITDA target ahead of plan, exiting the year at less than a turn of leverage.
At today's pricing, we expect our leverage to trend even lower in 2022 pushing toward a zero net debt balance by year-end.
And lastly, I do want to highlight that our disciplined strategy is also resulting in excellent returns on capital employed.
In 2021, we achieved a 20% return on capital employed, and we are positioned for this measure to substantially increase in 2022.
The strong rate of change we are delivering with ROCE, combined with our cash return framework, further differentiates Devon versus other opportunities in the market today.
In summary, 2021 was a banner year for Devon.
We delivered on exactly everything we promised and then some.
Now, as we shift our focus to the upcoming year, I want to be clear that there is no change to our cash return playbook.
It will be more of the same.
We will be relentlessly focused on delivering high returns with capital employed, margin expansion, accelerating free cash flow growth, and returning excess cash to shareholders.
Our talented team here at Devon take great pride in leading the industry in this discipline operating framework, and when coupled with the development and deployment of two net of new technologies.
Simply put, we are very energized and ready to roll in 2022.
I sincerely hope you can now appreciate how we've delivered on the vision that Dave Hager and I, along with our respective teams, had when we announced our merger in September of 2020.
We wanted to create something truly special and we feel that we've done just that.
We'll now open the call to Q&A.
Please limit yourself to one question and a follow-up.
With that operator, we'll take our first question.
 Assistant:

Chosen response:
qtrly adjusted core earnings per share $1.39.
devon’s total production averaged 611,000 oil-equivalent barrels (boe) per day in the fourth quarter.
production in q1 of 2022 is estimated to be reduced by 3 percent or 15,000 boe per day due to the impact of severe winter weather.
expects production to approximate 570,000 boe per day in the first quarter.


Prompt:
Human: I'm pleased that you're joining us for DXC Technology's second quarter FY '22 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our executive vice president and CFO.
In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
Today's agenda will begin with an update on our Q2 performance, which shows hard evidence that we are delivering on our transformation journey and building the foundation to make DXC operationally efficient, sustainable and ultimately grow.
Next, I will provide you with additional insights as to the operational work we are performing as we execute our transformation journey.
Then I will hand the call over to Ken to share our Q2 financials, guidance and more details of the financial results driven by our strong operational execution.
Regarding our Q2 performance, our revenues were $4.03 billion.
Our organic revenue growth continued to show progress as we improved from minus 3.7% in Q1 to minus 2.4% in Q2.
Also, I was very pleased to see that the GBS business segment grew for the second quarter in a row from positive 2% in Q1 to positive 3.4% in Q2.
We also continue to improve the organic revenue of the GIS business segment from minus 9.1% in Q1 to minus 8% in Q2.
Now all of these results show our organic revenue is on the right trajectory.
Our adjusted EBIT margin was 8.6% and was driven by the operational work that we are doing to optimize our business.
This is the third straight quarter of both improving organic revenue growth and sequential margin expansion, and we expect both trends to continue in Q3.
Book-to-bill for the quarter was 0.91, which came in below our goal of one due to the timing of a couple of deals.
I'm happy to report that both deals are hybrid cloud/ITO deals and are now closed.
We continue to track to a book-to-bill over one year to date, and we expect to be back above 1.0 in Q3.
Our non-GAAP earnings per share was $0.90 in the quarter, which is up $0.41, as compared to $0.64 a year ago.
Finally, we are encouraged by the strength of our Q2 free cash flow, which moved us into positive territory.
On a year-to-date basis, we have now produced roughly $100 million in cash.
Now let me turn to the progress we are making on our transformation journey.
The first step is inspire and take care of our colleagues.
We are executing a people-first strategy, and attracting and retaining talent is fundamental to enable our growth.
We know our strategy is working.
We saw a higher percentage of our employees complete our September employee engagement survey, and we are showing improved and stable engagement scores.
These engagement scores give us confidence that we have a motivated workforce, and we will be able to manage attrition, which we've seen an uptick.
To offset this increase in attrition and demand, we hired and onboarded more colleagues than any other quarter since I became CEO.
Key advantage to our hiring efforts is that we have implemented and are running a virtual-first model.
Hiring has been a focus for us and will continue.
While hiring improved, we left some open demand and project work unconverted.
And we are focused on capturing this moving forward.
Focus on the customers is the second step of our transformation journey and continues to be the primary driver of our success in improving our organic revenue growth.
A key metric that we measure is our Net Promoter Score, and we are seeing continued improvement.
The last time we gave you our NPS score was during the Investor Day in June, and it was 18, almost within the industry best practice range of 20 to 30.
Currently, our 12-month rolling NPS score is at the midpoint of the best practice range.
This is the most positive our customers have been since I arrived.
This improvement is due to our strong service delivery and gives us the ability to sell up the enterprise technology stack from our GIS business to our GBS business.
Now let me remind you that the way we will get to grow is to deliver the GIS services that are critical for our customers and build trusted relationships.
Once these trusted relationships are built, we can move our customers up the enterprise technology stack toward the services of our GBS business.
This is exactly what we are doing.
And the organic revenue trajectory of GIS, GBS and the overall business is great evidence that this strategy is working.
Now let me turn to our cost optimization program.
We continue to make progress in optimizing our cost and delivering for our customers without disruption.
I've already commented on some of the operational work we are doing like motivating our colleagues, hiring new talent and implementing a virtual-first model.
In addition to this work, we are also improving the efficiency of our service delivery, implementing better IT tools and actively managing our real estate footprint.
Let me provide you with some additional color considering the operational work we are doing with real estate.
This quarter, we closed our Tysons facility and are moving to a much smaller footprint in the D.C. area, where our colleagues that need to come into a facility will share a space versus having dedicated space.
This work emphasizes our commitment to a virtual-first model, reduce our carbon footprint and represents our desire to maintain a much smaller real estate footprint.
Jim will detail out the financial results of all of these operational work that, simply put, this work is allowing us to improve margins from 8% in Q1 to 8.6% in Q2 and gives us the confidence to increase our margin and earnings per share guidance for FY '22.
Next, seize the market is where we are focused on cross-selling for our existing customers and winning new work.
As I previously mentioned, we had two significant deals slip into Q3 and are now signed.
The great news about these deals is they were both hybrid cloud/ITO deals with long-standing customers.
Specifically, we are helping these customers modernize their existing IP estate and building new private cloud capability to run their mission-critical applications.
In Q2, 59% of our bookings were new work and 41% were renewals.
The new work continues to increase due to the focus on another piece of our strategy, which is our platinum customer channel.
Taking our offerings through this channel is another key foundation piece for growth.
We are now starting to see evidence that we are being successful taking Luxoft, which drives our Analytics and Engineering services through our platinum customer channel.
The evidence is that Analytics and Engineering grew 17.3% in Q2, which is clearly helping us create growth in our GBS business segment.
Now let me give you an example of what the Platinum customer of the future looks like at DXC.
We have a 14-year relationship with one of the world's largest specialty retailers.
Now before I arrived and implemented the strategy, our revenues were roughly $80 million per year, split a third GBS and two-thirds GIS.
