Prompt:
Human: Although we face some continued market challenges during the third quarter, including the impact of Hurricane Ida and the lingering COVID-related impact on our international operations, we are encouraged by the improving market dynamics in the oil and gas sector and remain focused on ongoing efforts to reshape our U.S. Fluids business.
Our third quarter was highlighted by continued strength in Site and Access Solutions product sales along with notable progress in our Fluids recovery.
Consolidated revenues improved 7% sequentially to $152 million including 11% improvement in Fluid Systems.
Consolidated third quarter EBITDA generation was $4 million, which includes $4 million of charges associated with Hurricane Ida as well as costs associated with restructuring our U.S. Fluids business.
Turning to the specifics of the segment.
The strong performance from our Industrial Solutions business continued in the third quarter, demonstrating the value of our diversification efforts as we expand our presence in the power transmission and other industrial end markets.
While the third quarter was impacted by the typical seasonal slowdown in T&D project activity, the seasonal low was largely offset by a $4 million increase in site access product sales, reflecting the benefit of our expanding presence outside of oil and gas.
With a modestly lower revenue and shift in mix, our Industrial Solutions operating margin declined 18% in the third quarter, generating $13 million of EBITDA.
Through the first three quarters of 2021, we remain very pleased with the momentum we are building particularly within the multibillion-dollar transmission access market.
Year-to-date, we generated $108 million of site access revenues from the power transmission and other industrial markets, which puts us on a pace for nearly $150 million of revenues for the full year 2021, a 25% improvement from our previous high mark.
This revenue level and growth rate reflects significant progress in our power transmission market penetration, which is a key component of our strategy.
Turning to our Fluid Systems.
Total segment revenues improved 11% sequentially primarily driven by strength in the Canadian market as well as our other international markets.
In North America, revenues improved by 14% sequentially to $71 million, substantially all driven by the Canadian market.
U.S. revenues remain in line with prior quarter with modest improvements in land activity offset by a $2 million weather-related decline in the Gulf of Mexico.
International revenues improved 6% sequentially to $37 million in the third quarter, with our expansion in Asia Pacific being the primary driver of the improvement, while certain areas in the EMEA region continued to be negatively impacted by COVID-related restrictions.
Benefiting from the revenue improvement as well as our ongoing efforts to reshape the U.S. Fluids business, the Fluid Systems segment made progress toward a return to positive cash flow generation.
As another sign of the international market recovery, I'd like to highlight that we received a five-year award in Albania from Shell Oil as they look to return to drilling activity in early 2022, which we believe will generate roughly $5 million of revenue per year.
We've had a strong history with Shell in Albania, though the upcoming contract reflects their first drilling activity in this country since 2019.
And with that, I will hand the call over to Gregg to discuss in more detail our financials for the third quarter.
I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook.
Total revenues for the Industrial Solutions segment declined 3% sequentially to $44 million in the third quarter.
Site and Access Solutions business contributed $42 million of the segment revenues in the third quarter including $28 million of rental and service revenues and $14 million of product sales.
As discussed on our August call, the third quarter was impacted by the typical seasonal slowdown in T&D project activity, which led to a $5 million decline in rental and service revenues following the strong Q2 results.
This decline was largely offset by a $4 million increase in revenues from product sales, benefiting from our expanding customer base in the utility sector.
Industrial blending contributed $2 million of the segment revenues in the third quarter, in line with prior quarter levels.
As discussed last quarter, although our primary industrial blending customer experienced a decline in consumer demand for disinfectant and cleaning products and canceled their orders early in the third quarter, revenues remained flat sequentially largely due to the cancellation fee provisions within our customer contract.
With the modestly lower revenues, the Industrial Solutions segment operating income declined by $2 million sequentially to $8 million, contributing $13 million of EBITDA in the third quarter.
As highlighted last quarter, the Q2 results included a $1 million gain associated with the enforcement of our patent rights.
Comparing to the third quarter of last year, revenues from the Site and Access Solutions business increased $13 million or 46%.
This increase includes an $8 million improvement in product sales along with a $5 million or 22% improvement in rental and service revenues.
Looking at the year-to-date 2021 performance for the Industrial Solutions business, as Paul touched on, we're continuing to see a significant shift within our segment revenue mix.
Through the first three quarters, the power transmission end market contributes more than half of our Industrial Solutions segment revenues, while our historical E&P market activity accounts for less than 20%.
Now turning to Fluid Systems.
Total segment revenues improved by 11% sequentially to $108 million in the third quarter primarily driven by improvements in Canada and other international markets.
Revenues from U.S. land increased 4% sequentially to $51 million, reflecting the benefit of the 11% improvement in market rig count as our market share remained relatively stable.
Revenues from the Gulf of Mexico declined by $2 million, contributing $6 million in the third quarter, largely reflecting the weather-related impact on our customers' operations.
In Canada, revenues nearly tripled sequentially to $14 million in the third quarter, meaningfully outpacing the market rig count improvements following spring breakup.
Outside of North America, although we are seeing continued recovery in customer activity levels, the global surge in the COVID Delta variant caused some delays to customers' plans in certain EMEA markets, hampering the pace of recovery.
International Fluids revenues improved 6% sequentially to $37 million in the third quarter, with our ongoing expansion in Asia Pacific being the primary driver of the improvement.
As Paul touched on, with the sequential revenue growth in the third quarter, we saw continued progress in returning the Fluids Systems segment to profitability, although the $4 million of charges related to Hurricane Ida and our ongoing cost actions largely offset the improvements, keeping the Fluids Systems reported operating loss flat sequentially at $7 million for the third quarter.
Contributing to this improvement, we achieved a modest net improvement in pricing for this quarter while passing on inflationary impact of raw materials and transportation costs.
On a year-over-year basis, our Fluids Systems revenues increased $40 million or 59%.
North America land revenues nearly doubled year-over-year, fairly in line with the market rig count, while Gulf of Mexico decreased modestly.
International revenues improved $12 million or 47% year-over-year, benefiting from new project start-ups and the recovery of customer activity in several European markets and Algeria.
SG&A costs were $24 million in the third quarter, which includes $7.5 million of corporate office expenses, reflecting a $1 million increase from the prior quarter.
The sequential increase in both SG&A and corporate office expense is primarily attributable to the timing of long-term incentive expense along with the full lifting of salary austerity measures put in place during 2020.
Comparing to the third quarter of last year, SG&A costs increased $3 million, including a $1 million increase in corporate office expense.
The year-over-year increase in SG&A primarily reflects higher personnel costs including higher incentive expenses in the Industrial Solutions segment and Canada as well as the $1 million increase in corporate office expense.
Interest expense remained stable at $2.2 million for the third quarter, nearly half of which reflects noncash amortization of facility fees and discounts.
Our weighted average cash borrowing rate on our outstanding debt is approximately 3.25%.
The third quarter includes a $2 million income tax expense despite reporting a pre-tax loss.
We are currently unable to recognize the tax benefits on our U.S. losses, and therefore, the income tax expense primarily reflects taxes on foreign earnings.
Our reported net loss in the third quarter was $0.11 per share, which included $0.04 of charges and compares to a net loss of $0.07 per share in the second quarter.
Reported net loss in the third quarter of last year was $0.26 per share, which also included $0.04 of charges.
Turning to third quarter cash flow.
Cash used in operating activities was $12 million including $14 million of cash usage associated with a net working capital increase.
Substantially all of the working capital increase is attributable to growth in receivables with the majority in Canada and our international Fluids operations.
While partially driven by the improving revenues in these regions, much of the receivable increase is reflective of elevated DSOs driven by the timing of activity within the quarter, which we expect will normalize next quarter.
Investing activities used $6 million of cash in the third quarter, substantially all of which reflects mat rental fleet additions in preparation for fourth quarter rental projects.
It's worth noting that through the first three quarters of 2021, investments in the rental fleet totaled $13 million, the majority of which replaces mats sold from the rental fleet as part of our standard commercial offering.
Consequently, while gross capital expenditures totaled $19 million year-to-date, our net capital investments are only $7 million.
We ended the third quarter with a total debt balance of $94 million and cash balance of $31 million, resulting in a modest 17% debt-to-capital ratio and 12% net debt-to-capital ratio.
Our net debt increased by $20 million in the quarter, largely reflective of the elevated receivables as well as the additional capital investments to support our Industrial Solutions growth efforts.
Our increase in debt was fairly balanced between the U.S. and international loan facilities.
We also purchased $10 million of our outstanding convertible bonds in the open market during the quarter, resulting in a small loss on extinguishment of debt.
We ended the third quarter with $24 million outstanding on our U.S. asset-based loan facility.
And after providing for the $39 million convertible bond maturity next month, we have $42 million of remaining availability.
Now turning to our near-term operational outlook.
As we look ahead, we remain encouraged by the strength in the longer-term fundamentals across all major energy sectors, though we continue to see significant inflationary pressures on raw materials, transportation and labor costs as well as increasing lead time requirements for many purchases.
In the Site and Access Solutions business, we've experienced a meaningful recovery in rental projects in recent weeks following the seasonally soft Q3.
We have several power transmission projects now underway including our first large-scale project in Florida following last year's expansion into the Southeast U.S. market.