By continuing to deliver our GIS services for this customer, we are offering the opportunity to sell our GBS services.
The result is we have increased the total revenue on this account by 13%, and the mix between GBS and GIS is now split 50-50 as we are now providing them Analytics and Engineering services.
We're in the early innings of this strategy, but we feel confident that we can implement this approach to our other Platinum customers, successfully delivering GIS services and growing GBS services to have the same or more revenue at better margins.
Turning to our quarterly financial performance on Slide 11.
As you can see, our progress continues.
Our organic revenue improved to a decline of 2.4% or a 130 basis point improvement from Q1.
This represents our third consecutive quarterly improvement.
As you can see, we have come a long way from double-digit organic revenue declines in Q1 FY '21 to low single-digit declines in FY '22.
Our adjusted EBIT margin continues to improve as well, delivering 8.6% in Q2, up 60 basis points as compared to the first quarter.
Year over year, our adjusted EBIT margins have expanded 240 basis points or 460 basis points, excluding the disposed businesses.
Our book-to-bill for Q2 was 0.91, below our goal of one due to timing and remains over one year to date.
Further, we expect to deliver a book-to-bill of over one for Q3 and for the full year.
Non-GAAP diluted earnings per share was $0.90, up $0.06 from Q1 and a healthy 41% increase as compared to the prior year.
Our earnings per share expanded due to increased margins, lower interest expense and a lower tax rate.
Moving to our segment results on Slide 12.
Our GBS segment continued its strong growth performance, posting its second quarter of positive organic revenue growth of 3.4%, an improvement from 2% in the first quarter.
The GBS growth is a positive sign as we continue to deliver higher value for our customers.
Our GBS business has higher margins and lower capital intensity.
So as we grow this business, it has a more positive impact on margins and cash flow.
Our GBS margin was 15.9%, up 150 basis points compared to the first quarter and up 180 basis points compared to prior year.
Our GIS segment organic revenue declined 8%, a full 110 basis point improvement compared to the first quarter and improved 380 basis points compared to the decline from prior year.
GIS margins were 5.5%, an improvement of 390 basis points compared to prior year.
Turning to the enterprise technology stack.
Analytics and Engineering revenue was $520 million, up 17.3%.
Analytics and Engineering book-to-bill was 0.95 and 1.13 year to date.
We continue to see high demand in this area.
The Applications layer was up 1.5%, book-to-bill was 0.94 and 1.13 year to date.
BPS, our smallest layer of the enterprise technology stack, at $118 million of revenue, was down 13.7%.
Book-to-bill was 0.69 and 0.91 year to date.
Cloud and security revenue was $521 million, down 1.5%.
Book-to-bill was at 0.8 in the quarter and 0.82 year to date.
IT Outsourcing revenue was $1.05 billion, down 9.6%.
ITO book-to-bill was 0.81 and 0.92 year to date.
We expect our ITO decline to continue to gradually moderate as we move through FY '22.
The two deals Mike mentioned earlier that slipped out of Q2 that were subsequently closed were in the ITO and Cloud and Security layers of our technology stack and would have boosted our GIS book-to-bill for the quarter to over 1.1.
Lastly, Modern Workplace revenues were $581 million, down 10.9% as compared to prior year.
This is an improvement from last quarter when Modern Workplace was down 19.7% year over year.
Book-to-bill was 1.2 and 1.1 year to date.
Next up, let me touch on our efforts to build our financial foundation.
This quarter, we made particularly strong progress on strengthening our balance sheet and solidifying our financial position, cash generation and reducing restructuring and TSI expense.
As Mike pointed out earlier, we've made measurable improvements driving our business to improve our financial foundation that will ultimately allow us to increase our deployable cash affording us more opportunities to create value.
We reduced our debt from $12 billion to $5.1 billion.
The refinancing of all of our high rate bonds during the quarter culminates our collective efforts to transform the business, improve its trajectory and strengthen our balance sheet.
There is no similar and clear way of seeing the impact that Mike and his team have made improving the operations of the business than what was accomplished with our debt over the last year.
Net interest expense has been reduced from $83 million in the first quarter of FY '21 to $45 million this quarter.
With the full benefit of our refinancing, we anticipate interest expense to be reduced to approximately $33 million in Q3.
We also continue to deliver on reducing restructuring and TSI expense while increasing our margins.
This not only improves our cash flow, it also narrows the difference between GAAP and non-GAAP earnings.
Finally, capital lease and asset financing is an area that was overused.
In the last year or so, we've significantly curtailed new capital lease originations from $1.1 billion in FY '20 and are on track to reduce originations to approximately $500 million this year.
These efforts to better manage this form of financing allowed us to reduce our debt and ultimately our capital lease cash outflows from $245 million in Q1 FY '21 to $177 million this quarter.
We expect further reductions in our quarterly cash outflows to around $150 million per quarter at the end of FY '22 and further below that level going forward.
We delivered these reductions while also better managing capital expenditures.
Our capital expenditures were reduced from $225 million in Q1 FY '21 to $159 million Q2 FY '22.
Based on our reductions to capital lease originations, a more meaningful metric to demonstrate our progress is capex spend and capital lease originations as a percent of revenue.
Capex and capital lease originations as a percent of revenue were 10.2% for FY '20, 8% for FY '21 and now down to 5.3% for Q2 FY '22.
Delivering 5.3% is a good step forward related to better managing our capital spend as it gets us in the peer range, albeit at the top end and is a proof point of our improved operational rigor.
Returning to our debt on Slide 16, I want to spend a minute on our recent refinancing.
This chart shows how the refinancing further solidifies our financial position.
By extending maturities, we now have no bond maturities before FY '26, lowering maturity towers and reducing annual interest expense and cash outflows by about $50 million a year.
From our improved balance sheet, let's move to cash flow.
Cash flow from operations totaled an inflow of $563 million.
Free cash flow for the quarter was $404 million, up 33% compared to prior year and moves us to positive free cash flow for the first half of FY '22 of $100 million.
The second quarter was impacted by previously disclosed cash tax payments related to business disposals, accelerated interest payments due to our refinancing and a payment related to restructuring a vendor relationship to take greater control over our delivery.
Further, as part of our strategy to focus on customers, we were able to better manage working capital in the quarter.
As we look to the second half, we expect the fourth quarter free cash flow to be stronger.
Our third quarter has two discrete nonrecurring cash payments, including a $60 million payment associated with a legacy vendor that has a take-or-pay agreement and a $90 million payment associated with COVID relief legislation where we deferred certain tax payments and now have opted to accelerate the tax payments to utilize the tax deduction.
Slide 18 shows our trended free cash flow profile.
The negative cash flow over the last three quarters was due in large part to absorbing a number of nonrecurring cash outflows of over $1.7 billion to put the business on a better trajectory, building our foundation.
state and local health and human services business for sale; $114 million to end an AR securitization program; $88 million to end a value-destructive take-or-pay agreement; the $1.7 billion headwinds put into perspective; the $749 million trailing four quarters negative free cash flow.
A key driver of improving cash flow is to continue to reduce our restructuring and TSI spend.