In addition to the stronger rental and service activity, we expect the fourth quarter to benefit from the typical year-end strength for product sales into the power transmission sector.
Meanwhile, revenues from industrial blending are expected to remain limited in the near term as we look to replace the disinfectant sales volume.
In total, we expect Industrial Solutions segment revenues of roughly $50 million, with the level of year-end demand for product sales being the greatest variable.
At that revenue level, we expect segment operating margin to remain relatively stable to Q3 primarily impacted by the following factors: first, the significant surge in raw material cost for mats combined with the competitive pricing environment; second, a change in the mix of rental projects with lower pricing on a few of the larger-scale, longer-duration projects; and third, the lack of near-term industrial blending production volume.
With the anticipated Q4 performance, the Industrial Solutions segment is expected to deliver more than $190 million of revenues for the full year 2021, just shy of our 2019 results, while also generating more than $60 million of full year EBITDA.
This comparison to 2019 highlights the successful transformation in this segment as the strong revenue growth in the power transmission and other industrial end markets is expected to substantially offset the more than $50 million decline in annual revenue derived from the E&P sector as compared to 2019.
In Fluids Systems, we anticipate most regions will continue to strengthen in the near term, benefiting from the strong commodity prices and the gradual easing of COVID-related restrictions around the world.
In North America, we expect revenues will remain relatively stable with improvements in U.S. land mostly offset by the typical holiday-driven slowdown in December.
Although we previously anticipated a meaningful improvement in the Gulf of Mexico activity in the fourth quarter due to the start-up of a second drillship with Shell, recent changes in Shell's plans for this drillship have now pushed this activity by several quarters.
Internationally, while the COVID Delta variant surge has tempered the pace of recovery, we expect international revenues to improve by a mid-teens percentage in Q4, benefiting primarily from higher customer activity in Africa with continued international recovery expected into early 2022.
In total, we anticipate our Fluids segment revenues to grow by a mid-single-digit percentage in Q4.
And although the change in Shell activity in the Gulf of Mexico provides an unfavorable headwind, we expect Fluids segment operating income will be roughly breakeven for the fourth quarter prior to the cost of any further restructuring, including a solid earnings contribution from our international operations along with improvements in the U.S. Looking beyond Q4, with the improving outlook for the oil and gas sector and particularly benefiting from our meaningful international presence combined with the impacts of our ongoing actions to reshape our U.S. operations, we expect revenue growth in 2022 will continue to deliver solid incremental margins and drive further improvements in Fluids profitability.
Corporate office expense is expected to remain fairly flat in the near term then decline modestly in the first quarter and beyond.
Also, with the December one maturity of our remaining $39 million of convertible bonds, we expect interest expense to step down modestly in Q4 then level off at roughly $1 million of quarterly interest expense in 2022.
With the sequential improvement in both segments and the modest decline in interest, we expect consolidated pre-tax income to be roughly breakeven for Q4 prior to restructuring charges.
With regard to Capex, we expect expenditures in the near term will remain fairly limited with investments focused on growth opportunities within the Industrial Solutions segment.
Total net Capex for the full year 2021 is likely to come in around $10 million.
It's also worth noting that as we look beyond the repayment of our upcoming convertible bond maturity in December, in addition to funding the expansion of our Industrial Solutions business and working capital needs of the business, we will look to resume returning value to shareholders in 2022 through purchases of outstanding stock under our existing share repurchase program.
I'd like to take a moment to elaborate on my recently announced decision to retire as CEO of Newpark.
I have also decided that upon my retirement, I will resign as a member of the Board.
As I reflect on my 15 years as the company's President and CEO, I'm extremely proud of all we have accomplished and the unique culture we have created.
While there is never a perfect time to retire, I believe the time is right, having turned 65 earlier this year and with the executive leadership team in place to continue on Newpark's journey.
I'd now like to hand the call over to Matthew Lanigan, who was recently promoted to President and Chief Operating Officer,and will ultimately succeed me as CEO upon my retirement.
As many of you know, Matthew has been with Newpark since 2016, where he led the transformation and diversification of our Industrial Solutions business.
I'm confident that Matthew, along with the rest of the Newpark leadership team, will do an outstanding job building upon the platform we have all worked to create and deliver long-term value for our shareholders.
It's an honor to have been selected as Newpark's CEO upon Paul's retirement.
I've had the good fortune to work very closely with him over these last five years and appreciate the profound impact he has had at Newpark including the establishment of a culture with unwavering commitment to safety, compliance and operational excellence.
Equally, I feel very fortunate to be surrounded by an exceptionally strong senior leadership and employee teams, all of whom who are committed to our core values and driving our long-term strategy across the business.
As I look to step into the role of CEO in the coming months, I wanted to provide a few thoughts regarding Newpark's focus going forward.
Consistent with our long-term planning process and as highlighted in the past, we'd continue to work closely with the management team along with our Board of Directors to evaluate various alternatives to generate value for our shareholders.
With ongoing support from outside financial and other advisors, we have continuously reviewed our portfolio during this unprecedented oil and gas market downturn and assessed necessary adjustments in course.
These reviews are focused on evaluating changes in the outlook of our served markets and customer priorities while identifying opportunities for value-creating options in our portfolio as well as placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability.
We remain encouraged by the progress we are making in the Industrial Solutions segment and our international Fluids business.
However, we recognize that the U.S. and Gulf of Mexico oil and gas markets are facing prolonged headwinds necessitating consideration of broader structural changes to transform this business for the new market realities.
Regarding our ongoing focus on innovation, we must continue to deploy our industry-leading sustainable products and services into markets where we uniquely meet the needs of our customers and generate acceptable returns.
Newpark is no stranger to taking the lead in developing solutions that provide meaningful impact to our customers' environmental footprint as well as providing industry-leading service to support them.
This focus, which goes back well over a decade, will continue to guide our investments in product and service development.
We will also remain focused on our unyielding commitment to safety and to acting in a manner consistent with Newpark's core values.
Nothing is more important than keeping our employees, customers and other stakeholders safe and being a company that is trusted to always do the right thing from a values and compliance perspective.
I look forward to sharing more about Newpark's strategy and key priorities on future calls.
 Assistant:

Chosen response: net loss for q3 of 2021 was $0.11 per share.


Prompt:
Human: Along those lines, recall that in the first quarter of 2020 we launched a rationalization of our locomotive fleet by 703 units, which resulted in a non-cash charge of $385 million, so we will speak to the quarterly results excluding that charge.
A full transcript and download will be posted after the call.
It is now my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.
Norfolk Southern started strong in 2021.
Our successful implementation of precision scheduled railroading translated into solid financial results.
Our team delivered all-time records for operating ratio and free cash flow and achieved first quarter records for earnings per share and operating income.
Northern Southern employees accomplished this despite significant supply chain disruptions brought on by severe weather nationwide in February.
For the quarter, revenue increased 1% due primarily to volume growth up 3% year-over-year.
At the same time, expenses declined 3% or $48 million compared to our adjusted first quarter of 2020.
Throughout the quarter, we continued to streamline resources resulting in impressive gains in workforce asset and fuel productivity.
Looking ahead, we remain intent on achieving strong revenue growth and efficiencies to propel the bottom line and create shareholder value.
Investments in technology and sustainability will be critical, and I'll provide some recent examples of these after we review the quarter.
I am excited to share our first quarter achievements and what we have in the hopper looking ahead.
Our team on the ground is proving its capability and motivation to move quickly on advancing efficiency and restoring service reliability.
We've also introduced a few new team members with PSR experience who are leading initiatives alongside our field team to increase productivity inside our major hump and flat switching terminals.
These actions are having an immediate impact for our shareholders and our customers.
Slide 6 shows our operational indicators.
While volumes were variable in the quarter, efficiency gains were consistent.
By absorbing additional volumes within our existing train network, despite how those volumes varied during the quarter, we were able to realize substantial gains in train length and train weight and improve fuel efficiency.
Productivity initiatives such as locomotive horsepower optimization and additional usage of distributed power were key to the success.
Execution of our efficient scheduled railroading plan enabled us to handle more freight with fewer resources compared to a year ago.
Let me add some more color on train length.
We are committed to improving productivity by running longer trains, and accomplishing that involves targeted investments within certain parts of our network.
During the quarter, we completed an initial assessment of incremental infrastructure that will aid our long train initiative.
As a result, we've begun construction on a long siding extension in the Chicago-Atlanta corridor that will be complete ahead of this year's peak season, and we have identified two others that we will begin construction on this year.
We will quickly identify and address opportunities to efficiently deploy capital to support both train consolidation and organic growth.
Moving to Slide 7, weekly carload fluctuations tell an important story of the quarter.
Volumes rose quickly coming out of the new year's holiday and were running several percentage points higher than last year, until severe winter weather arrived in February.
This affected both railroad operations and our shippers, with Chicago being hit the hardest by both snow and extreme cold.
While we kept main lines fluid, overall supply chain congestion slowed traffic through terminals.
I would like to especially recognize our field operations, engineering and signals teams for ensuring a safe and efficient operation despite historic cold deep into our network.
Their work is critical to the success of NS and our customers.
Beyond the weather episodes, we continued to adjust our yard network to handle volume increases expected during the year.
We are focusing on driving improved efficiency and reliability at our key terminals, which in turn creates a capacity dividend that enables us to absorb both volume variability and overall growth.
We are continuing our yard and terminal focus in the second quarter.
Slide 8 shows that to start the year, network fluidity was comparable to 2019 levels, but a condensed winter that followed in February impacted our velocity and terminal dwell and snarled supply chains in general.
As you see by the network performance trends over the past seven weeks, we continue to progress and are committed to further improvement to get our service reliability to where we want it to be.
Additional progress creating consistent fluidity leads to enhanced rail car velocity, which in turn benefits our shareholders and customers.
I'll finish on Slide 9 by explaining how we continued Norfolk Southern's operating transformation during the quarter and how it showed up in the results.
We've undertaken a series of focused initiatives to improve capacity and drive down dwell at our major terminals, including current humps as well as flat switching operations.
These improvements support the longer and heavier trains we are running, allowing us to operate efficiently with fewer resources.
Finally, Q1 reinforced the benefits of effective interline cooperation, and we are building on that even though the winter weather has passed.
The results show in both productivity and asset usage.
These trends have been improving since we implemented Top 21 in mid-2019, but the team has been able to both accelerate and extend the improvement and we are very well positioned to continue these trends, leveraging our efficiency initiatives with rising volumes.
Beginning on Slide 11, we experienced significant volume volatility in the first quarter.
We delivered a strong start to the year with January volume exceeding last year, while February was challenged with winter weather events that disrupted supply chains cross the country.
Progressing into March, business levels improved as supply chain fluidity started to recover and we adjusted to dynamic shifts in the freight environment.
Despite the difficult operating conditions, overall revenue improved 1% year-over-year to $2.6 billion while volume grew 3%.
Revenue per unit excluding fuel improved in each of our individual business units this quarter, reflecting our commitment to grow yield as part of our long-term strategy, though total revenue per unit and revenue per unit excluding fuel were down slightly due to the mix of intermodal volume growth with declines in merchandise volume.
Merchandise revenue fell 4% from prior year levels on a 3% volume decline.
This segment faced difficult pre-COVID comps in the energy sector.
Partially offsetting these declines were gains in soybean, steel and automotive shipments.
March U.S. light vehicle sales surged to a 17.7 million unit seasonally adjusted annual rate, the second highest March ever, while inventories are at a 10-year low.
Merchandise revenue per unit excluding fuel reached a record high for the quarter, delivering 24 consecutive quarters of year-over-year improvement in this market.
Intermodal revenue and volume both increased compared to the first quarter of 2020.
Volume growth was driven by a continuation of the inventory replenishment cycle combined with the tight truck market and strength in consumer activity as retail sales grew 9.8% in March, the largest sequential increase since May 2020 when sales initially rebounded as states reopened from shutdowns.
Intermodal revenue per unit excluding fuel improved 6% year-over-year, supported by continued strength in the LTL market driven by growth in e-commerce.
This marks the 17th consecutive quarter of year-over-year improvement in this metric and a record high.
Our coal business delivered 5% revenue growth in the quarter.
Volume gains were driven mostly by export thermal shipments as the global economic recovery continued, as well as tailwinds from China-Australia trade tensions.
Domestic met and coke volumes continued to improve as demand for finished product accelerated.
Utility demand was down as it continued to be pressured from product substitution and lower industrial load.
Revenue per unit improved 3% year-over-year, inclusive of a $9 million incremental gain from volume shortfall revenue.
We have an unrivalled consumer-oriented franchise that continued to benefit our customers and shareholders throughout the quarter.
Although severe weather certainly impacted business levels particularly in February, our diverse industrial franchise serves the improving manufacturing economy and we saw gains from rising commodity prices.
We are delivering sustainable revenue growth in line with our long term strategy to capitalize on the strength of our franchise and provide value-added solutions in the marketplace.
Moving to Slide 13, our outlook for the remainder of the year is strong.
Consensus for U.S. GDP growth is north of 6%, the highest in the last 40 years.
PMI rose to 64.7 in March, hitting the highest level since 1983, while inventories remain low.
These are expected to be key factors driving robust economic activity for the rest of 2021.
We remain confident that our markets will achieve volume growth in the high single digits this year and our franchise is poised to capitalize on the expected growth that will drive value for both our customers and our shareholders.
Merchandise growth will be driven by continued expansion in the manufacturing sector.
Elevated demand levels coupled with low dealer inventories in the automotive segment will drive volume gains; however, the current semiconductor chip shortage creates uncertainty as to the timing of the recovery.
U.S. light vehicle production currently is expected to exceed pre-pandemic levels in 2021.
That production growth along with the return of total industrial production to pre-pandemic levels will drive steel demand, which is another market where we expect to generate volume growth as the year progresses.
We also anticipate our energy markets within merchandise will benefit from the return of gasoline demand in the consumer travel sector as the economy fully reopens.
Our intermodal franchise will continue to build on the momentum associated with the ongoing U.S. economic recovery.
An expected rise in consumer spending, low inventory levels, and continued tightness in the trucking sector are all key factors boosting growth opportunities.
Spending on durable goods is expected to grow 15% in 2021, which bodes well for our domestic intermodal franchise that is closely correlated with consumption markets.
International intermodal will benefit from the resumption of global trade activity.
Coal business will remain challenged in 2021.
The export thermal market continues as a near term strength, although with a lower RPU than average.
Domestic met and coke volume is expected to improve in line with the economic recovery.
Natural gas and renewal energy source conversions will continue to negatively impact the utility markets.
Decisions on stockpile levels will be determined by summer weather and gas prices.
In summary, we expect to generate revenue growth in 2021 as economic conditions continue to improve.
As the needs of our customers constantly evolve, we remain diligent in delivering valuable transportation solutions to the marketplace.
We continue to focus on initiatives to drive growth, margin improvement, and a strong service product.
We are confident in our ability to leverage our value in the marketplace to secure new opportunities to support our customers' growth and grow our margins.
As Jim mentioned, the OR and earnings per share records we achieved in the quarter came through disciplined cost control while handling additional volume in the midst of pretty challenging operating conditions.
On Slide 15, walking you through our summarized results compared with an adjusted first quarter 2020, we reported an OR of 61.5%, which was a 220 basis point improvement, and an earnings per share improvement of $0.08.
I will note that the $0.08 improvement in earnings per share was dampened by the absence of a gain recognized last year from a 2012 income tax refund that equated to $0.09, so core earnings per share improvement in the quarter was $0.17.
Moving to Slide 16, revenue grew 1% in the quarter due primarily to the 3% increase in volume year-over-year, with growth in intermodal and coal more than offsetting declines in merchandise.
At the same time, we drove operating expenses down by 3% as we harvested additional benefits from workforce and asset productivity.
The volume growth coupled with the productivity drove the operating ratio down to a record low 61.5%, improving 220 basis points year-over-year and 30 basis points sequentially versus Q4.
This produced operating income of $1 billion, another record, up $62 million or 7% year-over-year, and we generated first quarter free cash flow of $750 million, also a record, up $161 million or 27% versus the first quarter of 2020.
Moving to a drill down of operating expense improvement on Slide 17, the reduction of $48 million or 3% comes with improvements in nearly all expense categories.
Comp and benefits declined $11 million or 2% from lower employment costs related to a workforce that was 12% smaller than a year ago and 2% smaller than the fourth quarter.
Partially offsetting these tailwinds are headwinds this year from higher and stock-based compensation.
Purchase services and rents were collectively down $10 million or 2% as reduced freight car expenses more than offset higher spend associated with technology investments and increased intermodal volumes.
When matched to a 3% volume increase, the 3% decline in opex provides another quarter of additional productivity, building in the work we've done over the past several quarters, as you'll see here on Slide 18.
From the quarter that we launched our Top 21 operating plan, we have made meaningful progress on our workforce productivity with GTMs per employee up 16% since the third quarter of 2019 and a 340 basis point improvement in our operating ratio.
We remain intensely focused and committed to drive further improvements.
Turning to Slide 19 for the remainder of the P&L below operating income, you'll see that other income net of $7 million is $15 million of 68% unfavorable year-over-year due primarily to lower net returns on our company-owned life insurance investments.
Our effective tax rate in the quarter was just over 22%, and recall last Q1 we had the 2012 tax refund that resulted in a lower effective tax rate.
As a result, net income increased by 1% compared to pre-tax earnings growth of 5%.
Earnings per share rose by 3%, supported by 2.3 million shares that we repurchased in the quarter at an average price of $254.
Wrapping up now with our free cash flow on Slide 20, free cash flow at $750 million was buoyed by strong operating cash conversion and a relatively modest $265 million in property additions in the quarter, which was below our annual targeted run rate for the year due to timing issues, including weather related delays and capital spend.
Our company is also in the middle of a digital transformation.
We expect investments in technology to drive the next phase of improvements in service growth, efficiency and sustainability at Norfolk Southern, and we're already making great headway.
Slide 22 shows a few recent examples.
The introduction of new mobile apps and a redesign of our customer portal are giving customers a more user-friendly and truck-like experience, delivering real time shipment intelligence, facility truck to rail conversions, and reducing emissions.
We're putting an easy-to-use mobile application in the hands of our train conductors, streamlining internal workflow and improving shipment visibility for customers.