Our restructuring and TSI efforts are highly focused, and we believe are a prudent investment in the business addressing our outsized cost structure in certain countries and to reduce our facilities footprint to align to our virtual model.
We remain on track to reduce restructuring in TSI from an average of $900 million per year over the last four years to $550 million in FY '22 and about $100 million in FY '24.
I would like to take a moment to update our capital deployment expectations from Investor Day.
The Investor Day chart called for 55% of our free cash flow to be used to pay debt and capital lease obligations.
As a result of our progress, our cash outflows for debt and capital lease financing are now expected to be about 20% of our free cash flow.
That leaves 80% of our expected free cash flow to invest in our business and/or repurchase our stock.
I should note, we like the business we have and believe that we have the right level of investment in GBS and GIS.
We believe our technology stack has critical mass and capability at each layer.
We believe we will create more value by continuing to focus on driving the transformation journey across our business, improving the fundamentals and continuing to build organic growth up the stack, ultimately delivering 1% to 3% organic growth in FY '24.
Related to acquisitions, our focus is to ensure our platinum channel strategy will be fully vetted and proven out.
So eventually, when we are acquisitive with tuck-in sized acquisitions, we will have a clear path to deliver value.
Related to our debt, we have a clear line of sight to achieving our targeted debt level of $5 billion near term as we have scheduled debt repayments via our capital lease financing and commercial paper.
Our preference is to maintain approximately $2.5 billion of cash on hand to fund an appropriate level of working capital.
When we have cash in excess of $2.5 billion, we will determine how best to deploy the cash as we do not expect to leave significant levels of excess cash, generating no meaningful returns on our balance sheet for an extended period of time.
At this point in our journey, we favor share repurchases as our valuation is attractive.
In Q2, we repurchased $83 million of our common stock, bringing the FY '22 year-to-date repurchases to $150 million or 3.9 million shares.
Our share repurchases are a disciplined approach to capital allocation and are expected to be self-funding using a rather simple formulaic approach of deploying cash in excess of $2.5 billion when we are at our target debt level of approximately $5 billion.
We remain very focused on our investment-grade credit profile.
Turning to our third quarter guidance.
We expect revenue between $4.08 billion and $4.13 billion.
If exchange rates were at the same level as when we gave guidance last quarter, our third quarter revenue guidance range would be $90 million higher.
Organic revenue decline improved to down 1% to down 2.5%; adjusted EBIT margin of 8.6% to 8.9%.
Non-GAAP diluted earnings per share is expected to be in the range of $0.88 to $0.93 per share.
We are pleased by our progress as we look to the second half of FY '22.
I would like to update our current fiscal year guidance.
dollar, our revenues are expected to be negatively impacted by approximately $200 million, which has been reflected in our revised guidance range of $16.4 billion to $16.6 billion; reaffirming organic revenue growth at down 1% to down 2%; increasing adjusted EBIT to a range of 8.5% to 8.9%; increasing non-GAAP diluted earnings per share to $3.52 to $3.72 per share; and reaffirming free cash flow guidance of $500 million.
We are reaffirming our guidance for FY '24.
This reflects our strong execution in driving forward on our transformation journey.
We are clear-eyed on the value we are driving with the transformation journey.
We feel strongly there is more opportunity in front of us to continue to improve the business and the underlying economics.
Let me leave you with the following key takeaways.
We are building the foundation to make DXC operationally efficient, sustainable and ultimately grow.
By focusing on the operational work of motivating our colleagues and hiring new talent, moving to a virtual-first model, making service delivery more efficient and implementing better IT tools and reducing real estate, we're able to deliver better for our customers and gives us the ability to sell up the enterprise technology stack to GBS.
The good news is the financial results that Ken just took us through reduced debt, shrinking restructuring and TSI costs, increased margin and earnings per share and stronger free cash flow are all sustainable and a result of the operational work we are doing.
This gives us confidence that we will achieve our FY '24 double-digit margin guidance.
On growth, Q2 confirms that we're on the right trajectory for growth.
Our focus on delivering and fixing the GIS business develop trusted relationships with our Platinum customers.
We're then taking our GBS offerings to our Platinum customers, selling up the enterprise technology stack.
The evidence that this is working is in our organic revenue results of GIS, GBS and the overall company.
This also gives us confidence that we will achieve our FY '24 guidance of 1% to 3% growth.
In closing, I'm confident that by staying focused on our transformation journey of building the foundation, we will continue to deliver in the short term and ultimately deliver our long-term financial targets of margin, growth and free cash flow.
 Assistant:

Chosen response:
q2 non-gaap earnings per share $0.90.
q2 revenue fell 11.6 percent to $4.03 billion.
reducing fy22 revenue guidance range due to foreign exchange fluctuations.
increasing fy22 non-gaap diluted earnings per share and increasing fy22 adjusted ebit margin guidance ranges.
sees q3 revenues $4.08 billion to $4.13 billion.
sees q3 non-gaap diluted earnings per share $0.88 - $0.93.
sees fy 2022 revenues $16.4 billion to $16.6 billion.
sees fy 2022 non-gaap diluted earnings per share $3.52 - $3.72.
reaffirmed its longer-term guidance.


Prompt:
Human: Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer; Smriti Popenoe, President and Co-Chief Investment Officer; and Steve Benedetti, Executive Vice President, Chief Financial Officer and Chief Operating Officer.
As many of you know, who have followed us for a long time, we manage our shareholders' capital for the long term.
One of our core strengths is understanding the environment in which we operate, positioning board and adjusting that position as the environment changes.
We believe the beginning of this decade marked a major change in the global economy and capital markets environment.
It has been a great environment for Dynex to build on our solid track record of industry-leading performance as you can see on Slide 12, including the 21% cumulative shareholder total return since December 2019.
As we finished the third quarter, we continue to be excited about how we have performed during this period and how we have positioned our balance sheet for the future.
We're in a unique moment in history, and we believe every asset management team around the globe will be challenged by unforeseen surprises as we have already continually witnessed over the past 22 months.
At Dynex, we believe this environment calls for patience, discipline, and flexibility.
We also believe this is a great environment for our stakeholders as we expect to see attractive opportunities to deploy capital.
Our experienced management team has proven time and again that they have a flexible mindset to successfully navigate any operating environment and to generate above-average cash dividends and a solid economic return for our shareholders.
For the third quarter, we reported comprehensive income of $0.09 per common share and a total economic return of $0.06 per common share or 0.3% for the quarter.
We also reported earnings available for distribution of $0.54 per common share, a 6% increase over last quarter and well in excess of our $0.39 quarterly common stock dividend.
On a year-to-date basis, through the third quarter, we have paid $1.17 in dividends.
Book value per common share declined modestly to $18.42 from $18.75 or 1.8%, primarily from economic losses on the investment portfolio, principally in lower coupons relative to our hedge position.
As Smriti will discuss later in her comments, we've recovered this decline post quarter end with the curve steepening, which has occurred since then.
Beginning this quarter, consistent with others in our industry, we have renamed our non-GAAP earnings measure to earnings available for distribution from coordinate operating income.
All prior quarters have been relabelled to earnings available for distribution.