We're digitizing our internal and external communications through a new CRM platform, enabling better, faster decision making.
We're using new information systems to promote intermodal equipment utilization and efficiency at our intermodal terminals.
We're using predictive analytics to reduce locomotive failures and plan maintenance proactively.
Machine vision technology is creating a path to automated track and freight car inspections with manifold benefits to safety and efficiency.
On Slide 23, we show that NS has been a sustainability leader for over a decade.
Years ago, we recognized the importance of reducing our environment footprint, beginning in 2007 when we first established our sustainability program.
We've been reporting on our results ever since, delivering on the goals we set forth.
Here we highlight a few key milestones and also show a few examples of external recognition, including recently being named by the Wall Street Journal as one of the 100 Most Sustainably Managed Companies.
In summary, we have a track record of leadership on sustainability which is good for business and the right thing to do for all our stakeholders.
Although we don't generally update guidance, given the unusual circumstances in the first quarter with February's extreme cold and a global supply chain disruption, let me wrap up restating our confidence in our ability to meet the market for full year 2021 with the expectation that strength in consumer-oriented and manufacturing markets will drive 9% revenue growth year-over-year.
For the full year, we expect to achieve more than 300 basis points of OR improvement versus our adjusted 2020 result, and we expect to end 2021 with a 60% run rate OR.
As we've said before, once we achieve these targets, we won't stop improving.
We're optimistic about growth in the year ahead and all the initiatives we have under way to create long-term sustained value for our shareholders.
Before we open the call to Q&A, I want to quickly address the proposed transactions involving another Class 1 railroad.
We're watching the situation closely, but we won't be discussing the proposals or industry speculation generally.
As the regulatory review process unfolds, there will be opportunities for further discussion.
With that, we'll open the call to questions.
 Assistant:

Chosen response:
qtrly railway operating revenues of $2.6 billion increased 1%, or $14 million, compared with first-quarter 2020.
qtrly railway operating expenses were $1.6 billion, a decrease of 21%, or $433 million, compared with same period last year.
qtrly railway operating ratio was 61.5%.


Prompt:
Human: Along those lines, recall that in the third quarter of 2020, we recorded an impairment charge of $99 million related to an equity method investment.
So we will speak to the quarterly results excluding that charge.
A full transcript and download will be posted after the call.
It is now my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Jim Squires.
Our third quarter results reflect a strong performance from the team as we delivered third quarter records for operating ratio, net income, income from railway operations and earnings per share.
While volume held steady with last year, revenue grew an impressive 14% and our 60.2% operating ratio reflects a 230-point improvement on a year-over-year adjusted basis, our second-best OR performance ever, outpaced only by last quarter's 58.3% mark.
In the midst of significant supply chain disruptions and labor shortages across the country, we're delivering upon our commitments.
And we could not have achieved those milestones without the tireless work of our employees who day in and day out, keep our customers' goods moving safely and efficiently.
Now let's turn to Cindy to go through our operations.
In the quarter, we continued to successfully drive productivity improvement throughout the network.
We worked to be as efficient as possible as we adjusted to accommodate demand shifts in many of our markets.
This quarter shows continued progress as we attack our cost structure while positioning ourselves for further improvement in both cost and service levels.
The quarterly operating metrics on slide six clearly show that, once again, we generated positive operating leverage on flat unit volumes and GTMs that were up 5%.
While we are proactively hiring train crews, efficiency in all areas of our operations, including engineering, mechanical and communications and signals, enabled us to run the network with 7% fewer people in the quarter compared to a year ago.
Because assets drive activity, reducing the number of active locomotives was an important lever in managing the size of the workforce.
Both train weight and train length continue to improve, driven by a focus on improving the productivity in our bulk network.
Coal, grain and other single commodity unit trains offer real opportunity for gains through collaborating with our customers on operating trains with more cars per set and by doubling up existing trains over portions of their route.
I expect we will show continued progress in the fourth quarter as we see the fruits of our efforts.
While strong coal traffic helped drive train weight more than length, train length continued to improve and set another quarterly record.
After seven consecutive quarters of fuel efficiency improvements, we saw a modest deterioration this quarter despite the increase in train size as our horsepower leverage was challenged at times due to volatile traffic flows and we had modestly fewer of the very heavy, highly fuel-efficient trains.
I am pushing the team to respond more quickly in the face of change, and we are committed to closing the gap with our peers over time and are redoubling our efforts in this critical area.
As you can see on slide seven, train speed and terminal dwell were generally flat versus second quarter and do not reflect performance at desired levels.
While there were some effects from Hurricane Ida, those impacts were localized, and I'm extremely proud of how the team, especially engineering and our signal forces, helped us return our routes in Louisiana to operation and reopen the New Orleans Gateway very quickly.
As I mentioned last quarter, we are experiencing hiring and retention conditions that are increasingly challenging, especially in some of our more critical locations, and it is having an impact on our network.
Despite hiring all year long, attrition has been accelerating in each of the last two quarters in several of those critical areas.
In many of these locations, we've been able to absorb the impact by executing upon productivity initiatives, and this will be very much a part of the equation going forward as we grow capacity, which I'll talk about more in a moment.
Some of the things we are doing to create relief: we've more than tripled our conductor trainee rank since the first quarter so that we can effectively backfill in critical areas; we've implemented tools such as perfect attendance bonuses, referral bonuses and signing incentives to improve the stickiness of our current and future workforce; and we continue to leverage the valuable Go Teams to quickly respond to business opportunities where needed.
People are the backbone of the railroad, and we need to make progress on these initiatives to better manage the effects of a tight labor market.
We are committed to having the right amount of resources in the right place at the right time, which will drive both cost control and service quality.
As our business mix continues to evolve, creating capacity across our market segments has become an even more significant area of focus as highlighted on slide eight.
Some shippers are looking to take advantage of unexpected market opportunities by shipping extra volume.
Others are looking for us to help them adjust to volatility coming from other parts of their supply chains, and of course, all place a high value and service predictability.
We're adjusting our network and operations to generate the various types of capacity that customers are looking for.
For example, increases in both train sizes give shippers extra lift without further demands on our crew base.
Train size increases often require connecting railroads, customers and Norfolk Southern to change processes, and we have found those process changes are worth the effort because they improve asset turns and capacity.
We also continue to focus on terminal efficiency, whether helping to drive dwell at our biggest hump yard, Elkhart, to very low levels or tactically redirecting trains to intermodal terminals that have the capacity to unload quickly.
Moving to slide nine.
I want to show how we can use these capacity efforts to drive productivity.
We've had great success over the past two years driving train size and, in doing so, have addressed a handful of infrastructure bottlenecks.
We're fast-tracking a set of siding improvements, the first of which went into service at the end of the third quarter so we can keep making progress.
Bigger trains unlocked by siding extensions helped drive locomotive utilization because it allows us to fully match train size to available pulling power.
And because locomotives are at their most efficient when pulling hard, this is a key lever to our fuel efficiency improvement.
While I've used locomotives and fuel as my primary example, capacity additions have a similar effect on our crew productivity: more cars per crew, asset turns, keeping trains moving with greater train capacity, and also helps our customers with improved train and car performance.
On slide 10, we are complementing our investment in physical capacity with a comprehensive technology strategy that makes our crews more efficient and our assets more productive.
Virtually all of our routine signal and track maintenance is now scheduled via the mobile track authority app, a process that used to be measured in minutes can now be accomplished in seconds.
It is inherently more efficient than the radio process of the past, and most importantly, safer because it reduces transcription errors.
In the words of our chief engineer, the app has been a game changer for the productivity of his forces.
We're doing the same with our mobile train reporting app, which enables our train crews to quickly report completed work and to receive updated customer work requests while in route.
This takes a lot of hands out of the process, including significant retyping and delay and enables our crews to be more productive.
We're still early in the deployment of this application with rollout to the local trains that do the preponderance of pickups and setoffs just beginning.
The use cases for this technology in the field are numerous, and driving adoption and innovation around this platform is a focal point that will allow us to capture additional benefit.
The common use thread in these apps is that better information allows people to plan.
Our track supervisors can better plan their schedule knowing the availability of track time, and our customers can better plan their plant operations and product pipeline with up-to-date shipment information.
In the third quarter, we continued to execute on our growth plan, yielding double-digit revenue gains in each of our three markets, further demonstrating our ability to deliver value for our customers and shareholders.
Beginning on slide 12, I will highlight our results for the third quarter.
We achieved total revenue of $2.9 billion, representing a 14% increase from the same period last year despite flat volumes.
Our revenue performance this quarter was driven by significant gains in revenue per unit and revenue per unit less fuel, both reaching record levels with double-digit year-over-year growth.
This reflects the success of our ongoing efforts to yield up and improve revenue quality, a strategy that enhances our long-term potential for revenue and margin growth as conditions improve.
Revenue in our merchandise segment improved 10% year-over-year, while volume increased to 5%.
Growth was led by our Chemicals franchise that benefited from recovering energy demand that drove higher shipments of crude oil and natural gas liquids.
Also contributing to merchandise growth was sustained strength in steel markets due to record-high commodity prices and growth in manufacturing activity.
Steel shipments were up an impressive 34% from the same period a year ago.
Partially offsetting these gains were declines in shipments of finished vehicles and vehicle parts due to the ongoing semiconductor shortage.
This limited automotive production activity and further depleted finished vehicle inventories to new lows.
Both revenue per unit and revenue per unit less fuel improved year-over-year due to price increases.
Our intermodal franchise experienced several headwinds related to supply chain disruptions that negatively impacted volume in our domestic and international business lines.
In both segments, unprecedented demand from inventory restocking and consumer spending outpaced available capacity in the supply chain ecosystem.
The combination of drayage shortages, warehouse productivity, equipment availability, labor force participation and rail network fluidity pressured intermodal volume throughout the quarter, resulting in a 4% year-over-year decline.
Overcoming these headwinds, we delivered revenue growth of 16% in the third quarter due to higher revenue from storage services, increased fuel surcharge revenue and price strength.
Coal revenue increased 32% in the third quarter as both domestic and global economies continued to recover from the pandemic and drive demand for electric power.
Export coal shipments increased significantly as strong demand and record high seaborne prices increased opportunities for US.
Utility volumes declined in the third quarter as coal supply was limited and some crossover tons moved into the higher-rated export market.
The mix shift from utility to export, coupled with price gains, led to a 20% increase in revenue per unit less fuel for coal in the third quarter, a new record for the franchise.
Moving to our outlook on slide 13.
We expect the third quarter environment to continue through the end of the year.
Strong consumer demand will continue, while pressures from material shortages and labor issues remain challenging global supply chains.
Inventory levels remain at historic lows despite the continued push to replenish stock, providing a boost to transportation demand.
We remain confident in our ability to leverage our strengths in these market conditions and deliver robust revenue growth for the full year.
We expect merchandise business will continue to benefit from recovering economic activity as conditions that limited business and recreational activities in the fourth quarter of last year have been much less impactful in the fourth quarter of 2021.
We anticipate our markets for crude oil, natural gas liquids and waste to experience higher volume as a result.
Ongoing demand for steel will also be a growth driver, with forecast for industrial production up more than 5% year-over-year in the fourth quarter and steel prices currently above $1,900 a ton.
A projected 4% year-over-year fourth quarter decline in US.
light vehicle production will remain a headwind as the industry remains challenged by the chip shortage.
Within intermodal, we continue to see strong demand from consumer spending and tightness in the truck sector.
These favorable conditions are offset by constraints from supply chain congestion and equipment availability.
We are working closely with our customers and our channel partners to mitigate these challenges.
However, we do not see meaningful improvement in these headwinds before the end of the year.
Coal demand is expected to remain strong with extremely favorable market conditions, although coal supply will be the governor on year-over-year growth.
Natural gas prices continue to climb, and declining inventory levels leading into the winter months are the current focus of utility customers.
Seaborne prices are at decades-long highs in the export market, creating demand beyond capacity and supply abilities.
Overall, we are optimistic about the opportunities in the fourth quarter and confident in our ability to execute our plan to generate value and grow our business.
Turning to slide 14.
There are several factors impacting the supply chain in which we participate.
This includes external factors, such as the chip shortage and intensifying congestion in the intermodal supply chain.
Coal supply availability continues to be a constraint to meet the higher demand in every market as both thermal and met production remain tight.
NS has taken action to mitigate some of these factors and effectively position us for revenue growth.
As drayage challenges affected international intermodal, we provided an alternative storage solution to our customers.
We're working diligently to add chassis capacity to support demand and alleviate shortages across the supply chain.
Last quarter, we outlined our plan to repair a portion of our chassis fleet that was impacted by a manufacturing defect.
I appreciate the quick action and effort from our team, and I'm pleased to report that this issue is effectively behind us as we have repaired and returned approximately 95% of the recall chassis back to service.
We are also in the process of taking delivery of leased chassis to augment our fleet.
We've added terminal capacity to support growth driven by e-commerce and a recovering economy as well as reduced terminal congestion and improved network fluidity.
We remain focused on growth opportunities across our network.
We are continuously innovating to compete in the $800 billion plus truck and logistics market, as shown by our Thoroughbred Freight Transfer or TFT service launched earlier this year.
TFT is one of our initiatives to drive growth by targeting opportunities for highway conversions to rail.
This service combines the efficiency of our intermodal trains, the capacity of our boxcar assets and the last mile flexibility of trucks to provide an innovative door-to-door service.
We're also leveraging our sustainability advantage to propel long-term growth.
The choice of transportation mode is one of the most powerful levers any shipper has to reduce the size of its carbon footprint, and we are working closely with our customers to deliver additional value through sustainability.
We have proven our ability to deliver results despite challenging market conditions by providing innovative solutions that our customers value and position us for future market demands.
On slide 16, as Alan just detailed, revenues were up 14% on flat volumes.
With operating expenses up 10%, we delivered strong incremental margins leading to 230 basis points of operating ratio improvement, driving us to a Q3 record of 60.2%.
The improvement Alan detailed in RPU, coupled with strong productivity, led to record Q3 operating income, with growth of 21% or nearly $200 million.
And our free cash flow is also at record levels, a 33% increase during these nine months compared to last year.
Moving to slide 17, let's drill down into the change in operating expenses.
While operating expenses grew $149 million or 10%, it's up only 4% or $67 million, apart from fuel cost increases.
The fuel cost increase of $82 million is driven mainly by price, but the 5% increase in GTMs also drove more consumption.
You'll see purchase services up $35 million, with the majority of the year-over-year increase in areas.
We have an increase in technology spend, which is consistent with our technology strategy, and you've heard a couple of project examples in Cindy's remarks.
There are also headwinds from Conrail operating expenses.
And there are increases in intermodal costs.
More specifically, we had trucking costs associated with shuttling longer dwell containers to satellite parking lots in order to reduce congestion at our terminals and keep the freight moving.
Lift expenses were actually up in the quarter despite fewer lifts, and that is primarily because of inflation we absorbed on lift rates associated with contractor labor availability.
This is an area we do expect to see continued inflationary pressure going forward.
And we also absorbed costs in the quarter related to our chassis repairs.
Moving on to compensation and benefits.
It is up 5%, but you'll note the $40 million in savings from 7% lower headcount that more than offset increases in pay rates and over time.
Meanwhile, incentive compensation comparisons in the quarter are a headwind of $43 million, similar to what we reported in the second quarter, reflecting our strong 2021 financial outlook compared to lower accrual rates last year.
Materials, claims and other expenses were all down year-over-year.
Turning now to slide 18 and looking at the rest of the P&L below operating income.
You'll see that other income of $14 million is $25 million unfavorable year-over-year, and that is due almost entirely to lower net returns from company-owned life insurance.
Our effective tax rate in the quarter was 23.6%, close to our federal and state statutory rates, but unlike Q3 last year where the rate was 21.9% and benefited from tax advantages related to both COLI investment gains and higher stock-based compensation.
Net income increased by 17% and while earnings per share grew by 22%, supported by 3.6 million shares we repurchased in the quarter.
Wrapping up with our free cash flow on slide 19.
As I have mentioned, free cash flow is a record through nine months of 2021 at $2.3 billion, buoyed by very strong operating cash generation, and that translates into a 102% free cash flow conversion.
While property additions are trending a bit lower than run rate for our $1.6 billion guidance number, capital spend is never linear, and we expect fourth quarter property additions will get us close to the $1.6 billion.
We first demonstrated our commitment to sustainability with our visionary appointment of a Chief Sustainability Officer back in 2007, the first in the industry.
And our efforts to support a low-carbon supply chain have greatly accelerated since then.
Building upon the momentum earlier this year with the approval of our science-based targets for greenhouse gas emissions reduction and our launch of $500 million in green bonds in the second quarter, we're excited to report another set of milestones on our sustainability journey.
In August, we released our 2021 ESG report, our 14th annual report on corporate responsibility, highlighting the transformational role sustainability is having on our business as we further integrate sustainable practices into daily operations.
We celebrated our 500th modernized locomotive unit in partnership with Wabtec in August and announced our collaboration with Progress Rail in September on a first of its kind Tier four locomotive prototype for yard and terminal operations.
And just earlier this month, we announced our decision to purchase 100% renewable energy to power company operations in Altoona in Reading, Pennsylvania.
Our commercial and sustainability teams work hand in hand to provide demonstrable low-carbon solutions to a wide variety of current and prospective customers, providing a compelling value proposition as we convert more freight from truck to rail, simultaneously benefiting our customers, our communities and our shareholders.
Before we open the call to Q&A, I'll take a moment to provide an update to our outlook based on the current economic environment.
As shared previously, we expect to achieve an operating ratio improvement above 400 basis points for the full year versus our adjusted 2020 result.
And there's likely upside to the 12% year-over-year revenue growth, as strength in our consumer-oriented and manufacturing markets drive the majority of the growth.
Near-term upside in coal markets provides a boost for the balance of the year as well, though coal remains challenged in the long term.
We are delivering on our financial commitments and remain focused on creating long-term sustainable value for our customers and shareholders.
 Assistant:

Chosen response:
qtrly railway operating revenues of $2.85 billion increased 14%.
qtrly railway operating ratio was 60.2%.


Prompt:
Human: We appreciate you joining us.