There have been no changes to the calculation of the non-GAAP measures and the adjustments made to reconcile the comprehensive income, the earnings available for distribution are identical to those previously used to reconcile the coordinate operating income.
We believe that the caption earnings available for distribution more accurately reflects the principle purpose of the measure and will serve as a useful indicator, but not the only indicator in evaluating the Company's performance and its ability to pay dividends to common shareholders.
Other factors that are considered in the dividends to common shareholders include our taxable income, total economic return, gains and losses including carry-forwards for tax purposes, and our outlook for future performance.
Turning back to the discussion of the performance, the increase in earnings available for distribution was driven by multiple factors.
First, our earning asset yields improved 3 basis points while overall repo borrowing costs were down another 3 basis points.
The improvement in asset yields was largely attributable to slower prepayment speeds during the quarter, as we benefited from adjustments to the overall prepayment profile of the pass-through portfolios or asset purchases.
Agency RMBS prepayment fees were 11.3 CPR versus 19 flat CPR in the second quarter.
Secondly, TBA dropped income contribution improved by 5 basis points primarily from continued dollar roll specialness during the quarter.
The funding cost benefit on dollar rolls versus repo and RMBS was approximately 60 basis points during the third quarter versus 49 basis points last quarter.
And third, average earning assets increased as we deployed equity capital proceeds raised in both -- raised in both second and third quarters.
Together, these items drove 4 basis point increase in our adjusted net interest spread to 2.1% for the quarter.
Offsetting these items was an increase in G&A expense of approximately $800,000.
The majority of the increase related to legal fees related to a contingent matter that we have previously disclosed in our SEC filings and which is now has been fully briefed for the court.
We do not expect these costs to repeat going forward.
From a portfolio perspective, from quarter to quarter, we reduced our investment portfolio, including TBAs by approximately $500 million, mostly through reducing our investment in TBA, 2.5 [Phonetic].
This occurred toward the end of the quarter and resulted in adjusted leverage declining by nearly a full turn to 5.9 times at the end of the quarter.
As noted on Slide 23, our investment portfolio is approximately $4.8 billion at September 30, with $4.3 billion invested in agency RMBS and TBAs.
From a hedging perspective, we reduced the notional balance of our hedges by a similar amount.
The overall notional balance of our hedges at September 30 was $4.3 billion as indicated on Slide 19 with the bulk of the hedges protecting book value from increases in rates in the long end of the curve.
Overall, total shareholders capital grew approximately $18 million during the quarter, which includes approximately $28 million in new common equity raise at the market offerings in the quarter.
Year-to-date, we have raised approximately $224 million in new capital at a gross price before commissions of $18.80.
Our market capitalization adjusted for all shares outstanding is $650 million today versus $420 million at the beginning of the year, substantially increasing the liquidity of our stock for our shareholders while at the same time, unlocking the operating leverage in our business.
Our stock price is virtually unchanged year-to-date and our total shareholder return for 2021 is 6.9% through yesterday.
That concludes my remarks.
I'll briefly discuss performance drivers for the quarter and then turn to our macroeconomic outlook and portfolio construction.
We communicated last quarter that the risk of a whipsaw in rates was substantial.
During the quarter, the 10-year treasury yield touched a low of 1.13% twice and ended the quarter virtually unchanged at 1.46% with a 44 basis point intra-quarter trading range.
We also indicated during the quarter that we had maintained a portfolio structure, a hedge with the long end of the yield curve through July and we continue to hold that hedge position through today.
Book value on September 30 was at $18.42 and thus far as of October 22nd, book value is up between 2% to 2.5%.
Our trading discipline and top-down macroeconomic-centric approach continue to serve us well and remain the cornerstone of our decision-making framework.
Leverage at the end of the quarter stood at 5.9 times, down from 6.4 times at the beginning of the quarter.
As Steve mentioned, we decreased our exposure to convexity by selling TBA [Indecipherable], and to add to dry powder, to make future investments.
With the recovery in book value quarter to date, leverage stands at 5.6 times and the liquidity position is over $500 million.
At this current level of the balance sheet, we expect earnings available for distribution to continue to meet or modestly exceed the current level of the dividend in the fourth quarter with any excess returns providing a cushion to capital.
Book value will continue to fluctuate with the level of interest rates and mortgage spreads.
Future book value volatility is mitigated by our low leverage, substantial levels of liquidity, and the dry powder that we have to deploy capital opportunistically.
Turning now to our macroeconomic outlook that is the foundation for our positioning.
The global economy is in a period of transition to a post-pandemic environment.
And as such, we expect to see new risks and new opportunities develop over the next few quarters.
In the very short term, we are focused on specific risk events on the horizon, including the announcement of the taper, resolution of the debt ceiling, passage of any fiscal stimulus, a possible leadership transition at the fed, the composition of the new fed and international risks such as the Japanese elections and spiking fuel prices to name a few factors.
In the intermediate-term, the speed of reopening adjusting to living with COVID, inflation pressures from supply imbalances, labor shortages, fuel costs spikes are all having different impacts across economies.
Global central banks are adjusting their post-pandemic strategies as inflation and growth trajectories are uneven and disparate across the globe.
While most global bank policy remains highly accommodated, several have begun raising interest rates and have moved to hawkish language as inflation has accelerated.
In the near tone, US data points to stronger growth, higher inflation, and a tighter labor market, but the durability of these trends remains very difficult to parse out.
On the strength of this information, it is very clear that the fed is planning to taper later this month, that looks very likely to happen.
In our assessment, it is still too early to arrive at conclusions on long-term trends for inflation, labor market, and growth.
And for this reason, the timing, the pace, and the number of fed hikes is less clear.
I must point out that the levels of inflation that we are experiencing and inflation expectations are among the highest in the last 20 years.
And we are truly entering uncharted territory as global central banks attempt to exit their emergency interventions in the financial markets, trying to balance growth and maintain their inflation-fighting credibility.
Our team at Dynex is navigating the coming months by preparing for elevated uncertainty, higher volatility, and the increased probability of surprise factors.
We are also preparing for the impact of a more complex, turbulent, and evolving domestic and international political situation.
These factors lead us to maintain an up and credit up and liquidity position to position most of our hedges on the long end of the yield curve and to hold significant amounts of dry powder for investment during bouts of volatility and most importantly, to hold a very flexible portfolio and to have a flexible mindset to respond to evolving conditions.
Let me now discuss our market outlook and portfolio construction.
The portfolio today is constructed with lower leverage that reflects the uncharted territory we are in.
Our hedges remain focused on the 7-year to 10-year part of the curve, reflecting the interest rate risk on our longer-duration asset portfolio.
We have selectively added hedges through the year and the five-year part of the curve and options remain a core holding.
From a financing perspective, we expect that front-end rates will remain low, close to zero through most of 2022, providing a solid base from which to generate returns.
However, we're not taking this for granted.
We are selectively and strategically locking in lower financing levels by taking longer-term repo.
On Slide 20, our weighted average contractual days to maturity of our repo book was about 169 days at September 30, as we targeted longer tenure for our roles between three months and 12 months.
Roughly 50% of the book had a contractual maturity that fell in the six to 12-month range.