First, I'm going to discuss the details behind our third quarter 2020 financial results.
Paul will then comment on the key drivers behind our Q3 results, our outlook for the remainder of 2020 and some general comments on 2021.
I will return to provide our financial guidance for the fourth quarter and an update to the full year 2020 guidance.
We'll then end the call with a question-and-answer session.
In addition, some of our discussion may include non-GAAP financial measures.
Now, let's discuss our third quarter results in which we achieved $0.91 in adjusted earnings per share, a 21% increase over Q3 of 2019 and adjusted EBITDA of $58 million, a 13% increase.
These results reflect outperformance in worksite employee growth and pricing relative to our expectations in this uncertain and challenging business environment and upside in our direct cost programs brought about by the dynamics of the pandemic and the structure and ongoing management of these programs.
As for our growth metric, the average number of paid worksite employees in Q3 of 2020 increased by 1.7% sequentially over the Q2 period to 231,750, which was above the high-end of our expected range.
Now you may recall that employee layoffs in our client base drove a 6% reduction in paid worksite employees from the outset of the pandemic in March through the low point in May of this year.
Since then, worksite employees have grown sequentially as employees returning to work and being hired by our clients have outpaced any further layoffs.
Additionally, client retention for both Q2 and Q3 has remained at our historical level of 99% and worksite employees continue to be added from new client sales.
Given these recent positive trends, we now expect paid worksite employees to return to near pre-pandemic levels by the end of this year.
Now let's move on to gross profit, which increased by 8% over Q3 of 2019.
Worksite employee volume and pricing above target levels, combined with upside in our benefit and workers' compensation programs, resulted in significantly higher-than-expected gross profit.
This quarter's benefit costs included some favorable development from Q2, a period of highly unusual claim activity due to the impact of the shutdown orders.
In addition, healthcare utilization began trending toward more normalized levels in the third quarter, although not to the degree of our expectations.
Going forward, we expect further normalization along with the resumption of some deferred care in COVID-19 testing and treatment costs, the extent and timing of which is still uncertain.
Our workers' compensation program continues to perform well due to ongoing management of safety practices and claims.
Recent favorable claims development has been associated primarily with periods prior to the pandemic.
And any favorable impact from the reduction in severity of workers' compensation claims associated with the work-from-home status of many of our clients' employees would likely favorably impact our costs in future periods as this claim experience develops over time.
As for our pricing, we charge our clients a comprehensive service fee, inclusive of our HR services and direct cost programs.
We entered 2020 with certain pricing targets set prior to the offset of the pandemic.
And we continued to manage toward these budgeted targets.
As you may recall, certain savings resulting from the disruption caused by the pandemic were negotiated with our vendors and were passed along to our clients in the form of a comprehensive service fee credit as reflected in our Q2 financials.
Now turning to operating expenses, Q3 operating expenses included continued investment in our growth, including costs associated with a 10% increase in the average number of trained business performance advisors.
Other corporate employee head count has remained level over the past three quarters due to the effort and effectiveness of our staff in the face of increased HR service demands from within our client base.
Cost savings have been realized in other areas of the business, including travel, training and other G&A costs, as we manage through the current business environment.
The Q3 year-over-year increase in total operating expenses of 15% was impacted by increased stock-based compensation costs.
Now this increase was driven by a few items: first, our outperformance in the level of paid worksite employees and earnings during the pandemic; second, the shift in the weighting to performance stock awards from the performance cash awards for 2020 to further align our employees' interest with shareholders during these challenging times; third, the acceleration of expense for employees meeting retirement eligibility requirements under recent modifications to our plan; and fourth, a comparison to prior year's quarter in which earnings and related performance-based compensation were adversely impacted by large healthcare claim activity.
Now operating expenses excluding stock-based compensation and depreciation and amortization increased just 4.6% over Q3 of 2019.
Now, as far as our financial position and liquidity, it remains strong as we manage through the pandemic conditions, continue investments in our growth and provide returns to our shareholders.
Adjusted cash has increased from $108 million at December 31, 2019 to $213 million at September 30th, while repurchasing 1.3 million shares of stock at a cost of $91 million, paying now $47 million in cash dividends and investing $69 million in capital expenditures to-date during 2020.
Borrowings increased by $100 million over the nine months and $130 million remains available under our credit facility.
Today, I'll provide comments on three topics, starting with some thoughts on our significant outperformance in the recent quarter.
I will then discuss how the primary drivers to our business model reacted to the pandemic, resulting in the opportunity implied by the guidance we are providing today to attain double-digit growth in adjusted EBITDA this year.
I'll finish with some comments on our view of these factors going forward, which will ultimately drive our outlook for 2021.
We are certainly pleased with our execution in the third quarter, which resulted in a variety of factors contributing to better-than-expected results.
The resiliency of our client base supported by our dedicated service providers combined with solid sales and retention to drive a nice rebound in sequential growth in our key metric paid worksite employees.
Net gain in worksite employees from within our client base exceeded our expectation as client hiring of furloughed and new employees occurred sooner and at a faster pace.
As Doug mentioned, client retention continued at historical levels of 99%, despite the economic pressure on small businesses in the current environment.
In addition, our booked sales since the pandemic have been approximately 70% of our pre-pandemic sales budget, which we believe is solid performance in a virtual selling environment.
In the third quarter, paid worksite employees from previously booked sales was 92% compared to the same period last year, demonstrating continued demand for our services and strong execution in enrolling new clients.
Another highlight of the quarter was our strong pricing of both new and renewing accounts in service fees and allocations for direct costs, including our benefit programs.
The matching of price and direct cost is critical to our model and exceeding our targets in this area is important as direct cost affected by the pandemic normalize.
We've also been able to continue to grow and develop our BPA team through this quarter.
During this period, we virtually trained over 350 BPAs in our Level 1, 2 and 3 and our certified Business Performance Advisor programs.
Our trained BPA count increased 10% over the same period last year, positioning us well for our fall selling season.
This quarter, we were also able to divert some operating expense savings to develop client testimonial videos and increase advertising to support our fall selling season and our retention campaign.
These videos captured the emotion we were hoping for demonstrating the value of a sophisticated HR function in a crisis.
We were also able to continue important technology development beyond responding to the many compliance needs that emerged earlier this year.
We are extending our People Analytics platform, which has been very well-received by our mid-market and enterprise clients to our emerging growth segment just in time for our critical renewal period.
We are continuing to make strides improving in Insperity Premier, our proprietary human capital management system, rolling out a new time and attendance user interface and using new behavioral analytics tool to guide road maps making premier easier and more efficient for clients.
The bottom line for the third quarter was that we experienced the ideal combination of higher volume and pricing and lower direct and operating costs.
Each of these elements contributed to our strong outperformance in the quarter.
So we have responded quickly and effectively to the unusual events we've experienced in 2020 meeting client needs and achieving better-than-expected growth and profitability.
We've also kept our eye on the long-term making progress on many important initiatives.
Now that we have three quarters under our belt and our estimate for Q4, we can evaluate how our business model has reacted during the pandemic.
When the pandemic hit, we did not expect our business model would have the potential to generate double-digit growth in adjusted EBITDA that we have within the guidance we're providing today.
The effects for the pandemic on our business model ran the full gamut from obvious expected negatives to completely unexpected positives.
It's worth taking a moment to summarize these factors that drive the model since, as we all know too well, this pandemic is not over and it appears the effects will carry into 2021.
For example, one would think the pandemic a health issue would increase health costs.
However, what we've seen is that rising COVID cases created the need to protect hospital capacity and limit elective procedures, which combined with people's behavioral tendency to avoid hospitals as much as possible, healthcare expenses have actually declined significantly in the short-term.
Longer-term healthcare costs may be elevated due to the deferral of [Phonetic]care or cost associated with treatment of COVID or vaccines.
To this point, we have not seen these cost increases to actually increase the overall trend as other offsets like telemedicine and some level of deferral of care [Phonetic] continues.
In addition, many experts, including the CDC, are anticipating that the precautions currently being taken to reduce the spread of COVID could substantially reduce the incidence of flu this year.
An obvious negative factor we experienced from the pandemic related to lockdowns was the economic effect on small and medium-sized businesses, which affects us in the form of layoffs in our client base.
We saw a drop in paid worksite employees of approximately 6% in two months, followed by a steady rebound over the following four months, supported by fiscal stimulus and easing restrictions.
In retrospect, the CARES Act and specifically the Paycheck Protection Program was effective in mitigating some level of layoffs.
Further, we believe our quick and effective support of our clients to take advantage of these programs played a role in fewer layoffs occurring and a faster rebound.
The effects of the shutdown also highlighted one specific advantage in our business model, which is our client selection strategy.
Due to our risk-based client selection process, we have a very small percentage of our client base in industries most affected by the pandemic and shutdowns such as entertainment, hospitality, travel and restaurants.
Another surprise somewhat due to our client selection strategy has been the nominal business closings we have experienced in our client base.
Although we expected to see an increase, our strategy of targeting the best small and mid-sized businesses across a wide range of industries proved to provide some insulation from this factor as we saw no significant increase in business failures.
Another dramatic effect we experienced was the increased workload as many issues arising from the pandemic landed in the HR department.