We continue to target longer-term roles at opportunistic levels.
Turning now to agency MBS spreads, it's really a mixed story between fundamentals and technicals, and we believe spread volatility will be driven by macroeconomic events versus factors specific to the MBS market.
The fundamentals for agency RMBS are still challenging as we see many factors that will keep refinancing levels higher and net supply elevated.
The structure of the mortgage finance industry is drastically different today.
There are more public non-bank mortgage companies, subject to quarterly profit metrics now than any other time in the last 20 years.
This will be a major factor in driving competition to keep mortgage rates low, despite higher nominal treasury yields.
And this will keep the pressure up on net supply.
Government policy also favors broader access to refinancing with potential modifications from the GSEs to loan level pricing adjustments, therefore lowering the mortgage rate that's available to consumers once again, meaning that higher coupons remain vulnerable to prepayments and lower coupons susceptible to supply.
The technicals for RMBS are also challenging as the fed begins to exit and it is unclear whether bank demand will continue at the same level as early on 2021.
Market psychology and agency MBS spreads is bearish with many investors holding underweights and strategists recommending neutral or underweight positioning.
With this backdrop, we believe agency RMBS spreads could wipe up to 10 basis points to 20 basis points as the taper begins to be implemented, but we think this is more likely to happen during bouts of volatility.
We also expect agency RMBS spreads to be more volatile and directional widening and rallies and tightening and sell offs.
We do expect to increase leverage in these situations, and we are always looking for a good window to make this adjustment.
We expect to make an initial adjustment in leverage back up to eight times and when appropriate up to 10 times.
Longer term, we believe there will be good support for MBS spreads.
The Fed's balance sheet will create a powerful stock effect that will limit spread widening.
Demand from money managers as MBS becomes a high-quality alternative to corporate bonds and lower net supply from potentially higher rates will also provide an additional buffer against wider spreads.
We believe that holding a flexible liquid high credit quality position, even as spreads widen, we can manage both sides of our balance sheet to position for solid long-term return generation.
So to wrap up, the steep yield curve and low financing costs support our opportunities to generate solid returns for our business.
We expect this to continue well into 2022.
Book value is higher versus quarter end by 2% to 2.5%.
The portfolio is well-positioned for returns to cover or exceed the current level of the dividend today.
The low leverage that cushions book value and dry powder to drive forward earnings growth provide a solid foundation for return generation.
Specifically, we are entering the next few months with over $500 million in liquidity, almost an all-time high for Dynex relatively low leverage of 5.6 times that puts us in a solid position to navigate the environment and limits the risk to the existing portfolio.
We have dry powder for at least three turns and up to five turns of leverage each turn of leverage invested at 11% return adds roughly 1% or $0.24 per share incremental return annually.
This is a significant upside to the 9% dividend yield on our common shares that are trading somewhere between 94% and 95% of book value today.
The most important principles for the environment we're in right now, and this is how we're operating our discipline and patience while continuously assessing the environment as it will take time for the economic picture to become clear.
We stand prepared for the risks and we're ready for investment opportunities as they arise.
Let me wrap up with a couple of comments.
Dynex Capital is the oldest REIT focused solely on financing real estate assets in the United States.
We've encountered and navigated every market environment for 33 years.
Today, we are building a resilient organization to last the next 33 years and beyond.
We're making investments in people, processes, and technology that will allow us to rapidly adjust to a world that is destined to change.
We're also focused intensely on maintaining your trust by how we manage our risk, how we treat our employees, and how we positively impact our community at large.
We are positioned for this environment and we're excited about our opportunities.
Through our years of experience, we have learned that the best opportunities can appear at the most uncertain moments in the capital markets.
 Assistant:

Chosen response: q3 earnings per share $0.09.


Prompt:
Human: This is Alison Griffin, Vice President, Investor Relations.
With me on the call I have Byron Boston, Chief Executive Officer; Smriti Popenoe, President and Chief Investment Officer; and Steve Benedetti, Executive Vice President, Chief Financial Officer and Chief Operating Officer.
And with that, I now have the pleasure of turning the call over to our CEO, Byron Boston.
As CEO of Dynex, I'm very proud to report that in 2020 we delivered a 15.2% total economic return and a 17% total shareholder return.
I've been at Dynex for 13 years and no other year has demanded as much active decision making as 2020.
We stuck with our discipline and excelled.
We didn't just protect shareholders money.
We made money for our shareholders in 2020.
Our book value increased and we delivered a solid dividend.
This performance stands in contrast to most other mortgage REIT and many other investment alternatives for investors seeking income.
Now as you can see on Slide 5, Dynex has now delivered industry leading performance on a one-year, three-year and five-year basis.
And when you look at our long-term chart on Page 17, you can see that we have delivered solid returns through multiple market cycles during my tenure at Dynex Capital.
This performance reflects my distinct philosophy of how to manage a mortgage REIT for the long term and that same philosophy is guiding our investment approach today.
We believe in risk management first, followed by disciplined capital allocation.
As experienced and skilled investors, we have been cautious about leveraging lower credit illiquid assets since 2016.
When spreads are tight, this strategy looks attractive during short term, but ultimately crumbles when liquidity dissipates in a crisis.
This is what happened last year when the prices of illiquid assets dropped dramatically as COVID-19 intensified and creditors demanded more cash or margin in response.
The takeaway here is that, it was no surprise that the market reacted the way it did.
We witnessed the same reaction in every major crisis in recent memory.
The Dynex management team has successfully managed through these intensified risk events throughout our careers and we were prepared.
2020 was a challenging year, but in our opinion, not a black swan event.
As we indicated at the beginning of 2020, we saw the global risk environment intensifying.
So, we were prepared for increased volatility.
While it is impossible to predict the timing of specific events, we foresaw a higher risk profile building in the global financial markets.
Our experience and insight gave us the edge to actively manage our portfolio to provide our shareholders strong returns.
We managed our book exactly as we told investors we would.
For years, we have emphasized liquidity and diversity in our portfolio, and this discipline served us well in 2020.
Our 2020 performance was not a coincidence or good luck, but rather years of thoughtful planning around our portfolio and a team of talented people ready to actively manage the book of business in volatile times.
As a CEO and coach, I could not be prouder.
Now from a human capital perspective, we have a world-class team with unmatched skills and experience.
And 2020 was the year when the management team mattered more than anything.
Our team has weathered significant crises in the past and long-term capital management to the Great Recession.
And as we have learned again this past year, nothing surpasses experience.
We have the institutional knowledge to address many market disruptions and to identify new opportunities that may come along.
Our team is diverse, which is critical to our strategy.
Risks do not stay within borders, and our teams worldwide perspective is invaluable when dealing with a global crisis.
Now, COVID-19 disrupted many work environments, but we already had the advantage of enabling our people to work remotely long before it became a necessity.
Just as risk is border-less, so is talent.
Our employees were accustomed to working outside the office.
So, we remained calm, focused during the quarantine, filtered out the noise to actively manage our risk, and effectively maintained key relationships and the confidence with lenders, regulators and investors.