As I mentioned last quarter, client interactions increased 300% and the average length of time of these interactions doubled.
This five-fold increase in workload has diminished somewhat, but remains elevated.
On the flip side, lockdowns led to working from home.
In our case, this resulted in improved productivity and our dedicated staff performed heroically in response to the increased demand for our services.
Our experience leads us to believe working from home is effective for ongoing routine activities.
However, innovation and collaboration may suffer in the longer-term.
A hybrid scenario of working from home and coming into the office may provide optimal productivity, efficiency and innovation going forward.
Another upside in our model from the lockdowns and work-from-home environment across our client base is a substantial decrease in the incident rate of workers' compensation claims.
This impact is yet to be reflected in our cost, but -- and should benefit future periods to some degree.
However, these lower costs may be offset by COVID-related claims that may be covered by workers' compensation in some states.
An additional upside surprise to me has been our effectiveness, continuing to sell in a virtual environment with a service offering as comprehensive and complex as ours.
We now know the range of sales efficiency under these conditions.
And as we integrate face-to-face meetings back into the mix, we could see a longer-term efficiency gain.
One final observation is the success we've had during the pandemic in retaining clients even as financial considerations prevailed on our client base.
Our services simply were invaluable and clients have continued our premium services despite the need to tighten their belts.
So now that we have a better understanding of the factors driving our business model during a pandemic, what does that mean as we look ahead to 2021?
Well, first, it means planning will be dependent on these factors and drivers that are likely to ebb and flow based upon the state of the pandemic.
We will be monitoring these new inputs very closely and we'll finalize a budget later than usual to include the most recent information.
Making estimates at an early stage makes little sense in view of the number and range of possibilities, especially when considering the timing and degree of severity of the pandemic or the actions that may occur to mitigate its effects.
For example, COVID cases are on the rise now, but one or more vaccines may be available by 2021 or an anticipated economic downturn from additional lockdowns may occur.
Additionally, small businesses may be bolstered by additional fiscal stimulus.
What we have learned is there are many moving parts and offsets in our business model in this environment.
If the pandemic intensifies, our direct costs may be below our historical trends as we experienced this year, but growth may suffer.
Conversely, if the pandemic is mitigated or under control, direct costs may be elevated, but growth may accelerate as an offset.
What I do know with the degree of certainty today is, we have an amazing organization with the necessary curiosity and brainpower to provide the agility and capability to manage through a crisis and come out with impressive results for shareholders clients and other stakeholders.
This year we have demonstrated the depth and breadth of our competence and level of care for our clients to execute on matters within our control, along with inspiring ingenuity and resourcefulness to respond to unexpected events.
We are certainly pleased with our 2020 results today and our outlook for the balance of the year and we look ahead with confidence in the future whatever we face next year.
At this time, I'd like to pass the call back to Doug.
Now let me provide our guidance for the fourth quarter and an update for the full year of 2020.
As you're aware, there continues to be uncertainty as to duration and the conditions of the pandemic and the trajectory of the economy.
The current political environment and the timing and details of any further government stimulus add to this uncertainty.
We have taken this into account when providing our financial guidance over the remainder of 2020 and we will be considering these factors in our budgeting process for the upcoming year.
We typically do not provide formal guidance for the upcoming year at this time and, therefore, we'll consider any further developments in these areas and the outcome of our year-end selling and renewal season [Phonetic] when providing 2021 guidance in our next earnings call.
Now based upon the details that Paul just shared, we continue to expect sequential worksite employee growth over the remainder of 2020.
For the fourth quarter, we are forecasting average paid worksite employees in a range of 236,500 to 238,500, a sequential increase of 2% to 3% over Q3 of 2020.
This equates to an expected decrease in average paid worksite employees of only 1% for the full year 2020 in the face of significant challenges for the small business community caused by the pandemic and its impact on the economy.
With an improved outlook for Q4 worksite employee growth, our current pricing strength and a range around expectations in our direct cost programs, particularly our benefits program, we're now forecasting Q4 adjusted EBITDA of $21 million to $30 million and adjusted earnings per share of $0.20 to $0.38.
When combined with our Q3 outperformance, we're raising our full year 2020 earnings guidance and now forecasting adjusted EBITDA of $271 million to $281 million, an increase of 8% to 12% when compared to 2019.
As for full year 2020 adjusted EPS, we are now forecasting a range of $4.35 to $4.53, up from our previous guidance of $3.67 to $4.04.
 Assistant:

Chosen response:
q3 adjusted earnings per share $0.91.
share repurchase authorization expanded by one million shares.
sees fy adjusted earnings per share $4.35 — $4.53.
sees fy adjusted ebitda $271 million — $281 million.


Prompt:
Human: These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated.
Also, during the call certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements.
We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner.
And with that, I'll turn the time over to Ryan.
We really appreciate you joining the call today.
This is my first earnings call as Nu Skin's CEO, so I'd like to take a few minutes to share my perspectives on our business both historically and for the future.
As we work to further transform our business toward our vision of becoming the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform.
Nu Skin has a rich heritage of building innovative beauty and wellness products for nearly four decades including billion dollar brands like Nu Skin, personal care, Pharmanex and ageLOC.
However, the value of our business has often been defined through the narrow lens of our historic direct selling distribution channel.
But when you examine our business for what it is becoming, we are better described as a beauty and wellness company that connects consumers to innovative products that help them look feel and live better through our trusted brand affiliates, via our socially enabled digital platform, affiliate powered direct to customer social commerce.
Nu Skin is fundamentally a beauty and wellness company, based on our global reputation for high quality, innovative products and deep consumer connections.
We provide a holistic inside outside approach backed by robust R&D and scientific rigor, which very few companies provide.
And we are a category leader for beauty device systems, according to Euro monitor for four years running, which provides a very unique opportunity for us as we expand our device ecosystem moving forward.
We're now engaged in transforming our business from a traditional direct selling company to becoming the world's leading beauty and wellness company powered by our dynamic affiliate opportunity platform.
There are three key strategic imperatives that will enable our next era of growth.
First, we will launch Empower Me, our personalized beauty and wellness strategy as we begin to connect our beauty device systems to our expanding digital ecosystem beginning in 2022.
Second, we'll continue to evolve our go-to-market approach from a traditional direct selling business model to an emerging affiliate powered social commerce business model around the globe.
And third, we'll expand our digital platform with an enhanced.com experience, as well as two new apps, Vera for our customers and Stella for our affiliates.
Let me give a bit more context on our work in each of these three strategic areas.
Building upon our leadership position as the world's number one beauty device systems brand, we will expand our device systems by introducing next generation connected devices beginning in 2022.
The beauty device category continues to be the highest growth sector in beauty and personal care, and we believe that our connected device strategy will further expand our share of that category.
Our products are loved by well more than a million registered customers today and many more unregistered customers around the globe, and through Empower Me personalized beauty and wellness.
We will be able to connect even more customers, nurture deeper engagement and build stronger community of brand lovers, which will result in greater lifestyle value.
We aspire to achieve what other great device companies like Apple, Amazon and Peloton have done making us the leader in connected beauty and wellness.
Next, social commerce is disrupting traditional e-commerce just as e-commerce disrupted retail more than 20 years ago.
Global research estimates the social commerce will expand from approximately $500 billion in 2020 to $3.4 trillion by 2028.
With nearly 70% of that stemming from Asia.
The power of influencer and affiliate marketing is now regarded as the next generation advertising model by most leading beauty brands.
This is where Nu Skin wins.
Our route to market has almost-has always been through micro influencers well before social media.
We're evolving our business model to further leverage social scale and reach for our authentic affiliate marketing channel around the globe, including further refinements to our sales incentives, campaigns and promotion plans.
This leads to the third strategic imperative extending our digital platform, which currently accounts for more than 90% of Nu Skin's revenues.
To fully capitalize on both our Empower Me personalized beauty and wellness product strategy, and our affiliate powered social commerce business model, we will continue to invest in our digital ecosystem by developing new tools to empower our customers and affiliates.
This includes our WeShop Tencent-powered social commerce tool set to begin rollout in Q3 in China to help drive customer acquisition.
Vera our product personalization app, which is being expanded with new functionality to enable deeper customer engagement.
And our newest apps Stella, which will contain my site and product offer our most popular affiliate tools, which is in beta test now.
We're expanding our social commerce capabilities within both of these apps through our recent acquisition of Maple Leaf an emerging socio-commerce technology company that will help our affiliates more effectively share and sell products via social media, and will continue to make investments that drive growth and advance the business objectives for Nu Skin, providing value creation potential for the overall enterprise.
This multiyear transformation will lead Nu Skin into a new era of growth and opportunity as we evolved from our traditional direct selling routes to become the world's leading beauty and wellness company powered by our dynamic affiliate opportunity platform.
Our sustained growth in the west over a strong 2020 gives us confidence that our strategy is directionally accurate.
As we continue to execute our plans, I'm confident you will begin to see the business through a much broader lens with a significantly larger total addressable market.
We'll share more about our long term strategy and at upcoming Q1 investor day.
We'll also introduce additional metrics we believe to be instrumental in evaluating our evolving business and provide measurable milestones to track our progress against our transformation objectives.