So in the past 12 months we have taken a strategic view on both sides of the balance sheet with the goal of being able to grow and scale the Company efficiently, and in a stakeholder-friendly manner.
We made several moves.
We retired two of our higher cost preferred stock issues and we replaced them with our new Dynex Capital Preferred C. And during the last two weeks, we issued approximately $56 million in common equity in line with our long-term strategy to grow our capital base.
It's very important to note the return environment is conducive for absorbing any costs associated with our capital activities.
Our ultimate goal is to increase our stock's liquidity and offer investors the opportunity to invest in Dynex via multiple products, including our fixed dividend C Preferred, and our higher yielding common stock.
We've been in business for 30 years and we are fully committed to delivering solid cash flow, and attractive total returns to our shareholders well into the future.
Now as a company, our greater purpose is to support two of our main stakeholders and constituencies, the individual savers and the communities across America.
We are building this company for the long term, because we believe in America, and our role in helping individual savers achieve a respectable return on their savings from financing of real estate assets.
The capital that we bring to the table is critical for housing and the real estate community.
As long as savers need cash income and housing and real estate finance exist in America, our business model will remain relevant and critical.
Most importantly, we are deeply committed to the highest ethical standards because savers need management teams with integrity as stewards of the capital.
Our management team operates with integrity and an unwavering commitment to our values and to supporting our community.
We take our fiduciary responsibility very seriously and strive to be good stewards of capital, transparent in our actions and good corporate citizen.
At Dynex, we are building a diverse and multi-generational organization with a 30-year vision that we believe will create enormous value for shareholders, stand the test of time and prepare us for the future.
I feel fantastic about 2020, and I'm very positive about 2021 and beyond.
Before I turn over the call, I want to highlight that we have promoted Smriti Popenoe to President of our Company.
And this is another reason that I'm excited as the CEO and a coach.
All of our stakeholders should be elated about her promotion, and what this means for the future of Dynex.
As I said earlier, we have a 30-year vision that include getting the right people in the right places with the right skill sets and experience.
The fourth quarter continued the excellent performance for the Company for 2020.
For the quarter on a per common share basis we recorded comprehensive income of $1.23, total economic return of $1.22 or 6.7% based on the beginning book value per share of $18.25 and core net operating income of $0.45.
For the year on a per common share basis, we reported comprehensive income of $2.88, total economic return of $2.73 and core net operating income of $1.94.
2020 performance was highlighted by active portfolio and risk management and dynamic capital allocation, which enabled us to take advantage of improving asset valuations over the year, and declining funding costs.
Realized and unrealized investment in TBA gains, net of hedges, were approximately $1.83 per common share, driving a large part of the comprehensive income and total economic return for the year.
For the fourth quarter, both comprehensive income and total economic return were bolstered by the strong performance of lower coupon RMBS during the quarter, particularly in TBA securities relative to associated hedges and to a lesser extent increasing value on CMBS IO securities.
Core net operating income sequentially declined from $0.61 last quarter to $0.45 this quarter, principally as a result of the smaller average balance of interest-earning assets and modestly declining asset yields.
In addition, general and administrative expenses increased $2.1 million during the fourth quarter from year end incentive compensation accruals reflecting a catch-up adjustment for accrued bonus expense for management's achievements of its corporate goals and objectives this year.
Net interest spread and adjusted net interest spread, both slightly declined by 2 basis points respectively quarter-over-quarter.
Prepayments increased, but were well within expected ranges.
Agency RMBS prepayment speeds were 17.1 CPR for the quarter.
While overall portfolio CPRs including the CMBS portfolio were approximately 15.1 CPR.
Adjusted net interest spread continues to benefit from the favorable TBA dollar roll conditions versus on balance sheet repo.
As a reminder, the Company utilizes the perspective method for amortizing investment premiums, and as such, our results fully reflect the actual realized prepayments during the quarter and do not include cumulative catch up amortization adjustments that are based on long-term assumptions and could potentially distort near-term results.
As it relates to book value, the driver of the $0.83 per share increase during the fourth quarter was net gains from continued spread tightening on investment assets, particularly in both lower coupon TBAs and pools.
Treasury future hedges also helped to offset the impact on investment valuations from the sell-off in interest rates during the quarter.
We estimate that book value per common share at the end of January is up approximately 1%, inclusive of the impact of the capital raise announced last week.
We ended the year with investment assets, including TBA securities of $4.2 billion and leverage at 6.3 times shareholders equity similar to the end of the third quarter.
Overall investment assets, including TBA securities were down on an average basis by approximately 7% as compared to last quarter.
This quarter we added 15-year agency RMBS investments through TBA positions and overall the portfolio composition is approximately 84% RMBS investments, including TBA securities and approximately 16% invested in CMBS and CMBS IO.
Let me also mention that the tax character of the dividends on the Company's equity capital.
For 2020, dividends in both the preferred stock and common stock were a 100% capital gain income.
Let me start by saying that I appreciate the confidence that the Board and Byron has placed in me.
I'm honored and delighted to serve the Company's shareholders in my new role as the President.
I'm going to briefly cover our 2020 performance and then shift to our outlook for 2021.
In extreme volatility events like March 2020, there can be a lot of risk and with that comes opportunity.
With thorough planning and expecting the probability of such events, we were positioned with higher levels of liquidity.
We successfully managed the portfolio rapidly in February before conditions deteriorated, positioned ourselves to weather the extraordinary market events of March, and rebalanced our investments in April to take advantage of the remarkable recovery in asset prices through year end.
Our annual total economic return of 15% is only the third best in Dynex's history since 2008, but it is remarkable in that it was earned in an outlier year like 2020.
Moving on to 2021.
I'll start with a summary of our macroeconomic view.
To deal with the pandemic and its after effects, central banks have implemented highly accommodative policies, designed to increase employment, increase inflation and put the economy on a growing trajectory.
A flood of unprecedented liquidity has raised the price of financial assets globally.
Governments around the world are also implementing debt financed fiscal policy to close the gap on lost GDP from the pandemic and to drive future growth.
This is likely going to lead to a period of massive deficits.
Against this backdrop of unprecedented monetary and fiscal stimulus, we have the health crisis that much of the globe is still dealing with.
In the near term, we expect to see a period where there is a tug-of-war between the negative impacts of the pandemic and the positive impacts of the vaccine.
In the medium term, the stimulus plus the impacts of more vaccination could eventually lead to a period of higher growth, as more of our services-driven economy is able to come back online.
The Fed also remains committed to a broad recovery in employment, and an overshoot of inflation over 2%.
In the long term, we believe the world has been permanently reshaped by the pandemic and its impact will continue for many years to come across broad segment of our economy and many aspects of our daily lives.
This will continue to be a focus for Dynex in our macroeconomic process.
Right now, our macroeconomic view leads us to prepare for a somewhat bumpy transition to a steeper yield curve as one of the more probable scenarios for 2021.
We believe this is also a more favorable environment for higher returns.
Turning now to our current positioning and economic return outlook.
Our goal is always to manage the balance sheet to generate a total economic returns to meet or exceed the dividend.
Rather than think solely about core earnings versus the dividend, we are focused on capital preservation and generating returns over the long term.
Our experience shows that this focus results in higher total shareholder returns and creates long-term value for shareholders.
We believe the broader investment environment remains favorable with financing costs anchored well into 2022 and beyond.
First, financing costs are anchored well into '22 and beyond, agency MBS are liquid, lower risk assets.
And third, we believe the market will evolve to a steeper curve environment that is ideal for earning wider net interest spreads.
We expect returns to move into the 10% to 12% range and could offer mid-teens returns if spreads widen.
We are entering this period with solid performance quarter-to-date.
Book value since year-end is up about 1% net of the equity rate.
We have a strong liquidity position of $375 million and tremendous upside earnings power on the balance sheet.
Leverage stands slightly over 6 times today and we still believe a liquid strategy is appropriate for the environment.
Let me explain why we believe a steeper curve is possible.
While financing costs are expected to stay close to zero through 2023, the back end of the yield curve will face pressure from treasury issuance, possible increases in realized inflation and expectations for inflation, as the economy begins a path to recovery and gains traction in the second half of 2021.
This will likely result in higher long-term treasury yields.
A steeper yield curve is a very positive factor for net interest spread expansion as it offers a chance to invest at higher yields, especially as prepayments slow.
In steeper yield curve environments, agency RMBS spreads also tend to widen because they now have to compete with other assets, including treasuries that offer higher yields.
And realized volatility in steeper yield curve environment is usually higher.
This has the potential to further add to returns.
If you go back to 2012, 2015, 2018, all periods were tight MBS spreads to start the year.
The curve steepened, and MBS widened.
In 2012, it happened even with the Fed doing QE.
So, we're not predicting this will happen, we think there is a path for the scenario.
And if it happens, it will be one where we can invest capital at higher return.
We also see a scenario where the low volatility environment keep spreads range bound and book value stable.
At this point, we're seeing a massive revision to net supply number for 2021, not just because of refinancings and low mortgage rates, but also because of new household formation, a migration out of cities, home prices appreciation, all of which are causing MBS supply to balloon much higher than expected.
We believe this will afford us the opportunity to also invest at better returns.
Finally, if rates decline and the curve flattens, given the current tightness and high dollar prices of MBS, we feel that spreads will move wider in a lower rate environment.
And we have the capital and liquidity to invest in that scenario.
While they may not occur as exclusively as I've described, my point is that we believe all of these scenarios offer us the opportunity to manage and invest our capital accretively.
Our core portfolio is also positioned to benefit in a steeper curve.
This has been the market scenario so far this year.
We currently have an RMBS portfolio allocation of 20% to 15 years, which outperform in a steepener relative to 30s [Phonetic].
We've increased our allocation to long-term option based hedges to better insulate the portfolio from rising long-term rates.
You can see on Page 10 of the slide deck that the portfolio performs relatively well across several types of rate shocks, both parallel and non-parallel.
I want to reemphasize that we have tremendous earnings power on the balance sheet.
A one times increase in leverage, invested at 8% total economic return, adds $0.19 per share per year in economic return.
At 10%, that's $0.24, at 12% it's $0.29.
We think we have the room to take our total leverage up at least 2 times from today's levels at the right time and possibly higher if the return environment is better.
Here is what I'd like to leave you with.
The favorable investment environment is supported by low and stable financing costs well into 2022 and beyond.
We expect to be able to opportunistically invest our capital at more accretive levels as the market evolves over the year.
There is tremendous earnings power in the balance sheet and we're comfortable with our ability to generate returns to cover or exceed the dividend over the year.
Let me reiterate and summarize real quick.
We believe this is a favorable investment environment that has the potential to improve as the year evolves.
Having our financing costs low and stable for some time into the future is an enormous benefit for our shareholders.
Nonetheless, we continue to maintain our discipline of scenario planning to ensure we are prepared for future economic or market surprises.
Now, please take a look at the long-term chart on Slide 17 again.
And let me emphasize, for those of you who have listened to us over the years and you're long-term investors, we always close with this chart.
You'll see the difference on the chart.
We've used the Russell 2000 value index and the shift is mainly because of the unusual attraction and performance returns of this tech sector.
So we tried to create something that is a little more comparable, but we could have created charts with 10-year charts.
We could have created with numerous of other different types of vehicles, and the picture looks very similar.
This displays the power of above-average dividends, the power of a long-term risk management strategy and the power of successfully managing through major credit market corrections.
We have proven time and again in my 13-year tenure, that our philosophy, disciplined process and long-term thinking leads to superior returns, achieving over this time period what many of us could not.
The management team, our Board of Directors and I are delighted to invest alongside of our current investors because we believe in our future.
Now, there are many other investors out there who should have Dynex in their portfolio.
So, we invite you to join us.
 Assistant:

Chosen response:
compname says qtrly core net operating income per share of $0.45.
qtrly core net operating income per share of $0.45 .


Prompt:
Human: During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
Joe and I will share highlights of our fourth-quarter performance and what we're seeing quarter to date.
And by now, you've heard most others in our space.
And despite the volatility we're all facing, it's good to see the category and the industry moving in the right direction.
You'll hear some of the same themes from us, like progressive improvements throughout the quarter as dining rooms reopened, growth in off-premise and digital expansion.
The biggest difference you'll hear is in our level of performance.
By staying true to our strategy and making aggressive moves to grow the business, our team has navigated this pandemic very well.
Chili's generated significant top-line progress throughout the quarter.
And with our operators' disciplined margin management, we delivered positive cash flow for the quarter, which we used to pay down debt.
Our debt load is now below our pre-pandemic level.
We continued this momentum into July, ending the month with Chili's down just 10.9%.
And in the 84% of our company-owned restaurants with open dining rooms were down just 3.8%, and 36% of our company-owned Chili's restaurants ran positive comp sales for the month.
It wasn't our quick reaction to the crisis that enabled us to deliver these results.
It was our choice to stay true to the strategy we've been working for more than two years.
We had already made significant progress in the areas required to thrive in this environment; off-premise, digital, value and scale.
We didn't have to scramble in the pandemic hit.
We walked into it with seven solid quarters of performance.
All we had to do is stay focused and push the accelerator a little harder.
As a result, we set the bar in casual dining, landing the top spot in sales and traffic for three straight months according to KNAPP-TRACK, and we're poised for continued future success.
You've heard how many restaurant companies are leaning into digital to manage through this crisis.
And while Chili's is no exception, we were leading the way in the digital space long before the pandemic.
Over the past decade, we've made significant investments to build our digital infrastructure, foster connections with guests and enabling us to quickly respond to their evolving dining needs.
Increasing convenience is a big component of how we leverage our digital capability.
We can lean into our 8 million member loyalty database, gain check-level purchasing insight from our tabletop devices and continue to improve our five-Star app with features like one-tap reorder of our guests most frequent-ordered items.
And last year, we integrated DoorDash into our POS system and our e-commerce experience, making it possible to shift our marketing focus from national TV spots to our digital platform, where we continuously test and learn to increase e-commerce conversions.
And as a result, our digital sales of off-premise meals have grown from low teens to more than 50% in the fourth quarter with only a slight dip as dining rooms reopen.