Now, let me share some thoughts on the third quarter results before turning it over to Connie and Mark for additional detail.
As we stated in our pre-release, we were disappointed with our third quarter revenue, which was lower than anticipated due to COVID delta variant disruptions.
Unexpected government restrictions interrupted selling and promotional activities in several markets, specifically in mainland China and Southeast Asia.
China continues to be a challenging market due to macro environmental factors, nevertheless, it continues to hold enormous potential for beauty and wellness brands, and will continue to explore additional approaches to market to rejuvenate growth in the midterm, including our Tencent WeShop partnership.
Additionally, macroeconomic issues in Latin America and extended summer time returned to vacation patterns in Europe affected our performance as well.
Despite these headwinds, we were pleased with 46% reported year-to-date growth in EMEA and see a bright future ahead as this market continues to lean into social commerce.
We were pleased with steady gains in the US driven by social commerce expansion and the launch of beauty focus college and plus, we also experienced double digit growth in Korea related to TR90 body shaping system campaigns and various affiliate promotional initiatives.
Both markets are well positioned for future growth.
For Q4, 2e are now focused on the rollout of Beauty Focus Collagen+, and Pharmanex META in most of our markets.
Collagen+ leverages our unique insight outside R&D capabilities to enter the growing $53 billion global beauty supplements market.
META is particularly interesting for us given the growing metabolic health challenges around the world.
Both products hold great potential as we roll them out this quarter.
So in summary, while the third quarter was a near term setback, we remain on track to grow 3% to 5% this year on top of a strong 2020.
In fact, our two-year growth is projected to be 10% to 11%.
As we further our strategic transformation, we anticipate challenges along the way, but I'm very optimistic about our future as we lead the beauty and wellness industry into a new era of connected consumerism, with Empower Me, through our dynamic affiliate powered social commerce model.
We have the right vision strategy and plans to achieve it.
And we have built the right team who will lead Nu Skin into the future.
In fact, we were pleased to be recognized this past month by Forbes on its list of the world's top female friendly companies.
And then Mark for a review of our financials and our updated 2021 guidance.
Connie is new to all of you but not new to business transformation, global markets or our industry.
She's spent almost her entire career in beauty and wellness, and has been a significant addition to our Nu Skin leadership team over the past several months as we partner together to transform our global business.
You'll then hear from Mark whom you all know in his also transfer transformational leader coming out of Silicon Valley in the connected devices world of Amazon Lab 126, which provides critical perspective and experience for a future direction.
So Connie, with that, take it away.
I'm excited to speak and share my perspective with you today.
Choosing to join Nu Skin in April was an easy decision for me as I believe the company is on the brink of something truly remarkable.
There are a couple of key things that drew me to Nu Skin.
First, I'm working in the beauty and wellness space most of my career, I have known Nu Skin for having exceptional products.
The second is the opportunity to draw upon the unique strengths of our affiliate community to better attract, engage and retain millions of customers and maximize that power of influence through our digital first approach and customer obsession commitment to deliver community building interaction.
In addition, the expanding sharing economy, another macro trends Ryan mentioned are lining up in our favor.
You'll be hearing more details about our specific plans at an upcoming investor day.
But rest assured, we are focused on providing high quality customer experiences for those who are curious and just starting to explore Nu Skin products to our most loyal fans who count on receiving their subscription of Nu Skin products each month.
As we do this, we are confident that we will drive customer attraction, loyalty, longevity and lifetime value.
So let me now provide a little more insight into each of our market segments.
At the highest level, the challenges in China have been offset by accelerated growth of the business in the West, up 35% year-to-date over a very strong 2020.
This improves the geographic balance in our business with less reliance upon any given market.
In the Americas region, the successful introduction of beauty focus Collagen+ in the US led to 14% revenue growth in the quarter on top of 67% growth in Q3 of 2020.
The US continues to benefit from the increased adoption of innovative products and social commerce.
The US achieved strong revenue and leader growth due to promotional product cadency and leadership alignment.
However, the Americas segments decline in revenue during the quarters predominantly due to the continued economic instability in several Latin America markets.
Our America's plans for the balance of the year include the continued launches of beauty focus, Collagen+ and boost, followed by connected devices in 2022.
Moving on to EMEA.
The 9% decline in revenue for the quarter is primarily attributable to extended summer vacations from pent up demand after a restrictive 2020 and a challenging compared to Q3 2020 growth of 72%.
EMEA continues to be the gold standard when it comes to social commerce adoption, with strong product promotions planned for Q4, we remain optimistic about the future of EMEA.
Mainland China continues to face industry and macro environmental pressures.
However, we remain committed to this market and continue to innovate our approach to market with the rollout of our Tencent digital tools, which include a WeShop personal storefront.
Q3 revenue was further negatively impacted by the COVID-19 Delta variant and the associated government restrictions.
Our customer count increased modestly due to the September WeShop shop rollout.
Our focus will continue to be increasing social commerce adoption, in what has traditionally been a person to person market.
During q4, we expect to benefit from the introduction of ageLOC META and Collagen+ and will continue these efforts throughout 2022.
In Hong Kong and Taiwan revenue remained relatively stable despite this being negatively impacted by the COVID-19 Delta variant.
We remain focused on advancing social commerce training in these markets and expect to benefit from introductions of ageLOC META in Q4.
Now, turning to Japan, the COVID impact caused us to give back some of the momentum we had been experiencing there as Japan was a market not only impacted by government restrictions, but also supply chain disruptions impacting product availability.
We continue to ramp up social commerce training for our leaders in this mature market, and have also begun introducing ageLOC META, which will continue throughout 2022.
In Korea, we were highly encouraged with our Q3 results as we continue to improve in this important market.
The 10% revenue and 18% growth in sales leaders was driven by successful product promotions around our TR90 body shaping system.
Our focus for the balance of the year will be previewing ageLOC META and expanding leader training around social commerce.
And finally, Southeast Asian Pacific.
This segment has been perhaps the most impacted by COVID with deepening lockdowns in various markets and local market distribution challenges hindering our ability to fulfill orders in some markets.
For the balance of the year we are looking forward to the introduction of ageLOC META in the fourth quarter.
I look forward to further participating on these calls, and hopefully meeting some of you in person soon.
I'll provide a financial overview and then give Q4 and full year 2021 guidance.
For additional detail, please visit our Investor Relations website.
For the third quarter, our revenue was $641.2 million and benefited 2% due to foreign currency.
While this represents an 8.8% decline versus Q3 2020, it is growth of 8.7% on a two-year look back versus Q3 2019.
Earnings per share for the quarter were $0.97 down 10% year-over-year, but up 22.8% versus the same period in 2019.
Gross margin for the quarter improved 130 basis points to 75.2%.
Gross margin for the core Nu Skin business was 78.6% compared to 76.3% driven by product mix, product cost reductions and supply chain efficiencies.
Selling expense as a percent of revenue remained consistent with the prior year at 39.9%.
For the Nu Skin core business selling expense was 42.7% compared to 42.4%.
General and administrative expenses as a percent of revenue were 25.1% compared to 23.5% in the prior year.
For the quarter G&A declined $3.9 million year-over-year, as we remain focused on carefully managing expenses.
Operating margin for the quarter was 10.2% compared to 10.6% in the prior year period, largely impacted by revenue.
We still anticipate an approximate 50 basis points year-over-year improvement in operating margin for 2021.
On our way to our stated midterm goal of 13%.
The other income expense line reflects a $2.8 million gain, compared to a $0.5 million gain in the prior year.
The benefit this quarter largely stems from unrealized gains and our rise investment holdings.
As our investments and rise increase, you can expect more variability in our other income expense line item.
Cash from operations was $30.2 million for the quarter, and was impacted by our continued strategic investment in inventory to meet customer demand for new products and build some protection from global supply chain construction.
We anticipate this elevated inventory level will decrease over the next few quarters.
We paid $19 million in dividends and repurchased $10 million of our stock with $255.4 million remaining in authorization.
Our tax rate for the quarter was 27% compared to 24.8% in the prior year period.
Our rise segment, which includes our manufacturing partners, grew 4% in the quarter.
These manufacturing entities continue to benefit our core business by helping shore up our supply chain and generate US profit that lowers our overall tax rate.
As Ryan mentioned, we also acquired an emerging social commerce technology company Mabelle.
And we continue to carefully seek investment opportunities.
Given our Q3 results, we are adjusting our annual guidance and now expect revenue of $2.67 billion to $2.70 billion, which is annual growth of 3% to 5% or growth of 10% to 11% versus 2019.
We anticipate earnings per share of $3.93 to $4.03, year-over-year improvement of 8% to 11% or 27% to 30% on a two-year look back.
This guidance assumes a positive foreign currency impact of 2% to 3% and a tax rate of 26% to 28%.
We are projecting fourth quarter revenue of $645 million to $675 million.
Assuming a foreign currency headwind of approximately 1%.
Q4 earnings per share guidance is $0.90 to $1 and assumed a tax rate of 25% to 29%.
 Assistant:

Chosen response:
q3 earnings per share $0.97.
sees fy revenue up 3 to 5 percent.
q3 revenue $641.2 million.
sees 2021 eps:$3.93 to $4.03.
sees 2021 revenue to be $2.67 billion to $2.70 billion.