We have also driven frequency -- increased frequency through our takeout and delivery channels at a fraction of the marketing expense.
That's the beauty of a digital strategy that makes dining easier and more convenient for guests.
Because we can meet them where they are, guests use us more.
Finally, here's something you haven't heard from anyone else in our space.
During the last fiscal week or last week of fiscal 2020, we accomplished something no other restaurant company has ever done.
In a single day, we launched It's Just Wings, our first virtual brand, in 1,050 Chili's and Maggiano's across the country.
Sales continue to build every week, and we clearly see the potential to exceed $150 million in the brand's first year, which would secure It's Just wings a spot in the top 200 restaurant brands.
Over the years, casual dinings has been deemed for being overbuilt.
We believe this is our opportunity to prove that maybe it isn't overbuilt, it's just underutilized.
It's Just Wings leverages existing buildings, equipment and labor.
Even after aggressive pricing and marketing, buying quality ingredients and packaging and paying our last-mile logistics partner, we're generating strong flow-through.
The brand's guests are highly incremental to Brinker concepts, and their feedback is extremely positive.
Satisfaction ratings are among the top restaurant brands on DoorDash and [Inaudible] is high, and we're just getting started.
We created this business in six months and launched it overnight with minimal investment in a consumer channel where demand is growing by more than 100% annually.
Taking into account our scale, the capacity of our kitchens, our exclusive partnership with DoorDash, we believe our ability to win in this space is unmatched.
So we're testing additional virtual concepts and learning how to drive visibility among the millions of DoorDash guests looking for food delivery options and how to continually improve our operations to meet consumer demand for speed, food quality and value.
We are pleased to have not one but two brands that rank among the most popular on the DoorDash platform, and we're excited about the potential that lies ahead.
Obviously, things aren't back to normal for any of us yet, but we see a bright future for all the Brinker brands.
We promised you last quarter that no matter what came our way, we would do two things; put the safety of our guests and team members first and continue to perform and take share.
I couldn't be more proud of how our operators and our support teams have delivered on both of those promises and how we're creatively and boldly building our future together.
No matter what lies ahead, with the talent on our team, the power of our brands and the scale at our disposal, we start from a position of strength.
Regardless of the descriptor you put on the operating environment to the most recent quarter and a number of less complementary ones come to mind, our operators quickly adjusted course to the realities of the pandemic and rose to the challenge to exceed expectations with the results delivered.
For the fourth quarter of FY '20, Brinker reported consolidated net comp sales of negative 36.7%, although comp sales recorded material improvement as the quarter progressed with the June period consolidated results down 19%.
Both brands generated a positive progression of performance through the quarter with Chili's leading the casual dining sector from a comp sales perspective.
While the reported quarterly net comp sales for the brand was a negative 32.2%, performance progressed from down 51% in April at the height of the dining room closures to down only 13% for the June period.
Chili's outpaced the competition throughout the quarter with comp sales positive the casual dining sector by approximately 13% and traffic positive to the sector by approximately 18%.
More than 25% of our corporate Chili's restaurants reported positive comp sales for the June period, a percentage, as Wyman earlier stated, that increased to 36% in July.
Our P&L highlights for the quarter were total revenues of $563 million, a restaurant operating margin of 6.4% and an adjusted loss per diluted share of $0.88.
Included in the $0.88 loss is a burden of approximately $0.18 due to the timing of recording expenses related to annual and long-term incentive compensation plans beyond what would typically be recorded in the fourth quarter in our G&A expense.
Throughout this crisis, our team has done an exceptional job of taking care of our guests and team members and has proven an equal ability to effectively manage expenses in the face of meaningful sales decreases.
Our managers have been efficient in utilizing our scheduling tools to optimize labor hours to fit the current business environment.
Hourly labor and payroll tax have a good degree of variability and were favorable year over year, although total labor, including restaurant management, was unfavorable in the quarter by 260 basis points driven by sales deleverage.
Restaurant expense margin for the quarter increased by 6.2%, again primarily due to sales deleverage.
Despite our operators reducing year-over-year spend in this area by more than $29 million, we recorded meaningful savings in advertising spend, repair and maintenance and supplies related to on-premise dining, a portion of which we believe will be ongoing.
As to cost of sales, we were positive 30 basis points versus prior year, primarily due to favorable menu mix.
By earlier commented, our restaurant operating margin from the quarter was 6.4%.
However, in conjunction with the progress we made, top line, our operating margin improved through the quarter, increasing to 12.2% for the June period.
Assuming an improving operating environment, we believe we are set up for additional margin improvement as we carry forward identified efficiencies, further open dining room capacity and leverage sales from our virtual brand, It's Just Wings.
Strengthening the balance sheet is an important part of our financial strategy moving forward, and we are currently focusing free cash flow toward debt reduction and liquidity enhancement.
To further enhance our liquidity position, we executed an equity offering in the quarter, raising approximately $139 million, which was used to pay down revolving credit debt.
Our overall total debt balance at fiscal year end was approximately $1.2 billion, a reduction of just over $220 million from the end of the third quarter as revolving credit borrowings decreased from $700 million to less than $473 million.
Our liquidity, which we consider to be cash balances and revolving credit availability, now exceeds $575 million.
In addition, we recently completed a 15-month extension of our revolving credit facility now maturing in December 2022.
As sales and cash flows improved, we resumed new restaurant development activity that have been temporarily halted early in the quarter.
We plan to open or relocate four new Chili's restaurants during this current quarter.
Now as to operating guidance, while in past years, we would typically provide annual guidance for Brinker during this earnings call, potential volatility and unknowns of the current operating environment makes that exercise difficult.
Instead, we are providing some limited guidance as to our consolidated performance for the current first quarter and anticipate providing quarterly insights as we move through the year.
For Brinker in the first quarter, we expect consolidated comp store sales to be down in the low to mid-teens range.
Adjusted earnings per diluted share are currently estimated to be a loss in the range of $0.25 to $0.40.
We anticipate positive operating cash flow, and weighted average shares is estimated to be 45 million to 46 million shares.
I would also like to remind everyone that fiscal year 2021 includes a 53rd week, which takes place during the fourth quarter.
Despite the difficulties experienced from this pandemic, our team has risen to the challenge.
Our strategy of focusing on value, convenience and safety has proven to be well received by our guests has given us the ability to outperform our competition and leaves us very well-positioned to continue to take market share as we move through the fiscal year.
I greatly appreciate the hard work and commitment from our team members, especially those on the front line serving our guests each and every day.
I have every confidence we will continue to demonstrate our ability to sustain our progress and return to growth on the top and bottom line for the long term.
 Assistant:

Chosen response:
chili's total comparable restaurant sales decreased 10.9% in fiscal 2021 q1-to-date.
sees q1 adjusted net loss per diluted share to be in range of $0.40 to $0.25.
comparable restaurant sales are expected to be down low to mid-teens in q1.
operating cash flow is expected to be positive in q1.
brinker international - during q1 of fiscal 2021 chili's and maggiano's continue to operate with reduced dining room capacities.
qtrly adjusted loss per share $0.88.